LETTER FROM LAGOS
Testing the MARKETS
Whatever goodwill Nigeria still commands, a critical measure of whether it can do competitive business with the rest of the world is the transparency of its finances. Thus, when recently the Olusegun Obasanjo government floated a series of 3-10-year bonds, the first in more than two decades, it was doing more than raising funds. Wittingly or unwittingly, it was asking the market to score it on the ultimate test of any government's financial credibility: long term bonds.
The government will need more than full or surplus subscription for success. Although these are domestic bonds, a major score line will be international subscription, after all, Nigerians own some US$170 billion cash abroad, most, according to the government 'legitimate'; and the Nigerian Stock Exchange is internationalised.
There are four bonds totalling N150 billion (some US$1.2 billion), offered simultaneously. Two, the N30 billion FGN Bond 2006 and the N40 billion FBN Bond 2008, have fixed interest rates: 17.75 percent and 18.25 percent respectively per annum. The other two, maturing in 2010 and 2013, are respectively floating at three percent and 3.75 percent above treasury bills rate. Two sinking funds are planned for the floating rate issues, to be funded half yearly from the 'general reserves and assets of the federation', starting September 2004.
That Nigeria has a huge financing gap, domestic and external, is long unarguable. So is the economic damage to short term borrowings - mostly three to six months - to finance that gap has wrought over the years. Problems include: inflation as the Central bank often prints money to lend the government, high interest rates as the apex bank mops up liquidity in the rest of the banking system to curb the inflation and the government starving the private sector of credit by borrowing directly from commercial banks.
As the offer closed on 15 October, however, the subscription level was poor. Some big outlets had under five subscribers. Why did it flop? For the same basic reason federal bonds were last issued in the 1980s: government's abandonment offinancial fundamentals. This has seen Nigeria being one of the few countries of its age without a sovereign credit rating, a must for especially international investors.
Underneath this is an increasingly unclear public finance framework. For instance, two months to fiscal 2003 end, there is no federal budget, yet both recurrent and capital expenditures have been going on apace, including the construction, at nearly N100 billion, of the Abuja stadium for October's All African games which ran almost simultaneously with the bonds offer.
Also, the April-May elections which returned Obasanjo for a second four- year term and entrenched his People's Democratic party in all tiers of government remains widely suspect while corruption remains rampant, earning Nigeria yet another year's ranking as the world's second most corrupt nation.
Furthermore, the government has a poor track record in the treatment of local and foreign creditors, respectively owed N1.3 trillion and IM4.4 trillion. Of the upper-middle income countries caught in the 1980s external debt crises - including Argentina, Mexico, Cote d'lvoire and former communist Poland - Nigeria is about the only one yet to achieve a comprehensive resolution with its creditors. Internally, however, some contractors have died with their debts, spanning decades, still unpaid. To cap it all, the bonds have no definite purpose. The government only states in the prospectus and elsewhere: "Purpose: This issue is the first step in the Federal Government's efforts to enthrone a more rational management of its fiscal operations, ensuring a wider maturity spectrum for its financing through the balanced use of the money and capital markets and in particular, longer term financing for its capital expenditure programme."
The government still has options though: offloading the bonds on the secondary market and/or arm-twisting banks and discount houses dependent on public sector deposits and foreign exchange to underwrite them. Both will, however, further damage the financial markets - capital and money - by sucking away liquidity from more productive investments, creating more of the effects of the government's short-term borrowings from the banking system.
Let the bonds chill.
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