As director-general of the Debt Management Office (DMO) of the Nigerian Ministry of Finance, Patience Oniha oversees the country’s public debt strategy.
Her speciality is innovative bond issues in the financial markets, albeit at the behest of her political masters.
Following an impressive 22-year banking career and 12 years as a senior official at the ministry during which she achieved several notable firsts in the local and Eurobond market, Oniha can teach beleaguered South African Finance Minister Tito Mboweni a trick or two.
While governments have scurried to mitigate the health and economic impact of Covid-19 through emergency financing packages, including Nigeria and South Africa, Oniha has brought a much-needed creativity to sustainable public finances.
She has innovated the use of Sukuk, an alternative investment “bond”, whose returns are based not on conventional interest rates but on profit or rental (leasing) rates linked to real assets.
In June the DMO raised 150 billion naira (R6.4bn) through its latest Sukuk – its third since December 2017, which has hauled in a total N350bn – all ring-fenced to finance the construction or rehabilitation of 25 arterial roads in Nigeria.
The issuances, according to Oniha, delivered impressive real economy benefits, including “jobs, improved travel times between major commercial cities, linked borrowing and government expenditure to specific critical projects, helped increase the flow of cargo and passenger traffic across major cities, and improved infrastructure delivery across the country”.
This is one of the most effective social and development impact debt financing measures in infrastructure.
Implicit is its financial inclusion because a quarter of the subscription is earmarked for retail investors – the ordinary person in the street.
Not surprisingly, the June issuance was oversubscribed 446%. It gives Nigerians a direct stake in funding their country’s infrastructure while earning an investment return to boot.
Where else in the world would you find a sign on a highway stressing: “This section funded by Sukuk”. Or: “Thanks for your Sukuk Investment, journeys are now faster”?
This is the reality on the Kaduna Eastern Bypass Road, the Kano-Maiduguri Highway or the Obajana-Okene Road.
The market, investor community and contractors linked to the projects have lobbied the government to continue issuing road Sukuk.
The process is safe-guarded by an arms-length independent audit body to oversee drawdown of funds against work completed to pre-empt corruption and misuse of funds; ring-fencing funds specifically for work stated in the offer documents; contractors receiving payment promptly; and Sukuk investors getting paid on time.
Sukuk, says Oniha, is an established part of Abuja’s diverse public debt raising universe “subject to the government’s funding need and portfolio management strategy”.
Domestic borrowing through Sukuk, an estimated $200bn niche ethical ESG instrument, has seen a dramatic uptake during the Covid-19 outbreak in the Middle East and Southeast Asia.
The Saudis have raised $12.42bn through sovereign Sukuk in FH 2020. The UK Treasury is issuing a second Sukuk to help mitigate the impact of a Hard Brexit, to attract FDI from the Middle East and Asia, and under its financial inclusion policy.
South Africa and Nigeria have a similar diversified debt financing approach including external borrowings and global and domestic bonds and Sukuk.
Both, despite being major commodity producers, have a low revenue base relative to their GDP which is reflected in their high Debt Service to Revenue Ratio.
While Abuja has shown urgency in Sukuk issuance, Pretoria has dithered.
South African state-owned enterprises (SOEs) have long toyed with the idea of issuing Sukuk, but the country’s dire economic fundamentals, mismanagement of SOEs, structural issues relating to toll road and electricity pricing and the Treasury’s reluctance to provide guarantees, put paid to Eskom, Sanral and TransNet going to the market.
Yet Pretoria has failed to capitalise on its first mover advantage when in 2014 it became the first and only African sovereign to issue an international Sukuk – a benchmark $500m offering which matured last month. Are the winds of change sweeping the Treasury?
In his Budget Review in April, Mboweni confirmed that “in 2020/21, the borrowing requirement will be R432.7bn.
To ensure a diversified debt portfolio that spreads risk, the requirement will be met from short and long-term borrowing in the domestic market, and from foreign-currency loans.”
The Treasury, he added, is preparing to issue a debut rand- denominated Sukuk in 2020/21. “The intention,” says Siyabonga Shange, director, debt issuance and management at the Treasury, “is to develop and help grow the rand Sukuk market while potentially diversifying the investor type.
“The need to develop the domestic market at the moment was greater.”
Given the Covid-19 disruption, the timing and size of the Sukuk will depend on market conditions and pricing. “We feel the market is big enough to warrant attention and potential development.”
If the pricing and market conditions are right, the government might return to the market later with a second US dollar Sukuk.
The Treasury can learn from its Nigerian counterpart. The pricing of Abuja’s three Sukuk sharply declined from a rental rate of 16.47% in 2017 to 15.743% in 2018 to 11.2% a year in 2020.
This despite the Covid-19 disruption and the sharp fall in oil prices and its impact on Nigeria’s revenues and public finances. Regular issuances instil investor confidence and build up a Sukuk yield curve for other issuers including SOEs and corporates, which ultimately reduces the cost of finance.
On June 24, Eskom issued a tender inviting “credible” law firms to bid “to provide legal services for a rand Sukuk issuance.”