Analysts have said that the cost of external debt will be increasing following the prospect that the U.S Federal Reserve (Fed) will hike its rates later this year. In what is a wakeup call on emerging economies including Africa, sub-Saharan Africa and Nigeria as a country, considering that it will fuel volatility in the economies’ bond, currency and even stock market.
As such, it may not be a good time for emerging countries like Nigeria and various organisations to tap from the foreign markets as experts in the sector expect interest rates and yields in the global financial market to increase further as the normalization of monetary policy in advanced countries continues.
The Cleveland Federal Reserve Bank President, Loretta Mester, said in a statement that the US Federal Reserve will raise interest rates three to four times in both 2018 and 2019.
“This development has two major implications. Firstly, countries or corporates that plan to raise money from the international market may pay higher interest rates because of rising yields. Secondly, countries in emerging markets may adjust the yields on their fixed income securities to sustain the interests of investors, both local and foreign, in the instruments,” FSDH Merchant Bank said in its weekly report.
Wale Okunrinboye, Head of Research at Sigma Pension was of the opinion that higher US policy interest rates imply a higher cost of USD debt for non-US borrowers.
“However, credit spreads on Nigeria’s Eurobonds remain subdued as a reflection of improved credit risk perception over Nigeria’s USD debt on account of a much improved outlook for oil receipts following the rise in oil prices and largely stable oil production. On balance, depending on the timing of the Eurobond sale, EM issuers are likely to find that global debt markets are more demanding of extra return for taking more risk than at prior issuances,”Okunrinboye told BusinessDay by email.
The Federal Open Market Committee (FOMC) of the United States Federal Reserve increased the Federal Funds Rate (Fed Rate) by 25 basis points to 1.75 percent-2.00 percent at its June 2018 meeting.
This was as a result of the US economy growing by 2.2 percent quarter-on-quarter in Q1 2018. Inflation rate increased to 2.8 percent year-on-year in May 2018, from 2.5percent in April. Unemployment rate dropped to 3.8 percent in May 2018, from 3.9 percent in April.
Analysts expect two more rate hikes in 2018, possibly in September and December, as the fundamentals of the US economy improve.
Most countries around the world rely on sovereign debt to finance their government and economy. When this debt is used in moderation, it can position an economy to grow more quickly. But too much debt can lead to a number of problems.
Nigeria and some other Africa countries fall in this category as in recent times have been busy tapping from the international market in order to raise funds for budget implementation and to finance their various economic activities.
South Africa, Egypt and Ghana are some of the African countries that have visited the international market in recent times with the aim to raise funds.
Nigeria has been working to lower costs, particularly as inflation is seen on the decline.
However, it is boosting dollar loans and wants to increase its foreign debt holding to 40 percent of total loans by 2019, while reducing the domestic debt to 60 percent in the same period.
Analysts have observed the inverse relationship between the movements in yields on FGN Bonds and US Treasury Notes over the last twelve months. The strategy of the Debt Management Office (DMO) to issue more of long term debt than short term debt and to increase the proportion of the external debt in the total debt stock was the major reason for the inverse yield movement.
“We expect the relationship to change as additional rate hikes are announced in the US and the Federal Government of Nigeria (FGN) starts to fund the 2018 budget deficit,” FSDH said.
Nigeria has been issuing sovereign bonds monthly to support the local bond market, create a benchmark for corporate issuance and fund its budget deficit, as compiled from The News Agency of Nigeria (NAN)
The Debt Management Office (DMO) paid part of the government’s maturing treasury bills instead of rolling over the debt as it has done in the past and plans to cut the amount it raises at home from future auctions.
Some financial analysts have expressed concerns that Nigeria’s foreign debt is moving towards the pre-2005 level and that we may fall into the problem of foreign debt trap again.
Meanwhile, Patience Oniha, the Director-General of the Debt Management Office (DMO) explained in a statement that the position of Nigeria before the exit from the Paris Club really was where most of Nigeria’s debt was in foreign currency, meaning most of it was external.
“Then, as we were told, we did not keep proper records, there was not a central office managing the debt, so there were several reasons we fell into a debt trap because, to manage debt, you need information, you need to monitor and you need to service. Thankfully, as a first step, all of that is behind us. We had a DMO created and, since then, we haven’t had a single record of default,” Oniha said in a statement.
On the plan that Nigeria wants to do more of foreign external borrowing, the DG explained that it is backed by a strategy and a plan “it is not just happening because we want to go and borrow externally,” she added.
