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Tyrion Lannister, one of the lead characters in G.RR. Martin’s book series: song of ice and fire, once said “Drinking And Lust, No Man Can Match Me In These Things.”
For Nigerian companies that have drunk deep on debt, the dwarf’s lines capture an enigmatic reality.
It was glaringly obvious that entities embarked on a borrowing frenzy when interest rates were low during the pandemic crisis as central banks slashed monetary policy rates to salvage economies from collapse. The result, companies now have a huge debt pile.
Added to the mix is an expectation that the new Central Bank of Nigeria (CBN) governor Olayemi Michael Cardoso will return to more orthodox monetary policy by raising rates steeply, which is needed to tame inflation that is waging war on Nigerians, help shore up the battered naira and attract foreign portfolio investment by making real rates positive again.
Nigeria has now been excluded from all the indexes on account of FX illiquidity. It was thrown out of the Barclays and JP Morgan local currency bond indexes in 2015/16 – and the FTSE Russell and now MSCI Frontier indexes.
“With the right policy mix, Nigeria could return … and back in 2012 just being included in one of those bond indexes was expected to result in $1bn of inflows,” Charlie Robertson, head of macro strategy at emerging-market investment firm FIM Partners, said.
Cardoso who recently unveiled his policy doctrine, urged a need “for interest rates to realign with money supply, inflation and market realities.”
In Nigeria, non-financial firms corporate debt is N8.25 trillion as at September 2023, which is 38.37 percent higher than 2022’s N5.29 trillion, according to data gathered by MoneyCentral. At 1.47 per cent of gross domestic product, it has never been greater.
There are concerns that as the Central Bank Nigeria (CBN) intensifies tightening cycle to subdue sticky inflation exacerbated by the Russia /Ukraine war and the new reforms of the new government, some firms who do not have enough cash flows to service their debt may be exposed to bankruptcy risks.
Of course, higher 10-year yields increase borrowing costs across markets, impacting everything from mortgage rates to business and government loans.
“I don’t think borrowing costs would come down as we expect further hikes by the regulator until foreign exchange issues are resolved,” said Ayodeji Ebo, managing director/Chief Business Officer Optimus by Afrinvest.
“It’s a chicken and egg situation. There is going to be erosion in profit margins of firms,” said Ebo.
The Monetary Policy Committee (MPC) of the central bank had increased the monetary policy rate (MPR) by 0.50 per cent to 18.50 per cent.
Inflation rate in Nigeria rose to 26.72 percent in September from 25.80 percent in August of 2023, according to recent data from the National Bureau of Statistics (NBS).
The Nigeria 10 year government bond has a 15.432% yield, according to data from World Government Bonds.
Manufacturing sector saw their combined debts to Nigerian banks rise from N5.56 trillion in January 2023 to N6.98 trillion in June 2023, according to the Central Bank of Nigeria’s Sectoral Analysis of Deposit Money Banks’ Credit.
“The projection for the Net Domestic Credit, though on the upward trajectory, reflects the expected credit dynamics in the economy. Credit to the Government is expected to decrease over the period due to the expected significant reduction in fiscal deficits arising from the removal of fuel subsidy. On the other hand, credit to the private sector is expected to increase owing to the government’s plan to achieve a higher level of growth driven by the private sector,” the report read partly.
Most firms have a healthy balance sheet and are able to pay interest on their debt as they still have a solid cash flow even amid foreign currency losses caused by an abrupt currency devaluation by a central bank that seeks to enhance flow of liquidity in the foreign exchange market.
The median interest coverage ratio for Nigeria companies stood at 5.81 as at September 2023, substantially lower than last year’s 7.31, according to data from MoneyCentral Intelligence.
The figure is a measure of a company’s ability to repay its debts, with a ratio of at least 2 generally considered the minimum acceptable amount for a company with solid revenues. Analysts typically prefer a coverage ratio of 3 or higher.
The combined finance costs or interest expense of the largest and most liquid firms spiked by 82.31 percent to N1.21 trillion as at September 2023, according to data from MoneyCentral.
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