National Danger Alert: Nigeria Heading For Debt Crisis

I have been getting worried by the aggressive bond sales by the Federal Government in the last one and half year. My initial worry was that it was crowding out private sector loans, making it more difficult and very expensive for companies/businesses to access loans. Banks would rather borrow the government, via its treasury bills and bonds sales, and be contented with its theoretically worry-free guaranteed unusually high 18% yield (return) than give itself migraine over private sector borrowers. Also, it was crowding out investments. People with money and who would have put it to some business use are now putting it in treasury bills. But then, I understood what the government, CBN specifically, was trying to achieve.

CBN’s paramount concern is inflation rate. Keeping it within its target bounds, which for some years now has been below 10% (single digit). So since the Oil triggered Naira crash that caused inflation to rocket, CBN has been mopping up liquidity to bring down the amount of Naira chasing scarce dollars by putting in place anti-market FX rules and selling bonds like crazy. And it is working. Inflation has stopped rising, and, impressively, is now falling. But the government is now drunk on borrowing. It is now beyond curtailing inflation, the new goal bandied around by our finance minister is “to reflate the economy and fund capital projects”. So we now go borrowing dollars like it’s the late 1970s.

We are now undoing all the gains we made with the Paris club debt cancelling. The very things that happened in the late 1970s and early 1980s that ultimately made us almost drown in debt in the early 2000s are now happening again, and I don’t think there will be any international club to save us in the future.

Currently, we spend over 60% of our government revenue to service loans. So now, the reason we can’t fund our national budget is no longer just because our oil revenue has dropped but because what is left after paying creditors can no longer sustain us as a nation. And this is very worrying.

World Bank is even getting worried on our behalf. IMF has been even more vocal since last year.

Below is the our debt profile as published by the Debt Management Office (DMO) as at March 31, 2017.

To help put things into perspective, last year the total Federal Government revenue was N2.97 trillion.

And from DMO, in just the first quarter of this year we spent N474 billion to service our domestic debt and N39 billion to service our foreign debt. That is a total of N513 billion in just first quarter of the year.

So let’s make a very conservative assumption, that the government is not trying to blow up its loan books further and will just refinance old loans, then we can roughly expect the government to spend about two-third of its annual revenue on debt servicing. But from all the signals coming from Madam Kemi and Oga Udoma, we are just getting started with the borrowing spree.

Personally, my worry is double fold — that buying bonds/TBills is no longer very financially sensible and that we are back on the road to repeating history (and bad history for that matter). I can’t do anything about the second worry as I am nobody to the government even if I can get the message to them, but I can do a lot about the first worry and profit handsomely from it. Currently, an insane amount of money is pouring into bonds — even Iya Basira is being enticed with the FGN Savings bond — when all these money realise something is amiss they are going to want out. And a good portion of it, especially from the institutional investors, will head straight for the stock market. So what I am going to do is to position well in the stocks market, take out all my remaining fund in the bonds and money market, and put them into the stock market. Just today, I have analysed the potential stocks to invest in and I am settling for Total, Zenith Bank, Dangote Cement and Unilever. Would have added Nigerian Breweries if I wasn’t too religious and not trying to close the door to my being a saint someday.

And in another news, I will be starting a series of posts on stocks to avoid. I figure out that it is a lot easier to write about what is wrong and should be avoided than writing on what to do (which stock to pick).

So stay back and watch out!

Originally published at www.olafusimichael.com.