11 November 2013, Abuja – Nigeria’s power sector, last month entered a new threshold with the handing over of power assets to their new owners, however as banks jostle to provide financial back-up for the emerging power market, the contribution of the Debt Management Office under the Federal Ministry of Finance illustrates the impact of managing debt for development.
As a new private sector-driven power sector takes shape in the country, there are clear indications that Nigerians banks are determined to be part of the transformational change in spite of the huge financial resources required by new investors in the power market. The input of the financial sector into the much awaited power sector privatisation is no doubt part of the success stories of the President Goodluck Jonathan power reform agenda. As a means of providing the solid financial base for the emerging power sector, some of the banks have issued Eurobonds valued at a total of $1.45 billion between January 2011 and July 2013. This was said to have been made possible by the creation of a sovereign benchmark in the international capital market (ICM) by the federal government.
A THISDAY report listed the banks to include First Bank of Nigeria Limited which issued $300 million Eurobond in July 2013, Fidelity Bank Plc’s $300 million Eurobond sold in May 2013, Access Bank Plc’s $350 million Eurobond issued in July 2012 and Guaranty Trust Bank’s $500 million Eurobond which was issued in May 2011. Economic watchers said the banks were merely maximising the opportunity created by the DMO’s initiatives.
The initiative has shown that more Nigerian corporates can leverage the existing sovereign benchmark to raise long-term capital in both the domestic and the ICM. The initiative is also described as a manifestation of the gains of policy direction of the Coordinating Minister of the Economy/Finance, who also doubles as President Jonathan’s chief economic strategist. Speaking on the support for the privatisation of the power sector, the Director General, DMO, Abraham Nwankwo said a reliable power sector will definitely drive other sectors of the economy.
The Target He said in a recent interview that “What prepared us at DMO is that we appreciate that our country needs to advance rapidly and what this means is for everybody to do their best and we believe at DMO that if everybody in the country contributes their best, then the country will achieve the highest height in the next few years. “So the commitment from DMO is to contribute whatever it can contribute to transform the economy and that is why we are prepared to do whatever we can do. As you know, government raised $1 billion from the international capital market for the purpose of building gas to power infrastructure mainly. And what will that do? That will be part and parcel of the new configuration of the private sector driven power sector.
Now the whole idea is that when you have reliable and sufficient power supply, you have increased the base for other productive activities, for manufacturing in various states of the federation, for mining and processing of solid minerals in various states of the federation, for boosting tourism potentials in various states of the federation, because power is at the heart of economic transformation.”
Nwankwo said with the support which DMO has given to government through the fund raised to support the power sector from the international capital market, in the next few years power will be very reliable and every state should take advantage to ensure that it attracts the necessary investors both domestic and foreign for manufacturing, for agro-processing, in their various states. “So our emphasis is not to encourage states to borrow to augment their revenue, our emphasis is that everybody, including the DMO, should contribute all they could to ensure that every state of the federation generates enough revenue from its agricultural, solid minerals, or tourism bases.”
Okonjo-Iweala had explained government plans for utilising the proceeds of the Euro bond thus: “What we have in mind is investment in the power sector. We are looking at funding the transmission grid. As you know, we have privatised both the generation and distribution power plants. “But the transmission and grid remain in government hands and we must keep up with transmission in order to make the entire power sector work. “We are also investing in building a gas pipeline from the east of the country to the west where we have all these power stations with no access to gas.
“We have already spent about $400m on it, so we want to complete it with some of the money we are raising now,” she said. Future of Bond Market On the plan for the nation’s bond market, Nwankwo said DMO will continue to develop the bond market which is evolving for it to be able to face global challenges like debt crisis in eurozone, budget crisis and credit ceiling in the United States.
