INFRASTRUCTURE FINANCING IN A PERIOD OF RECESSION DEBT MANAGEMENT OFFICE NIGERIA INFRASTRUCTURE FINANCING IN A PERIOD OF RECESSION by Abraham . E. Nwankwo Director-General Debt Management Office, Nigeria Paper presented at the Bonds, Loans & Sukkuk Nigeria Briefing Day, organized by GFC Media Group, at Sheraton, Lagos, 21st November, 2016

* Sectorally, adequately diversified DEBT MANAGEMENT OFFICE NIGERIA I. Introduction to Crisis and Recession Dependence on Crude Oil (& Gas) Contribution to GDP: 14% Contribution to Export Earnings: > 90% Contribution to Public Revenue: > 80% Contribution to Employment : 0.01% (2013, NBS Q4, Survey) Structure of GDP 2015* Table of Contents i. Introduction to Crisis & Recession ii. The Need Chain iii. Size of Funding Requirement iv. Responsibility for Financing v. Sources of Finance vi. Risk of Exchange Rate Exposure? vii. Conclusion * Sectorally, adequately diversified

DEBT MANAGEMENT OFFICE NIGERIA Introduction to Crisis and Recession cont’d Collapse of Oil Price (basket price) Average price for 2014: USD96.29 p/b Average price for 2015: USD49.49 p/b Average price for first 9 months of 2016: USD39.18 p/b Impact Reduction in revenue available to governments of the federation; estimated at USD20 billion per annum Drastic drop in aggregate expenditure and economic activity Exacerbation of unemployment

DEBT MANAGEMENT OFFICE NIGERIA Introduction to Crisis and Recession cont’d Associated bumpy monetary sector developments: Inflation: 8% at end-December 2014 17.9% at end-September 2016 MPR 11% before March 201 6 Changed to 12% from March 2016 Further changed to 14% from July 2016 Exchange rate N168/USD at official window as at December 2014 Floated on June 15, 2016 Interbank rate as at September 30, 2016 = N305/USD Parallel market rate as at September 30, 2016 = N450/USD

DEBT MANAGEMENT OFFICE NIGERIA Introduction to Crisis and Recession cont’d Enter: Recession Q1 2016 GDP growth: -0.36% Q2 2016 GDP growth: -2.06% Needed: Appropriate Response A bold plan for revenue-diversified, export-capable, export-diversified, and competitive economy Turnaround highly feasible because of abundance of idle capacity Imperative: massive development of power, physical and social infrastructure

DEBT MANAGEMENT OFFICE NIGERIA II. The Need Chain Ultimate objective: to turnaround the economy out of recession unto a path of self-sustaining, inclusive growth Route: public revenue diversification export-oriented diversification competitive economic environment real sector priorities: agriculture and agro-processing, manufacturing, petrochemicals, solid minerals, housing and infrastructure, ICT Critical requirement: adequate & reliable infrastructure electricity transportation (roads, railways, aviation, others) ICT social infrastructure (education, health) soft infrastructure: ease of doing business Table of Contents i. Introduction to Crisis & Recession ii. The Need Chain iii. Size of Funding Requirement iv. Responsibility for Financing v. Sources of Finance vi. Risk of Exchange Rate Exposure? vii. Conclusion

III. Size of Funding Requirement DEBT MANAGEMENT OFFICE NIGERIA III. Size of Funding Requirement Before recession, estimated that approximately USD25 billion per annum required for 7-10 years to close infrastructure deficit. Add: drop in public revenue caused by structural collapse of global price of fossil oil: approximately USD20 billion per annum Therefore, total investment required: approximately USD 45 billion per annum Imperative that this investment requirement be addressed in order to turn around the economy Table of Contents i. Introduction to Crisis & Recession ii. The Need Chain iii. Size of Funding Requirement iv. Responsibility for Financing v. Sources of Finance vi. Risk of Exchange Rate Exposure? vii. Conclusion

IV. Responsibility for Financing DEBT MANAGEMENT OFFICE NIGERIA IV. Responsibility for Financing Both public and private sectors will source both equity and debt finance But size and speed of private sector contribution could be uncertain, particularly in period of recession Therefore, government has to accept primary responsibility for financing the turnaround through substantial investment in infrastructure But private sector contribution , including PPPs, will be pursued pari passu Given the huge size of investment required, given the drastic drop in public revenue, substantial public debt financing will be necessary Table of Contents i. Introduction to Crisis & Recession ii. The Need Chain iii. Size of Funding Requirement iv. Responsibility for Financing v. Sources of Finance vi. Risk of Exchange Rate Exposure? vii. Conclusion

DEBT MANAGEMENT OFFICE NIGERIA V. Sources of Finance Why external borrowing will be the main financing source much higher cost of domestic borrowing existing high debt-service-to-revenue ratio need to leave more domestic borrowing space for the private sector apart funding projects, external borrowing will impact positively on foreign exchange reserves Major sources of external borrowing multilateral & bilateral international capital market (eurobond): a USD4.5 billion programme is being established for execution over the next 3 years Diaspora bonds Sukkuk (foreign currency sukkuk will be issued but only after local currency has been issued as planned for Q1, 2017) Green bonds Co-investment: resources (revenue + debt) available to government will be used to leverage sovereign, global and sector funds to aggregate a bigger investment pool − Nigeria Sovereign Investment Authority (NSIA) would play a critical role borrowed funds could also be used to meet governments part-funding of PPPs Table of Contents i. Introduction to Crisis & Recession ii. The Need Chain iii. Size of Funding Requirement iv. Responsibility for Financing v. Sources of Finance vi. Risk of Exchange Rate Exposure? vii. Conclusion

VI. Risk of Exchange Rate Exposure? DEBT MANAGEMENT OFFICE NIGERIA VI. Risk of Exchange Rate Exposure? Foreign currency borrowing will be for tenor of 10 years and above Successful turnaround programme, based on the massive investment envisaged, should ensure that from Year 8, substantial rise in foreign exchange earnings from diversified sources (agro-processed, manufactured, solid minerals, petrochemicals, etc) will be adequate to repay the loans Table of Contents i. Introduction to Crisis & Recession ii. The Need Chain iii. Size of Funding Requirement iv. Responsibility for Financing v. Sources of Finance vi. Risk of Exchange Rate Exposure? vii. Conclusion

DEBT MANAGEMENT OFFICE NIGERIA VII. Conclusion Pre-2014 collapse in oil prices Nigeria had established need for huge investments to fund its infrastructure deficit The collapse in oil prices has created an additional need for significant injection of capital This greater aggregated investment requirement is needed to turnaround the economy from downturn to recovery and prosperity Private sector equity and debt financing is expected but is unpredictable and, therefore, unreliable for a counter-recession programme Given the size of investment required and the constraints on domestic funds mobilization, public external debt financing seems a reasonable and necessary option Table of Contents i. Introduction to Crisis & Recession ii. The Need Chain iii. Size of Funding Requirement iv. Responsibility for Financing v. Sources of Finance vi. Risk of Exchange Rate Exposure? vii. Conclusion

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