$500M EUROBOND: FOR WHOSE BENEFIT?
BY: LES LEBA
Finance Minister, Olusegun Aganga confirmed to an audience of financial correspondents and experts last week that the government will float a $500m Eurobond before the end of January 2011. To this end, the Finance Minister and his entourage have planned roadshows traversing markets in Europe and the United States to promote Nigeria’s credit worthiness and thereby facilitate subscription for the $500m loan.
It is, of course, common commercial wisdom to borrow for productive purposes especially if internal revenue sources are inadequate for critical current needs. It is also rational expectation that the benefits from the object of a loan would eventually make both the service and final repayment of the capital sum relatively painless. In other words, it would be inexplicable or indeed, irrational if one embarked on a borrowing spree without a productive object for the application of the fresh loan. It is worse still if such a ‘purposeless’ loan is incurred in spite of the availability of substantial idle own funds, which enjoy minimal dividends in the accounts of potential subscribers of your current loan application.
Of course, Aganga, whom we are told, cut his teeth with one of the financial world’s highly rated brokers is certainly not a novice and must know his onions, even if his former employers’ expert credentials were rubbished in the wake of the global financial crisis in the recent past. In other words, Aganga would be the last person one would expect to commit the faux pas of borrowing money that he does not have need for, especially when the proposed 10-year loan may attract interest rates and management fees around 10% annually.
In addition, it is inevitable that the cost of the proposed roadshow for Aganga’s entourage and the fees and commissions payable to the brokers and other intermediaries responsible for midwifing the $500m Eurbond would easily deplete the net sum received by up to 10%.
But as I said, Aganga is no neophyte and most certainly has a purpose in mind for the $500m or is it $450m expected inflow. Hear him, “the aim of the 10 year bond is to set a benchmark in the global market for Nigeria, rather than to raise funds; meaning the pricing is considered more important than the timing!!” – Vanguard, 10/01/11, pg 31. Well, this might be too esoteric for over 90% of Nigerians who earn less than $2/day to comprehend, but what our financial expert is saying here in layman’s language is that “I know we don’t need this $500m, after all, we still have over $30bn idle funds as reserves; indeed, I am also aware that these reserves are saved abroad and earn less than 3% interest with some of the same potential subscribers to our bond issue; and yes, I know that Nigeria may end up paying up to $50m as annual service charges and management fees on the possibly $450m net that would come as fund inflows into our coffers after deducting cost of road show and other fees and commissions payable to Deutshe and Citibank (the book runners for the bond issue) and other obligations to Barclays Capital and FBN Capital who will serve as Financial Advisers for this loan; but I believe it is right to take this loan so that future loan applications from Nigeria will be guided by the market price we will pay this time out”.
As you can deduce from the above, Aganga is really a sharp financial wizard in the same mould as most of the ministers who held the Finance portfolio in the last three decades!
Indeed, no finance minister during that period has succeeded in providing an enabling economic environment for industries to thrive and stem the rising tide of unemployment or indeed, pursue fiscal policies that have improved the social welfare of our people, but they all always seem to have excelled in mismanaging our huge export earnings and frittering away much of our reserves to both internal and external buccaneers all the same. It is obvious from the present exercise that Nigeria may pay back $1000m for the $500m loan (less charges) within the next 10 years. In the event that Aganga admits that we don’t ‘need’ this loan, imagine what the potential interest payments of $500m could do to some of our universities or indeed, health institutions!
Well, maybe we should be a bit more charitable or objective, after all, Aganga has indicated that the joy of estimated $500m interest payments within ten years should make it possible for both Nigerian public and private sectors to access international loans, with a guided price tag, from which cumulative benefits in the future would more than compensate for the consolidated cost of the imminent Eurobond! Besides, it is common wisdom that banks would normally be eager to lend to an already financially buoyant client than one who is desperate for cash, so Aganga may be led to believe that our loan bid will be fully subscribed with our current, relatively healthy reserves of over $35bn and our existing rich crude oil resources as optical collaterals. But the point is that these factors by themselves are sufficient to assure potential lenders of our ability to repay our loans and the issue of pricing should really be left to be resolved between Nigerian public and private sector loan seekers and the international market at the appropriate time of their needs! In any case, it is not as if the much sought after benchmark is an iron cast guarantee and that the rate which evolves from the current Aganga ‘escapade’ will also be the most competitive rate possible or that future rates will not exceed or fall below this benchmark at the actual point of need based on market realities at that time!
