Nigerian businesses seeking to raise capital this year may have to compete with unprecedented local borrowing by the Federal Government.
That is after sources of raising cash have thinned out for the government with the country effectively shut out of the international capital market, which is the single largest source of its foreign loans.
The latest salvo in Nigeria’s waning ability to tap the international capital market came when global credit ratings agency, Moody’s, downgraded the oil producer’s Eurobonds further into junk territory at Caa1.
It puts Nigeria’s credit rating on par with Pakistan and only a notch higher than Ghana, two countries knocking desperately on the door of the International Monetary Fund (IMF) for a bailout after their debt levels ballooned.
If the government is unable to borrow money from foreign creditors, it may have to resort to local sources to raise the capital needed to fund its budget. That effectively means the government will be competing for credit with the private sector, which would lead to what economists call crowding out.
Crowding out happens when government borrowing increases and it forces interest rates higher thereby dampening loan demand by those in the private sector.
The private sector has been repeatedly crowded out in the last seven years by increased government borrowing, but with external funding option cut off, it may take a new dimension this year.
The implication of that is businesses may balk at fresh investments and new hires due to rising interest rates triggered by increased government borrowing.
George Imade, executive director at Lagos-based asset management firm, Alpha Morgan Capital, said businesses already have a credit crunch on their hands due to rising global interest rates but it could get even worse due to government crowding out.
“The impact of the global economic crisis has created a liquidity squeeze in the system for businesses to access funds to operate and scale,” Imade said during the BusinessDay Africa Business Convention.
“If the government steps up its local borrowing, then the situation would get worse,” Imade said.
The government plans to borrow N7.4 trillion from domestic sources and N1.8 trillion from foreign sources this year, according to the 2023 budget documents.
Worries about a crowding out effect of government borrowing may be a tad exaggerated, according to Wale Okunrinboye, the chief investment officer at Access Pensions.
“The private sector has essentially been crowded out for the last seven years anyway,” Okunrinboye said.
“Nigerian corporates will be affected once the sovereign is downgraded but not at the scale that is being projected,” Okunrinboye said.
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The downgrade by Moody’s also affected nine Nigerian banks and was followed by a review of Nigeria’s credit outlook to negative from stable by another global ratings agency, Standard & Poor’s.
The country’s Eurobonds took a soft beating following the downgrade as foreign investors had long sold off their holdings. When Nigeria’s West African neighbour, Ghana, was downgraded last year to Caa1, the Eurobond sell-off was far worse as investors started pricing in the risk of a default.
In Nigeria’s case, some analysts believe the downgrade was a bit harsh, a sentiment that has been re-echoed by Zainab Ahmed, the finance minister,
However, Nigeria is teetering towards a debt crisis. Only Sri-Lanka and Ghana are projected to spend more on debt servicing this year according to latest estimates by the World Bank.
The International Monetary Fund (IMF) goes as far as to project that Nigeria will spend 100 percent of its revenue servicing debt by 2026.