Over the next few years, we will continue strengthening what we have done, diversifying the bond market, going into Sukuk and the rest and maximise efforts to attract inflow into our economy. We also hope to improve in our economies, establish our own bond trading platforms to be more sophisticated. By the time we have consulates in our responsibilities with the states; we will find ways of linking all the debt management departments in the country. We want to be able to use debt management system to drive growth and poverty reduction. FG Bonds Oversubscribed According to him, the outcome of the $1 billion bond issued by the federal government recently, which was four times oversubscribed, showed that there was an effective demand for debt instruments from the country.
“The challenge is for Nigeria’s private sector, either as individual private companies, or alternatively by pooling their resources together to directly access the international market, to raise long-term, lump sum monies to for various projects in the Nigerian economy. It can be in agriculture, solid minerals, transportation, roads, power projects, manufacturing amongst others. “There is nothing holding other private sector firms either as individuals or by pooling their balance sheet together from accessing the ICM,” he said. Deepening Bond Market The DMO boss declared that the debt office would continue to deepen the bond market by enhancing liquidity as well as the introduction of other instruments. “Even if government is not undertaking new borrowing, the DMO will continue to issue bonds because you still need to refinance the existing debt stock. So, to say that we will continue to be active does not necessarily mean that we will continue to be borrowing money. We are proactively managing existing debt stocks.
“Government is insistent in making sure that public borrowings are reduced to the barest minimum, to ensure that government does not crowd out the private sector and to make sure that cost of borrowing is reduced,” he said. He also disclosed that in the domestic market, about 20 Nigerian companies had issued long-term instruments that enabled them raise about N200 billion between 2005 and 2012 from the market, to fund various real sector projects.
Nwankwo added: “Our yield curve domestically has been elongated to 20 years, so private companies that are in need for 5-year money, there is a market for it, those that need 10-year fund, there is a market and those that need 20-year fund, possibly for solid minerals and infrastructure, there is also a market where they can raise money.
“So the days are gone when Nigerian private sector complains that one of their major constraints was lack of long-term capital in the market or that their banks will lend them money only for a maximum of 12 months. So if there is any complain the private sector has, it should not be that there is no market where they can raise long-term funds.
“The fact that the International Finance Corporation issued its own bond in the local, a naira-denominated, also shows that the market for long-term fund exists in Nigeria”
Nwankwo’s optimism was reinforced by the recent survey of the International Monetary Fund (IMF), which showed that Nigeria’s subnational bond market yield performance has outclassed South Africa’s and the rest of the continents in terms of yield. The IMF, in its World Economic and Financial Survey said Nigeria’s subnational bond market has become the largest in Africa with $2.8 billion in outstanding domestic debt, compared with $1.6 billion in South Africa.
Reasons behind the burgeoning performance of Nigeria’s bond market, according to the IMF, range from necessary reforms and technical steps by the Nigerian authorities to recent successful corporate international issues. “Nigeria’s bond is performing well. Although the proceeds from the bond represented a relatively minor source of capital financing, the Eurobond’s trading in the secondary market has created a benchmark for future borrowing by the sovereign, sub-nationals, and firms,” said the IMF.
“Accordingly, Nigeria’s subnational bonds market has grown rapidly, becoming the largest in Africa in yields with $2.8 billion in outstanding domestic debt at end-2012 compared with $1.6 billion in South Africa. Some recent Nigerian corporate international issues include the $500 million five-year Eurobond offer by Guaranty Trust Bank, Nigeria, in May 2011.” The IMF said effective road shows facilitated the building of a strong network of potential investors. The road shows in Europe and the United States were geared towards wooing potential investors and telling them about Nigeria’s economic prospects and the government’s economic policy agenda.
The result of the shows was, unarguably, spectacular. The DMO was established on October 4, 2000 to centrally coordinate the management of Nigeria’s debt, which was hitherto being done by a myriad of establishments in an uncoordinated fashion. This diffused debt management strategy led to inefficiencies. The consideration of these myriad problems was said to have led government to support the establishment of a relatively autonomous debt management office, which resulted in the formation of the DMO in October 2000.
– Festus Akanbi, This Day