By Babajide Komolafe
Since 2006 when Seychelles became the first African country to issue Eurobond, more African countries have turned to the international capital markets using Eurobond to raise cheap and long term finance for a variety of purposes. A Eurobond is an international debt instrument that is issued in a currency that is not the currency of the country issuing the instrument.
According to the World Bank, Eurobond issuance by some sub-African countries rose from $1 billion in 2011 to $6.2 billion at the end of 2014. The proceeds of these bonds, the World Bank stated: “Are used to benchmark for future government and corporate bond markets issues, to manage the public debt portfolio, and for infrastructure financing.
Speaking on the increasing appetite of African countries for Eurobonds, Jocelyne Sambira of the United Nation’s and author of “How We made it in Africa”: said, “Eurobonds are a means of diversifying sources of investment finance and moving away from traditional foreign aid.
Not only do these bonds allow such governments to raise money for development projects when domestic resources are wanting, they also help reduce budgetary deficits in an environment in which donors are not willing to increase their overseas development assistance”.
Appetite for Eurobonds
The quest for alternative sources of budgetary funding has become increasingly necessary given the sharp and steady decline in commodity prices which accounts for the largest share of government revenue in many African countries. Thus last year November, six nations issued Eurobonds to raise $6 billion. These are Angola, Gabon, Ghana, Ivory Coast, Namibia and Zambia.
Furthermore, data by Reuters showed that sub-Saharan countries raised $6.9 billion in the first half of 2016. This trend is expected to continue in the second half of the year. For example, earlier this month, Egypt commenced preparations issue Eurobonds worth $3 billion to $5billion to plug its financing needs and also address acute dollar shortage that has hampered its ability to purchase from abroad.
Nigeria’s $1bn Eurobond offer
Nigeria has also indicated intention to issue $4.5 billion Eurobond in the next three years. This according to the Debt Management Office (DMO), will be done in tranches, with the first tranche of $1 billion to be issued this year.
In a statement announcing its decision to appoint managers and advisers for the Eurobond issuance programme, the DMO said, “The Federal Republic of Nigeria (FRN) is in the process of establishing a $4.50 billion Federal Government Medium Term Note (FGMTN) programme, 2016-2018, out of which it intends to issue $1.00 billion Eurobond in the year 2016.
The purpose of establishing the FGMTN programme is to enable the FRN have the flexibility of quickly taking advantage of favourable market conditions in the International Capital Market (ICM) to raise funds, if and only when the need arises.
“In view of the foregoing, the Debt Management Office (DMO), on behalf of the Federal Government of Nigeria, wishes to appoint: two international banks as Joint Lead Managers; and, one local bank as Financial Adviser for the planned FGMTN programme and the issuance of $1.00 billion out of the $4.50 billion FGMTN programme in 2016.”
Aiming for Economic Diversification
Prior to this announcement, the DMO had unveiled a new debt management strategy aimed at a marginal increase in external borrowing and increased commitment to capital projects execution. Explaining the rationale for the new debt strategy, Director-General, DMO, Dr. Abraham Nwankwo said that the ultimate goal is at economy recovery and diversification.
He stressed that the new strategy is the best for the Nigerian economy as the government is presently making sustained efforts on diversifying the economy, noting that in the next 5-7 years export proceeds accrued to the economy will be more and our exchange rate will be favourable.
He said the new strategy is based on the recognition that external financing sources are on the average cheaper than domestic sources, it becomes more necessary to slant more of the borrowing in favour of external sources. “Therefore one of the major elements of this strategy is that over the medium, term we will strive to remix the public debt portfolio from 84 per cent domestic and 16 per cent external to 60 per cent domestic and 40 per cent external.
“In addition taking into account other factors, the fact that over the next four years public borrowing proceeds will be devoted to capital expenditure an element of the strategy is to ensure that we remix the current status of about 31 per cent short-term and 69 per cent long-term to a maximum of short-term 25 per cent and the minimum of long-term 75 per cent. So we are remixing between external and domestic and we are also remixing within the domestic, between short and long-term” he said.
In addition to the attraction of cheap borrowing cost, Nwankwo said that the decision to seek foreign loan via Eurobond is to avoid crowding out local investors. Addressing Finance Correspondents during a breakfast meeting in Lagos, Nwankwo said: “This is the first time that the budget specified that all borrowed funds will be for capital expenditure.
The sharing of internal and international borrowing is almost 50/50. We have been borrowing locally, but we have to take advantage of the relatively low cost of funds externally. We do not want to borrow too much from the domestic economy, so that we do not crowd-out the domestic environment.