In any case, assuming that the $500m bond is fully subscribed, so what happens? The Finance Minister has indicated that there is no immediate crying need for this money, since we have large idle funds, so what do we do with the money?
Well, to start with, we can add it to our existing reserves, which as earlier indicated, are usually kept in minimal interest yielding accounts (certainly with interest dividends at a fraction of the cost of the proposed Eurobond); hazy financial logic, you would say! Alternatively, it could be captured in the accounts of the Central bank, and subsequently released as part of the monthly allocations to the three tiers of government after the dollar value has been substituted with naira at current exchange rates; thereafter the CBN would proceed to auction the $500m to commercial banks and bureau de change. After all, this is currently the ultimate fate of our dollar reserves under the current monetary framework, notwithstanding that this arrangement opens the door to wrong exchange pricing mechanism, round tripping and capital flight and also provides a great avenue for the funding of smuggling and money laundering!
Indeed, less than a week after Aganga’s dinner interaction with financial correspondents on the ‘need for the bond issue’, the CBN offered $300m for sale at its foreign exchange auction of Monday 10/1/2011. About the same time, the CBN had paid the naira equivalent of $1bn from the illegally constituted excess crude account to the three tiers of government on the eve of New Year’s day; the resultant naira sum of N150bn complemented the monthly statutory allocations to increase the cash available in the system and weaken the naira rate and quickly gulp the $300m offered in the first set of dollar auctions in 2011.
Thus, the $500m Eurobond will inevitably trace the same path and exacerbate the contradictions in our fiscal and monetary policies with adverse impact on industrial regeneration, employment and social welfare.
In spite of the above implications, Nigerians will wonder why Aganga is so motivated to commit Nigeria to this unnecessary and expensive loan. Indeed, if additional funds are required for some specific critical infrastructural purpose, the government has lately indicated that about $4bn soft multilateral loans, with low interest charges of between 1 – 3% and about 20 or more years' gestation are currently available for the picking! So why must we choose the hard and much more expensive option.
However, this modus operandi may not come as a surprise to keen observers of Nigeria’s ballooning domestic debt. Indeed, on the establishment of the Debt Management Office, DMO (read as Debt Creating Office) just over three years ago, Nigeria’s domestic debt was barely a N1000bn, consisting mainly of debts to local contractors. Soon after the exit from the Paris/London Club debt burden, the DMO came on stage and their immediate mission, according to the purposes indicated in their loan prospectus, was also to create a ‘benchmark’ (do you recognize that word?) and deepen the domestic market for long term loans. Indeed, the purpose, as similarly defined by Aganga in floating the current Eurobond is to create a benchmark for Nigerian bonds in the international financial market. Any reference to the prospectus published by the DMO soon after its establishment will also confirm that the loans sought for were not intended for any positive, tangible or practical application that had the potential of jumpstarting our economy or addressing our infrastructural deprivations. Today, Nigeria’s domestic debt has quadrupled to about N4000bn in less than four years and yet, there is no visible positive impact on our people’s welfare!
The bonds issued by the DMO were often generally oversubscribed and inevitably the commercial banks were the main patrons; inexplicably, the same banks that government frantically pumps trillions into their coffers will be beneficiaries. The bond issues were popular because of the mouthwatering yields of between 10 – 15%, rates which were well in excess of what you would get from the international financial markets. Currently, the Central Bank and the DMO jointly continue to borrow almost N200bn monthly from the same banks that enjoy tremendous government patronage with billions of naira deposits whenever allocations are paid to the three tiers of government.
No doubt, Aganga’s $500m Eurobond will, like the domestic counterpart, be oversubscribed and the Finance Ministry will celebrate its success, but the truth is that unusually high yield expectation will be the prime motivator for subscription to these sovereign bonds; again, the same motivation as with the domestic bond issued by our Debt Creating Office! Inevitably, with the current debt consolidation by another arm of government; i.e. AMCON, in mopping up banks’ toxic assets, Nigeria’s debt burden is primed to accelerate our march into an excruciating debt trap as the National Assembly, our constitutional watchdog continues to slumber and fiddle. Once again, the banks will be the major beneficiaries!
SAVE THE NAIRA, SAVE NIGERIANS!