Economist believe there is a boom and bust cycle once every decade. This theory has be proven severally in the past. The Dotcom crisis of the 90’s followed a decade of economic growth around the world. That boom was busted during the economic crisis that started in 2007 as the sub-prime mortgage crisis occured.
Nigeria has also witnessed its own share of boom and bust over the years. In the 70’s we had an oil boom which was followed by an oil glut that resulted in austerity measures in the early 80’s. We also had the boom in the late eighties and early 90’s when IBB liberalised the banking sector. That as well was followed by a bust as failed banks littered the economy resulting in a clean up by the Abacha regime. The advent of democracy at the turn of the millennium also precipitated a gradual amass of wealth in Nigeria as oil prices soared. This lead to a payment of about $12b of external debt paving the way to the much touted infrastructural development and wave of economic reforms. The accompanying economic blueprint ushered in sweeping banking reforms which help create a new boom in the Nigerian Capital Market. That off course bust in 2009. The debris of that bust still remains as a reminder more than 3 years after.
As its typical with the boom and bust cycle could a new boom be brewing in Nigeria? Trends in the bonds market tend to suggest of a boom. Over the years, the Federal and State Governments have shed off bank loans for bonds in their portfolio as banks seek for “safe” assets following the crisis which left them reeling. The increase has been as alarming as the rates in which they are obtained. From borrowing short term from banks at high rates Government has now gone for a more cash flow expedient medium term borrowing with rates ranging at between 10-16% per annum. State Bonds have doubled within the last one year from about N111.5b in 2010 to over N300b (market value) as at Feb 2011. The States also have a combined $2.1b (N336b) in foreign debts. This trend is worrisome as states differ in their ability to repay this loans considering their economic potentials. A state like Lagos that owes $491m in foreign loans can’t be compared to that of Kaduna with $182m.
The real danger in all of this is off course the banks. Most banks hold these instruments as Trade-able Investments on their balance sheets. This exposes them to huge financing risk if the value of the bonds taking a nose dive. With high yields of 18% and above Banks may be exposed to providing for losses emanating from the loss in value of the bonds. Remember bond yields move in opposite direction to its market value. And as most of the states evidently lack the economic atmosphere to generate alternate fiscal revenue, there is a huge danger in no time they will be unable to repay these loans. All it takes is a nose dive in oil prices and the chicken will come home to roost.
For the ordinary man there is cause to be worried. High yields on Government bonds hurt businesses. Companies who provide everyday goods and services borrow from banks to finance their activities. Banks lend to corporates at rates higher than they charge Governments. So when Governments borrow at 16% expect small businesses to borrow at 22%. When they borrow at high interest rates they pass down those costs to us. This makes us eat deep into our disposable income and make us feel poorer. The companies also stand to take in losses soon after as we may not be able to afford their goods and services. This will make us settle for cheaper and mostly lower quality substitutes which pass through our porous borders. More revenue is lost to imports just as factories close shops and lay off staffs. Banks see less quality assets to finance and consider laying more staffs as well. State Governments see their tax revenues drop as more people leave the labour force and business drift more into the black market and eventually out of the tax net. Riots start to occur as Government start to cut spending in response to its unsustainable debt. It’s a wave of inter connected and cataclysmic events when bubble like this bust. Greece is an example.
Should I be worried? Yes. Do I know exactly when the bubble will bust? The answer is no!
You need to consider why the yields are high.
Okay, from your article it seems like the one thing that could trigger this bust is a nosedive in oil prices. That doesn't look imminent. In any case, the debt profile of these state govts who seem to have no means to pay back these loans is still worrisome
Oil price droping is not imminent? Every happenings tilt toward possibility of price drop. Our problem in this part of the world is that fewer people discuss the effect of govt economic policies on our future. How can a state that has limited means of repayment borrow so large when the possibility of theft and public looting of treasury is rampant.
There could be more as well. Political Instability is one