Alarm, as FG suffocates private sector bond market

* FG raises 4.7 trillion naira as companies raise 802 billion naira year-to-date

* Analysts recommend options on private sector debt capital

* Risk of sovereign default, increase in economic nightmares, reckless use of debt as a financing tool – Experts

By Peter Egwuatu

Evidence has emerged that federal government bond issuance is crowding the private sector out of the bond market, as it has raised over 4.7 trillion naira, well above what private sector organizations have been able to raise on the market. Nigerian capital market, from year to year. Date, YtD August 2021.

The private sector raised 802 billion naira of corporate bonds on the capital market during the same period.

Therefore, analysts and capital market operators have criticized the government’s excessive borrowing in domestic and international markets without considering the revenues needed to service the debt even as they reached the alarming point of crowding out the government. real productive sector.

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Analysts have argued that the crowding out effect on the private sector poses a serious threat to the capacity of the real sector to create wealth and generate productive employment. They therefore advocated a low interest rate environment so that the private sector is encouraged to raise debt capital (corporate bonds).

Sukuk, green bonds, euro

Meanwhile, the federal government had issued Sukuk Bonds, Green Bonds and Eurobonds. Federal government bonds are the most liquid and capitalized bonds of Nigerian Exchange Limited, NGX.

The federal government issues bonds in the primary market through the Debt Management Office, DMO at its monthly auctions and these bonds are then listed for trading.

These bonds are guaranteed by the full faith and credit of the Federal Government of Nigeria and are semi-annual coupon bonds. Income earned on FGN bonds is tax exempt.

Financial Vanguard’s findings from data obtained from NGX showed that the federal government had raised more than 4.7 billion naira which was listed on the stock exchange, since the start of the year, in August 2021, while ‘About 802 billion naira of corporate bonds in various categories have been lifted and listed accordingly.

The various companies that have taken advantage of the weak performance of the fixed income market to raise bonds at rates below 10% to the tune of 802 billion naira include three issuers, namely Dangote Cement Plc, 300 billion naira MTN Nigeria Plc, 100 billion naira and BUA Cement Plc, 115 billion naira. They have raised over 60 percent of the total bonds raised in the market.

Other issuers include Fidelity Bank Plc which raised N41.213 billion; Flour Mills of Nigeria Plc raised N29.8 billion; Nova Merchant Bank raised N10 billion; Emzor Pharmaceuticals raised 13.7 billion naira; while Mecure Industries entered the market for 3 billion naira.

Others are CardinalStone Financing SPV Plc which raised 5 billion naira; C&I Leasing Plc (10 billion naira); CERPAC (15 billion naira) and Coronation Merchant Bank, 30 billion naira.

Analysts, market operators react

Responding, analysts and Highcap Securities Limited vice-chairman David Adonri said: “Both externally and internally, the government has taken on and is taking on more debt. This increases the risk of sovereign default and economic nightmares.

“Nigeria’s hard currency earning capacity may also not be sufficient, now and in the near future, to allow the public service to increase external debt. “

Lamenting the crowding out effect of government borrowing, Adonri said: “Internally, borrowing has now reached the alarming point of crowding out the real productive sector.

This poses a serious danger to the capacity of the real sector to create wealth and generate productive jobs. In every capitalist economy like ours, the government has the primary obligation through policies and actions to prevent crowding out and to ensure greater capital formation by the real private and productive sector.

“The excessive borrowing of this government to the detriment of the private sector which is the engine room of the economy, calls into question the soundness of their economic strategy.”

Regarding debt service, he said: “The reckless use of debt as a financing tool is fraught with calamitous dangers. Even more disheartening is when debts are mainly used to finance consumption or recklessly finance some secondary infrastructure (roads and rails).

“These will neither improve the productive momentum of Nigeria’s light industries nor make the economy self-sufficient. The disorderly growth of the economy pursued by this administration can only lead the country into an abyss if public borrowing is not reduced to reduce the cost of funds so that production is competitive. “

“The Nigerian government is reckless in its financial management. Their expenses far exceed income and the level of safe debt.

“If they do not retrace their steps by instituting prudent financial management and also promoting the development of primary infrastructure, that is to say of engineering infrastructure (technical education, metallurgical industry, construction industry) (electric power, chemical industry and modern energy industry), through the initiative of the private sector, the only result will be the continuation of economic lamentations, ”he noted.

Analyst and Head of Research and Investment at Fidelity Securities Limited, FSL, Victor Chiazor, said: “The federal government will continue to lead the way in terms of raising debt capital given the environment. interest rates in the country.

“Private sector borrowing does not thrive in a high interest rate environment, as such borrowing often becomes toxic to their business. The interest rate environment must be low for the private sector to be encouraged to raise debt capital.

“This expansionary measure will also improve economic activities, as the economy will benefit from a higher level of business activity compared to when companies are unable to raise the necessary capital to develop their activities due to the fear of not being able to honor their debts. “

In his own commentary, analysts and APT Securities & Fund Limited Managing Director Mallam Garba Kurfi said:

“The market is big enough to accommodate both. Remember that PFAs manage over 13 trillion naira that are ready to invest. I still believe that state governments are free to visit the market or the World Bank for funds, especially for development.

“Kaduna State has done the same and is looking at the development underway. Lagos State visited the market for a government bond.

The economy is feeling the pressure as gross domestic product, half-yearly GDP grows to five percent. Without borrowing, the economy will not recover quickly.

Also reacting, analysts and COO of InvestData Consulting Limited, Ambrose Omorodion, said: is not good but borrowing at a low rate is an opportunity for the private sector to approach the fund market but a lot. do not take advantage of it.

If the government lowers its borrowing rates to manage the high cost of servicing debt, funds will flow into the equity space in search of better returns, especially as these companies’ earnings become stronger for them. support the stock price and payout at the end of the day. “

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