Nigerian State Government Bonds: A Greek Style Default?

Nigerian State Government Bonds:  A Greek Style Default?

The economic situation affecting many Nigeria states today can in some respects be compared with that of Greece. Many Nigerian states are effectively bankrupt. Reportedly 12 of Nigeria’s 36 states owe their workers more than US$550 million in salaries and allowances. Perhaps, no more than 5 states are economically viable. A recent finance ministry official called Nigeria’s debt profile as “scary” and President Buhari reported that the treasury was empty.

In its annual report for 2014, the Debt Management Office reported that Nigerian states’ external and domestic borrowings amounted to US$10.967 Billion. These figures are unreliable based on 2013 borrowings and it has been difficult to obtain reliable information from certain states such as Bayelsa. The total amount for 2015 is likely to be far higher than the US$10.96 Billion reported by the DMO.

Only sixteen states are able to provide clear outlines of how the funds raised have been used. The Securities Exchange Commission was reluctant to approve new bond issues prior to the election for fear as to how those funds could be squandered by incumbents fearing a loss of power. Nevertheless, few governors can point to capital projects that represent the proceeds of debt borrowings.

Ironically, it has been the country’s growth allied with low yields in Europe and the US and stringent money laundering controls in those territories that has fuelled the growth in state debt. Supported by many banks that made significant amount of money in fees, Nigerian states took advantage of these factors to raise billions of United States Dollars in the past 5 years. The Nigerian economic growth story was strong. Debt prices were relatively low and rates high arising the attraction of yield hungry funds particularly pension funds, which had stringent asset allocation restriction and were put off by a poorly performing stock exchange.

The fall in oil revenues and the weakening of the Naira has had a detrimental impact on the ability of Nigeria’s states to meets its obligations as they fell due. States receive the majority of their revenue through an allocation of revenues from the Federal Government. As the price of oil has fallen so naturally has the allocation. To illustrate this further, the 2015 budget was passed on the basis of an oil price of US$53 per barrel. At the time the price of oil was US$68 per barrel. Brent Crude currently stands at just above US$52 per barrel. States have focused on using the smaller allocation to meet their debt service obligations rather than pay employees.

The immediate future appears rather bleak. The Nigerian government in July approved a $2.1 Billion rescue package. This would be repaid from the central government’s allocation to the states. However, with this allocation likely to be smaller rather than larger, an increase in demand for infrastructure a Greek style creditor renegotiation may not be too far away.