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Corporate Debt Pile of N4.91trn Now 2.4 percent of GDP

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While the Nigerian economy is growing slowly, corporate Nigeria is carrying trillions of Naira in debt in its book as interest expenses are spiking on the back of rising borrowing cost.

As of the first quarter of 2023, non-financial corporate businesses held close to N5 trillion in debt on their books—a record in Naira terms, according to data compiled by MoneyCentral.

This corporate debt outstanding is 2.43 percent of the gross domestic product (GDP).

Some firms manage their capital structures and make adjustments to them in the light of changes in economic conditions.

It appears companies are unperturbed by the negative impact of rising interest rates and currency devaluation on their balance sheet as they intensified on external financing.

Nigerian corporates issued commercial papers worth N507 billion in the first quarter, compared to the N175.4 billion raised in the corresponding period of 2022.

It is important to note that firms usually tap the debt market to finance working capital requirements, pay dividend, and fund expansion plans which strengthens earnings and bolster investor confidence.

There were record borrowings between 2019 and 2020 as a government stimulus to cushion the effects of the pandemic forced regulators to cut interest rates which made yields attractive for borrowing.

The Russia and Ukraine war that made central bank governors embark on a tighter monetary stance to curtail accelerating inflation means entities are now paying more to service debt and it also makes future borrowings expensive.

The CBN hiked the monetary policy rate (MPR) for the sixth-consecutive time over the last 12 months to 18 percent.

One-year T-bills closed at 14.7 percent in March 2023, compared to 4.5 percent in Q1 2022, as investors bet on higher yield amid the elevated inflationary environment.

Nigeria’s April inflation figure increased to 22.22 percent from 22.04 percent last month, according to the National Bureau of Statistics Consumer Price Index. The data represented a 0.18 per cent increase from April’s inflation figure.

The Nigerian naira weakened slightly by 2.6 percent to ₦460.9/$1 in Q1 2023, as high demand for dollar assets continue to weigh on the domestic currency.

Rising debt in an expanding economy with low interest rates may not necessarily be a bad thing if companies are increasing investments as well.

However, the Nigerian economy has been growing at a snail pace and it is expected that the cash crunch or scarcity which further deals a great blow to consumer spending and retail activities will undermine GDP growth this year.

“I am estimating a reduction in Q1 2023 nominal GDP by between N10-15 trillion due to challenges sourcing cash in Q1 2023,” Yemi Kale, a former Statistician General of the National Bureau of Statistics (NBS) said.

Overall growth fell to 3.10 per cent in 2022 from 3.40 per cent in 2021 according to new GDP results from the National Bureau of Statistics.

Fortunately, most bellwether firms appear better placed in their ability to repay debt as they have a strong operating income. They are also able to manage their capital structure to ensure that they will be able to continue as a going concern while maximizing the returns to their shareholders through the optimisation of debt to equity balance.

Dangote Cement, BUA Cement, and Lafarge Africa, collectively have N938.15 billion in short and long term debt sitting on their balance sheet, which is 1.67 percent higher than 2022’s N921.14 billion.

Dangote Cement’s debt to equity ratio stood at 0.67, which means the cement maker has N0.67 of debt for every Naira of equity; therefore, it is not susceptible to financial risk and there are no threats to its going concerns.

The company said it has a strong balance sheet/cash flow and internal resources to meet its obligations and withstand macroeconomic shocks.

Consumer goods firms have incurred N1.38 trillion in total debt as at March 2023, which is 43.14 percent higher than 2022’s N964.09 billion.

The combined total debt in the books of telco giants, MTN Nigeria Plc and Airtel Africa, stood at N1.78 trillion there are concerns over the huge debt they are being owed by deposit money banks that relates to non-payment for the provision of the Unstructured Supplementary Service Data (USSD) to bank users.

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