There is a corporate debt storm building over the Nigerian economy as financial obligations that are mounting due to rising borrowing costs expose some entities to bankruptcy since foreign exchange revaluation losses have wiped out earnings.
A few years ago and during the coronavirus pandemic, bellwether firms were dangerously binged on debt when interest rates were low as they needed to meet their working capital requirements and fund future expansion plans.
Fast forward to today, borrowing costs have been rising since last year as a hawkish central bank seeks to tame a red hot inflation that is waging war on Nigerians who have become poorer while firms are going to pay more interest on money borrowed.
The non-financial corporate debt is now N8.5trn as at first quarter of 2024, which is 2.09 percent of Gross domestic product (GDP), according to data gathered by MoneyCentral.
A high interest rate environment poses especially big economic hazards to companies with highly leveraged balance sheets, sources say, and there appears to be no respite as central bank governor Olayemisi Cardoso’s body language indicates interest rates would remain high as long as necessary to tackle inflation.
“Every indication” that the MPC would “do whatever is necessary” to keep soaring inflation in check, said Cardoso.
“They will continue to do what has to be done to ensure that inflation comes down,” Cardoso added.
Nigeria 10 year bond yield was 19.45 percent on Monday May 13, according to over-the-counter interbank yield quotes for this government bond maturity.
Bond yields were as low as 4.25 percent in 2020 on the back of a rush for treasury securities as many investors sought stability during the coronavirus crisis.
The Apex bank has raised its monetary policy rate by 200 basis points to 24.75 percent from 22.75 percent.
Nigeria’s headline inflation increased to 33.20% year on year in March, up from the 31.70 percent reported in February, as per data from the National Bureau of Statistics (NBS).
The total debt (long and short term) of the largest consumer goods firms hit N2.73 trillion as at March 2024, which is 17.42 percent higher than 2023’s N2.33 trillion.
Firms in the industrial goods sector incurred a combined debt of N1.18 trillion as at March 2024, from N1.89 trillion as at March 2023.
Information Technology firms whose leaders are MTN Nigeria Communications and Airtel Africa are indebted to a tone of N3.18 trillion in the period under review from N3.06 trillion as at March 2023.
With borrowing costs spiking, it is more expensive for firms to issue debt capital.
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