States’ inability to tap capital market could see another rush for FG’s bailout
…amid worsening revenue decline
The inability of most state governments to raise debt instruments from the capital market amid declining revenues could see a rush for another round of bailout from the Federal Government, according to views of a wide spectrum of analysts surveyed.
“There are strong indications that we might see another round of bailouts given that FAAC allocations, which account for a major source of states’ revenue, have come under pressure due to the pandemic,” said Gbolahan Ologunro, an equity researcher at CSL Stockbrokers.
States’ finances are speedily drying up due to the coronavirus pandemic which has resulted in a double whammy of falling internally generated revenue (IGR) by states as well as the monthly allocations from the Federation Account.
Revenue shared to states from the Federation Account saw a drop by 5.13 percent to N181.49 billion in April from the over N191.30 billion shared in January, according to figures from the National Bureau of Statistics, as the pandemic took a toll on both the demand and prices of crude oil, Nigeria’s biggest dollar earner.
The drop in the FAAC was despite the N360/$ conversion rate adopted by the Central Bank of Nigeria (CBN) in March, as opposed to the dollar to the naira conversion rate of N306/$ when the apex bank had not devalued the currency. Allocation from the Federation Account, at 70 percent, accounts for the biggest chunk of states’ revenue.
Similarly, IGR which makes up an average of 27 percent of states’ revenue, is already threatened as businesses suffer the sour taste of falling sales and revenue arising from the slowdown of economic activities due to the coronavirus-induced lockdown. When businesses make less profit, there will be less money paid to the government in the form of tax. The effect of a decline in both IGR and FAAC could render state governments handicapped from fulfilling their fiscal expenditure needed to boost cumulative economic growth for the economy.
Only recently, the International Monetary Fund (IMF) predicted a deeper contraction for the Nigerian economy as the country continues to reel from both the economic and health impact of the pandemic.
IMF projected Nigeria’s gross domestic product to contract by 5.4 percent in 2020, much lower than the 3.4 percent negative growth it had estimated for the country in April.
The attendant effect of states’ falling finances in the wake of the pandemic could be better averted through the capital market route.
Amid the low yield environment helped by the CBN’s policy restricting non-bank institutional investors from participating in its short-term financial instrument, tapping from the capital market in the form of issuing subnational bonds could be a veritable option for most state governments to shore up their finances and implement infrastructural projects that would have a multiplier effect.
Most state governments, however, are limited from raising finances by way of bonds due to their inability to meet certain conditions that will guarantee them access into the market.
“It is a lot more difficult for the state governments to tap the capital market because their cases are restricted by regulation, unlike corporates that only need the approval of their board and the SEC,” said Omotola Abimbola, a macro and fixed income analyst at Chapel Hill Denham.
For the states, he said, they need the approval of the Debt Management Office (DMO) and Ministry of Finance before they can raise debt from the capital market.
“This comes with strict requirements, one of which is having an IGR to revenue ratio of over 60 percent, and very few states qualify on that basis. The sole reason why only Lagos State has been the major one in the market,” Abimbola told BusinessDay.
Information from the Securities and Exchange Commission (SEC) on the requirements for states to raise bonds shows a number of reasons why states might not qualify to raise finances from the capital market. These range from previous track records of states’ financial viability to a lack of transparency to disclose key information to investors.
Among the listed requirements for a state to raise bonds, according to SEC, is that its total loans outstanding, including the proposed bond, should not exceed 50 percent of the actual revenue of the issuer for the preceding year. Also, the state must publish information on the funds utilisation in at least two national newspapers which should be subject to clearance by the commission.
Others include that the state’s IGR must not be less than 60 percent of its total revenue in the preceding year; in the event of default by a state, the trustee should, within six months of such defaults, take necessary steps to ensure that the accountant-general commences direct deduction from the state’s statutory allocation; and lastly, the state must publish its audited annual financial statements in at least two national newspapers throughout the life of the bond.
Sadly, only a few states can meet the aforementioned requirements.
Data obtained from FMDQ OTC securities show that since 2016 when the Nigerian economy entered it first recession in about 29 years, only Lagos State has leveraged on the capital market to raise funding.
That was a big drop in number when compared with the over 12 states that raised finances from the market between 2011 and 2015, FMDQ data show.
Since the 2016 economic recession, Lagos State has issued bonds with an outstanding total value of N244.39 billion.
The state raised N47 billion, N85.14 billion, N12.25 billion and N100 billion in 2016, 2017, 2018 and 2020, respectively. It was only in 2019 that the state didn’t raise debt, the data show.
Before then, Kogi State raised N5 billion and N3 billion in 2013 and 2015, respectively; Lagos N87.50 billion (2013); Ekiti N1.05 billion (2013); Nasarawa N1.06 billion (2014); Bauchi N4.64 billion (2014); Ondo N4.56 billion (2012); Oyo N1.96 billion (2015); Benue N2.01 billion (2015); Plateau N11.63 billion (2015); Zamfara N2.86 billion (2015), Cross River N3.27 billion (2015), and Gombe N7.04 billion (2012).
With most states being shut out from raising finances via bonds, amid their falling revenue streams, several analysts say they foresee a replay of 2016 when state governments went crying to the Federal Government for bailouts after a fall in oil prices, accompanied by agitation in the Niger Delta region, dealt a blow to the government finances.
At that time, the Federal Government rescued states to the tune of N614 billion, which the states are yet to completely refund.
Omotola, who noted that the Federal Government had already stepped in to provide support for them by suspending some of the deduction at FAAC level, said going by what was seen from the last crisis in 2016, like the Paris Club refund and the subnational bailout that was led by the CBN, one might not be wrong to expect the same playing out this time.
“It is looking as if it is that form of support seen in 2016 that will come this time around since many subnationals do not have their finances in shape,” he said.
But even the Federal Government is cash-strapped and may not be able to give the states any form of bailouts whatsoever, said Johnson Chukwu, MD/CEO, Cowry Asset Management Ltd.
To him, the only saving grace for the states to raise finances would be if the exchange rates are adjusted again.
“And I do not see this happening soon,” Chukwu said. “Many of these states have exceeded their borrowing limit and they are not in the right financial position to access the bond market.”