Nigeria taking lead in local debt
Johannesburg - Nigeria looks set to overtake South Africa as the continent’s biggest issuer of local government debt with a planned $650m auction by one of its states in October, but sub-national bonds remain far off for much of Africa.
Capital markets can prove cheaper than bank loans - and may be the only option - for some governments seeking to fill budget gaps or fund big infrastructure projects, but in much of Africa the growth of local debt issuance has been slow to take off.
A planned 100 billion naira ($650m) bond issue by Rivers State in Nigeria’s oil-producing Niger Delta would take Nigeria’s total local debt stock to more than $2.3bn compared to South Africa’s $1.9bn in municipal bonds.
“Banks in Nigeria have only a small direct exposure to Nigerian sub-nationals, about 5-10% of their total loans,” said Maciek Szymanski, an investment analyst at African Alliance, explaining why Nigerian states are keen to issue bonds.
“In South Africa, the banking sector is more consolidated and has more capacity to lend to municipalities.”
Johannesburg became the first local authority to tap the bond markets in 2004 and has since been joined by neighbouring Ekurhuleni and Cape Town.
But the outstanding issues still account for only about 1% of South Africa’s bond market - Africa’s biggest by far.
In contrast, Nigerian state bonds have mushroomed since 2008 to 7% of the overall bond market. Nine of Nigeria’s 36 states, including the commercial hub of Lagos, now have bonds.
Initially, states sought funds for local budgets after falling oil prices reduced the amount they received from central government, but they have since sought funding for everything from roads to a luxury resort.
Rivers State plans projects including a monorail and an entertainment complex.
No yield curve
Nigerian state bonds are tax-exempt and all except those of Lagos are backed by a payment order from the central government, which deducts coupon and principal payments from the amounts the states receive from the overall budget.
“It’s virtually impossible that you could have a default unless the sovereign defaults itself,” said Samir Gadio, an emerging markets strategist at Standard Bank.
The return on local debt is higher than for sovereign debt, although the lack of a secondary market means there is no yield curve, said Gadio.
However, there has been virtually no participation from foreign investors despite the guarantee from central government.
“They don’t really understand how it works. There’s a fear that there’s a lack of fiscal transparency at the (federal) government level. They think this is worse at the state level,” said Gadio.
With some of the issues as small as 6 billion naira, the lack of liquidity is also a discouragement.
Although South African municipal bond auctions had tended to be oversubscribed, a secondary market had not developed there either, said Francesco Soldi of Moody’s, the credit rating agency.
He nonetheless saw growth in the municipal bond market as cities sought others sources of funding.
In the rest of sub-Saharan Africa, municipal bonds may be at best a long-term aspiration while other domestic debt markets are still in their infancy.
Nairobi in Kenya and Rwanda’s capital Kigali have announced plans to issue municipal bonds in recent years but they have yet to happen. The City of Douala in Cameroon issued a 5-year bond in 2005, but that is very much an exception.
It will be another five to 10 years before municipal bond issuance becomes widespread as many local governments lack the financial skills to come up with viable projects that generate revenue, said Szymanski.
“It’s one thing to invest in infrastructure, it’s another thing to make it pay back,” he said.