Govt can’t sustain borrowing at current rate, says FSDH

Posted By Uchenna Ajah On Monday, June 11th, 2018 With 0 Comments

By FELIX OLOYEDE

The Federal Government cannot sustain the current rate which it borrows from the local debt market as yields would increase as the implementation of the 2018 budget commences, Govt can’t sustain borrowing at current rate, says FSDH have said.

General Manager, FSDH Merchant Bank Limited, Robert Ajiamah(left): Managing Director/Chief Executive Officer, Rilwan Belo-Osagie; Executive Director, Mrs Hamda Ambah, at the bank’s pre-yearly general meeting press briefing in Lagos PHOTO: The Guardian newspaper

Speaking at a press briefing in Lagos on Thursday, Ayodele Akinwunmi, Head, Research, FSDH Merchant Bank Limited explained that planned interest rate increase in the US would make Nigerian debt instruments unattractive to investors, which would cause yields to increase in the bond market.

“FSDH Research also believes the yields on the NTBs may drop marginally from the current levels. However, the yields on the FGN Bonds may increase from the current levels as government begins the implementation of the 2018 budget. Consequently, yields on FGN Bonds may trend higher,” he asserted.

He also said the government would have to pay higher coupon to raise funds to finance the 2018 budget from foreign debt market as investors would prefer to invest US bonds, which are safer than Nigerian debt instruments.

He expressed worry that six months into the year, the country has no budget, despite its fragile economic growth.

Akinwunmi reasoned that government needs to implement expansionary policies that would engender growth in sectors that provide massive employment so as to make the country’s economy recovery is enough to create jobs and improve the standard of living of the people.

According to him, NBS recent released population data that showed that Nigeria has a population of about 194 million people as the end of last year.

“It means means we are growing at over 3 per cent. If you are growing at 3 per cent year-on-year and your real GDP is about 2 per cent, it means in real terms, we are growing at negative rate. And that growth rate is not enough for us to create jobs,” he said.

He, then, urged the government to encourage sectors such as real estate, mining and quarrying, agriculture, manufacturing, trade, and information and communication, which have the capacity to create large volume of employment and creative inclusive growth.

“The expected growth in government spending in the second half of the year, once the 2018 budget has been signed into law, should increase economic activities, with positive impacts on the income of households and firms,” he explained further.

He noted that the Federal Government may source for about N1.05tr from the domestic bond market, despite its resolve to scale down its local debts and adding that it would all borrow about N901bn may from the international market to fund the budget deficit.

“FSDH Research believes that the FGN will finance the deficit through issuance of bonds (local and foreign) and this may put upward pressure on yields,” he maintained.

According to Akinwunmidemand from foreign investors caused the country to experience the lowest Month-on-Month (M-o-M) growth rate in its external reserves since July 2017 last month.

“The 30-day moving average external reserves increased by 0.36 per cent, up from US$47.49bn at end-April to US$47.66bn at 28 May 2018. The total turnover at the Investors’ and Exporters’ FX Window (I&E Window) between April 2017 and May 2018 stood at US$50.73bn.

“The highest amount was recorded in January 2018. Our analysis between August 2017 and May 2018 shows that Nigeria recorded the lowest foreign exchange inflows through the I&E Window in May 2018. FSDH Research expects the positive domestic and external environment to further lead to external reserves accretion in the short-term and this development should provide further stability for the foreign exchange rate,” he claimed.

FSDH Research forecasts that inflation rate would further drop to 11.50 per cent in May 2018, down from 12.24 per cent in April and expect the country to achieve a single digit by July 2018 provided there is no food shortage in the country due to of the current rising crisis in the food producing areas in the country.

Akinwunmi posited the depreciated for the fourth consecutive month in May 2018, which the Nigerian equity market recorded was attributed to uncertainty ahead of next year’s general election and the fact that some foreign investors are repatriating their maturing fixed income investments due to low yields.

He expressed optimism that there may be a reversal of the current downward trend very soon as the economic environment continues to improve, since the equity market is approaching an oversold position. Stability in the foreign exchange market due to positive developments in the crude oil market, bargain-hunting investors taking advantage of current prices, strategic positioning ahead of HY1 2018 results  and repositioning of portfolios as a result of the drop in yields on NTBs, would help drive market growth, he said.

“We expect the equity market to appreciate from current levels as investors’ position for HY1 2018 results and bargain hunt,” the Head of Research, FSDH asserted.

More so, Akinwunmi explained a research FSDH Merchant Bank carried showed that the N9 trillion the current government claimed to have spent in the last three year, was at the same level of what previous administrations had spent, when adjusted for naira depreciation.

He, therefore, encouraged the government created buffer into the Excess Crude Account with the current oil price appreciation and as well begins to look beyond oil through the development of the non-oil sectors.

According to him, the Central Bank would only be able to defend the naira when the country makes higher dollar earnings.