Further devaluation of Naira will worsen debt position, says FSDH Analysts

Analysts at FSDH Merchant Bank Limited have said that Nigeria cannot afford another level of devaluation of the currency, saying this will worsen the nation’s debt position.

The total public debt increased to ₦22.71 trillion in the first quarter of 2018 from ₦12.60 trillion in the fourth quarter of 2015, according to the Debt Management Office.

FSDH Research, in its latest monthly economic and financial markets outlook, noted that the growth in the debts stock was mainly driven by external debts and was accelerated by the devaluation of the naira.

It stated that further analysis showed that the domestic debt stood at ₦15.96 trillion, accounting for 70.28 per cent of the total public debt, while the external debt stood at ₦6.75 trillion, accounting for 29.72 per cent of the debt.

The analysts said, “The ratio of external debt to total debt at 29.72 per cent is lower than the target of 40 per cent. Meanwhile, the revenue of ₦813 billion from the Federation Account Allocation Committee to the FGN in Q1 2018 was the highest in two years.

“FSDH Research analysis shows that the ratio of domestic interest payment to the FGN revenue from the FAAC stood at 79 per cent as at Q1 2018. The average in the last two years is 60 per cent. This current rate is very high and unsustainable. FSDH Research believes that measures to grow non-oil revenue will help to achieve and sustain a comfortable debt service to revenue ratio below 30 per cent.”

FSDH Research expects interest rates and yields in the global financial market to increase further as the normalisation of monetary policy in advanced countries continues.

It said, “This development has two major implications. Firstly, countries or corporates that plan to raise money from the international debt market may pay higher interest rates because of rising yields.

“Secondly, countries in emerging markets may adjust the yields on their fixed income securities to sustain the interests of investors, both local and foreign, in the instruments.”

The Federal Open Market Committee of the United States Federal Reserve increased the federal funds rate by 25 basis points to a range of 1.75 per cent and two per cent at its June 2018 meeting.

The FSDH analysts added, “The increase in the Fed rate is in line with the expectation of FSDH Research. We expect two more rate hikes in 2018, possibly in September and December, as the fundamentals of the US economy improve.

“FSDH Research observes an inverse relationship between the movements in yields on FGN Bonds and US Treasury Notes over the last 12 months. The strategy of the Debt Management Office to issue more of long-term debt than short-term debt and to increase the proportion of the external debt in the total debt stock was the major reason for the inverse yield movement.”

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