That Nigeria’s first foray into the international capital markets in over four years was a qualified success is not in doubt. Nor is it surprising that the fact of the country selling US$1bn 15-year bonds at 7.875% was at the heart of much partisan debate, last week.
Ahead of the roadshow preceding the bond issuance, most critics of the Buhari administration were pessimistic on its outlook. The gloom wasn’t all about perceptions of poor governance (although this played a big part). Anxiety around the prospects of the issue also followed from the fact that in its run up, most rating agencies had given the thumbs-down to the country’s sub-investment grade ratings. There was also the small matter of the raging confusion over the whereabouts of the country’s president. And finally, folk on the Nigerian side of the roadshow scarcely covered themselves in glory, tripping on investors worry over the fate of the naira.
Why then did all this not matter? Why, despite increasingly cheerless outlooks on the economy, did investors bid in multiples of what was on offer, and far below the 8.5% that most had estimated as the market clearing rate for the country’s debt?
Partly, because the fundamentals of the economy are still good. About 193m people, close to 80m of whom are economically active, and supporting a N95tn-plus economy. Besides, poor management of a shrinking economy means that asset prices across all sectors are at, or near, bargain basement levels. In large part, though, much of the bond issue’s success owed to the fact that the risk premium on the debt issue was steep. In other words, as anticipated by the doomsayers, our cost of borrowing has gone up. In conversations, last week, I was reminded that only in January this year, Egypt raised US$4bn from the same markets by selling triple-tranche bonds. Its 5-year bonds (US$1.75bn), 10-year bonds, and 30-year notes paid 6.125%, 7.5%, and 8.5% coupons respectively. Remember, this is an economy with more risk buckets than Nigeria is yet to conjure.
The qualified success of the issue notwithstanding, it would seem, that the naira’s woes remained the elephant in the room when we went to market. Not only were investors betting on further devaluation of the currency, but they (the ones who spoke to the financial press after the issue, at least) were certain that the eventual adjustment of the naira will be supportive of the bond issue’s risk premium.
What to make, therefore, of the bond issue?
Investors had also worried that, given the poor management by the monetary authorities of the domestic foreign exchange market, some of the country’s new borrowing might end up supporting the central bank’s intervention in the market in support of the naira. Arguably, this would qualify as a most irresponsible use of expensive borrowed funds. Accordingly, government has been at pains to stress how big a proportion of its planned borrowing will end up supporting gross capital formation.
If we intend to spend much of our planned borrowing boosting the economy’s productivity by investing in new public infrastructure, and the maintenance of existing ones, we do well to look at an aspect of our public expenditure management system that is often overlooked in conversations on the economy. At bottom, these conversations revolve round the answer to the question: “What is the absorptive capacity of this economy for new investments?”
In the years since 1999, we have barely managed every year to deploy a little under 50% of the capital budget. Don’t forget that this sum is a measly 30% of annual appropriations to begin with. Still, structural problems — planning constraints, sequencing difficulties, procurement competences, and the due process mechanism — all mean that we have continued to struggle to spend on much needed new assets all the penurious amounts we grudgingly budget for these.
By extension, no matter how well-intentioned this government is about the next round of borrowing, objective constraints in the economy mean that we will deploy such borrowing sub-optimally. We owe a lot as it were, and it matters that additional borrowing feeds into strengthening our ability to repay these debts. I do fear, though, that without the changes to the economy’s structure that address these constraints, these new debts simply create a new “peonage” (that was the old one-word description of the then 3rd World’s debt burden).