Forex crisis: $30bn loan in jeorpady
Anxiety is beginning to cloud the possibility of international lenders to give Nigeria the $ 30 billion she needs to restructure her sagging economy. The Nation’s economy which slipped into a recession in the first quarter of 2016 has continued to deepen the government’s desperation for far reaching solutions.
The recent drop in Nigeria’s credit risk rating by international rating agency Fitch from BB- to B+ has set many investors on the fresh task of reviewing risk-adjusted returns expected from the country’s sovereign gilt instruments. So far global investors have been content with a 3 to 4% return above London Interbank Offer Rate (LIBOR) but this may not subsist for much longer as the downgrade puts pressure on bond prices and calls for higher yields to maturity.
Bond traders have explained that a country’s risk rating refers to the risk of investing or lending in a country, arising from possible changes in the business environment that may adversely affect operating profits or the value of a country’s assets. For example, financial factors such as currency controls, devaluation or regulatory changes, or stability factors such as mass riots, civil war and other potential events contribute to companies’ operational risks. Analysts note that this term also refers to political risk.
Details show that the total cost of the projects and programmes under the Federal Government’s borrowing plan is $29.960 billion, made up of proposed project loans of $11.274 billion, Special National Infrastructure projects $10.686 billion, Euro bonds of $4.5 billion and Federal Government budget support of $3.5billion.
President Muhammadu Buhari, in an engagement with members of the national assembly, recently explained the need for the mammoth-sized loan pointing out that the country’s massive infrastructural deficit can only be effectively tackled by borrowing money from external sources over a five-year time horizon.
“Considering the huge infrastructure deficit currently being experienced in the country and the enormous financial resources required to fill the gap, in the face of dwindling resources and the inability of our annual budgetary provisions to bridge the deficit, it has become necessary to resort to prudent external borrowing to bridge the financing gap, which will largely be applied to key infrastructure projects, namely power, railway and road projects, among others.” He noted.
But this has elicited mixed feelings amongst Nigerian policy observers. The major problem they have with the loans is its size, tenor and the application of the money raised. Given the country’s notorious lack of accountability and fiscal transparency, local economists have suggested that the loans should be made fungible and scalable meaning that it should be disbursed only based on clear project milestones attached to schemes that are self-sustaining and self-financing. This would exclude projects that are of a pure social nature with no stream of potential future cash flow to pay back the debt. The overtly welfarist orientation of government could cause severe reservations in international bond markets if prospective sovereign bonds are not tied to specific projects with clear cash flow plans.
The finance ministers proposed European road show could, according to analysts, end up being an embarrassing fiasco if the minister does not present a formidable bond amortization template based on underlying project cash flows. Says Tajudden Olanrewaju of Goldcraft Investments, a local equity and bond trader, ‘You need more than grand ideas to make a bond issue work, it is less about guile than about clarity and commitment to a plan everybody knows can work. If you are going to get people interested in your bond they want know what the heck you are going to do with the money raised and how the heck you intend to pay back. Sovereign bonds are not general obligation instruments they are revenue instruments expected to raise cash from tangible projects’.
There is a concensus among domestic and international analysts that the nations country risk is quite high. Therefore, lenders and investors alike are cautious in dealing with Nigeria in terms of lending or investing. According to a few foreign traders the chances are tangible that you could see bond prices tumble as country’s like America raise domestic interest rates in the course of the year thereby putting pressure on fixed income yields in markets such as Nigeria’s.
Making matters worse, the instability in the foreign exchange market has woken doubts about the country’s ability to attract big ticket lenders.
Intense volatility has made it difficult to predict where the exchange rate will be in the next one month with the gap between the official rate at N305/$1 and the parallel market at about N495/$1 widening wildly.
Some investors have also fingered the structure of Nigeria’s economy as a challenge as it rests almost exclusively on Crude oil for about 90% of its foreign exchange earnings. The lack of diversity of foreign exchange cash flow serves as a strong impediment to its ability to smoothly generate dollar-equivalent local returns that can be repatriated without capital conversion constraints. Besides at a less technical level, Nigeria is considered notorious for mismanaging loans.
Some of the country’s creditors under a negotiated Paris Club agreement in 2005 had had to write off a crushing $18 billion or 60 per cent of the $30 billion debt Nigeria owed to the lending consortium at the time. The staggering write-off took place under the administration of former President Olusegun Obasanjo when the country was brought to its knees by its epic sovereign debt obligations.
Former Managing Director of defunct, ACB International Bank, Emma Nwosu believes that lending money to Nigeria by foreign lenders depends wholly on their expectations of how Nigeria restructures and transforms her economy.
Nwosu who expressed fear that Nigeria’s antecedent does not portray her as having the ability to manage borrowed money well, expressed scepticism about fresh foreign loans.
‘’Historically, Nigeria has never managed any loan process well. It has not transformed the economy. And no responsible lender will lend this money given our antecedent in managing loans’’, he said
Dr. Afolabi Olowokere of Financial Derivatives Company Limited, who shares Nwosu’s view reckons that ratings, risk and interest rate charges play very important roles in international lending.
Olowokere believes that there are lenders willing to lend you money no matter the risk. However, he explained the such lenders takes very high their interest rate. According to him, the down grading of the country may push the interest rate for borrowing by Nigeria to as high as 7 or 8 per cent.
‘’Paying back this loan in dollar is where the problem lies because the conversion rate is currently high and the productivity growth needed to support a better forward rate is doubtful. You get a sense that the government is waxing emotional where it should be thinking structural’’ said Olowokere.
Interestingly, local and international investors are jamming their fists in their jaws, as they watch the country’s bond rating slip into junk territory, many have said, that negative economic indicators and a troubling macro-economic environment have kicked a cavity in the country’s capacity to raise new money at modest coupon rates.
There are still grave concerns that the lack of foreign exchange will hamper the economy, inflation has rather hit the roof top at 18.55 per cent as prices of consumer goods are now out of reach for the Nigerian populace, Unemployment stands higher than 12.5 per cent and still rising.
‘’While Nigeria’s economy will probably expand at 1.5 percent this year, after contracting by an estimated 1.5 percent in 2016, the non-oil industry will continue to be constrained by foreign-currency shortages.
“Access to foreign exchange will remain severely restricted until the Central Bank of Nigeria can establish the credibility of the interbank foreign-exchange market and bring down the spread between the official rate and the parallel market rates,” Fitch said.
The rating agency also noted that government’s debt remains low at 17 percent of gross domestic product, there is fear that the shortage of state revenue poses serious risk for the country. According the rating agency the government’s debt stood at 281 percent of revenue as of end 2016, and while 77 percent of that is domestic, foreign-currency borrowing is increasing.