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Vultures in flight: Should Nigeria consider suspension of sovereign debt payments like Argentina?

The vultures of finance at the center point of the COVID-19 pandemic causing significant economic damage around the world. 

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Vultures in flight, Should Nigeria consider suspension of sovereign debt payments like Argentina?

Does it make sense to enter into difficult sovereign debt plea discussions with the vultures of finance amid the COVID-19 pandemic, which is causing significant economic damage around the world?

Argentina, South America’s second largest economy behind Brazil, has a US$500-million payment approaching on April 22 to bondholders, which, if missed, will trigger a month’s deadline, until a bailout or default occurs. The COVID-19 pandemic crisis makes a default on sovereign debt more likely than not.

Argentina is asking its bondholders for a grace period to set up the conditions for economic growth, which will allow it to allocate some of its extremely limited resources for paying its debt, starting at 0.5% interest rate and gradually making its way to 4.5%, putting the average rate to 2.33%.

Coming back home, the Nigerian Government is not seeking a suspension of interest payments from its Eurobond holders, but looking for other alternatives like debt relief from the Chinese. The oil price wars triggered by the Saudis and Russians, coupled with COVID-19 pandemic shutting off global economic demand, has further impoverished the country, causing it to seek aid from unlikely avenues.

“We have not considered investors of our commercial paper,” Finance Minister, Zainab Ahmed, said. “If it happens anywhere, if it’s something that would work, then we will look at it.”

(READ MORE: Debt crisis looms in emerging markets)

Nigeria’s Eurobonds account for $10.86 billion or 39% of external debt as at April 7, 2020. The country paid $771 million in interest on its Eurobonds last year compared with $329 million in debt service to multilateral creditors, according to the country’s Debt Management Office.

 

Vultures in flight, Should Nigeria consider suspension of sovereign debt payments like Argentina?

 

READ ALSO: President Buhari not to blame for increase in debt – DMO DG

Michael Nwakalor, a Macroeconomist at CardinalStone Research, in a phone chat explained the challenges in getting a suspension on payment for its sovereign debts

“No doubt, Nigeria needs as many funds as it can get to cushion the impact of the twin shocks it currently faces. On debt relief and restructuring, this is more likely to come from multilateral organizations like the World Bank and AFDB. Going the route of Argentina, by seeking to restructure and suspend repayments on private debt may have devastating consequences on Nigeria’s credit ratings and reputation. Creditors may now have to factor in the possibility of debt suspensions in crisis situations.”

Stanbic 728 x 90

According to him, If the FGN is able to get debt suspensions on immediate repayments for bilateral and multilateral debt, which makes up c.60% of the country’s external debt, that should provide some fiscal space even though a high domestic debt (67% of total debt) will still have to be managed.  

(READ MORE: Update: FG to withdraw $150 million from sovereign wealth fund, to borrow $6.9 billion)

Nwakalor buttressed more points on why it’s hard for Nigeria to get such bail out.

“Restriction of private debt repayments of the Argentina may be considered a default by rating agencies and it is clearly difficult to get private bondholders to collectively agree to accept stipulated terms as it may mean losses for savings of individuals, who are being hit by the crisi,” he added.

Creditors know they need to concede, as they are faced with two options: giving up future profits, or entering into decades-long litigation that is costly and unwanted.

READ MORE: FG to go ahead with Eurobond payment, seeks debt relief from china, multilateral agencies

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Wale Okunrinboye, an Investment Analyst, Sigma Pensions Limited, in an email, explained why it might not be a bad idea for Nigeria to ask for  a suspension of interest payment. He stated:

“A request for suspension of Eurobond payments, as admirable as it might sound under the present circumstances, would be a tough sell at this time as private investors would be required to swallow uncompensated losses during a difficult time.

”It is important to understand that private investors invest in Eurobonds to meet investment needs or defense liabilities. As such, asking them to suspend payments could trigger portfolio losses leading to fresh market turmoil in the EM Eurobond debt space, as well as adversely impact future access for African countries. As such, I do not think this request is likely to receive favorable attention.”

He explained that Eurobond debt is held by a wide list of disparate creditors that makes it difficult to obtain collective agreement on debt relief. Okunrinboye added that realistically, Nigeria can push for multilateral/bilateral creditors to provide suspension or cancellation of interest payments over this period and hope for quick resolution of the covid-19 outbreak.

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Olumide Adesina is a France-born Nigerian. He is a Certified Investment Trader, with more than 15 years of working expertise in Investment trading. Message Olumide on Twitter @tokunboadesina. He is a Member of the Chartered Financial Analyst Society.

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Business News

Heavy sell-off in Guinness shares leads to N6.9 billion market value loss in a single day

Shares of Guinness Nigeria Plc suffered a 9.89% loss today.

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Guinness Nigeria Plc Reports Full Year F19 Results

Guinness Nigeria Plc suffered a 9.89% loss today following a heavy sell-off in the shares of the brewer. This triggered a market value loss amounting to about N6.9 billion at the close of trading activities on the Nigerian Stock Exchange, as investors scaled-down stakes in the brewer.

Data tracked at the close of the market today revealed that the shares of GUINNESS declined from N31.85 per share at the market open, to N28.70 per share at the close of the market today, to print a loss of 9.89%.

This decline saw the market capitalization of the leading maker of beer and spirits fall from N69.75 billion to N62.86 billion at the close of trading activities today, putting the total market value loss at N6.89 billion.

The shares of Guinness at the close of the market today cleared at N28.70 per share, 9.89% lower than the closing price of N31.85 per share yesterday.

At the current price, Guinness shares are currently trading 20.27% lower than their 52-week high of N36.00 per share. However, the shares of the company have returned about 120.8% gains for investors who bought them at their 52-week low trading price of N13.00 per share last week.

During trading hours on the Exchange today, about 159,380 ordinary shares of Guinness Nigeria Plc worth about N4.57 million, were exchanged in 27 executed deals.

The shares of Nigerian Breweries Plc and Golden Guinea Breweries Plc closed flat at N50.1 per share and N0.81 per share respectively, while the shares of International Breweries Plc shed 0.88% to close low today at N5.65 per share.

What you should know

  • At the close of trading activities today, the NSE All-Share Index and market capitalization appreciated by 0.29% to close higher at 39,128.34 index points and N20.477 trillion respectively.
  • The NSE Consumer Goods Index, an investable benchmark designed to track the performance of the shares of consumer goods companies like Guinness Nigeria Plc, depreciated by -0.35% to close the day lower at 553.26 index points.

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NAICOM revokes operational licence of UNIC Insurance, appoints Receiver/Liquidator

NAICOM stated that it had appointed Hadiza Baba Gimba as the Receiver/Liquidator to wind up the affairs of the company.

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Recapitalisation: 26 firms get NAICOM's approval

The National Insurance Commission (NAICOM) on Wednesday announced the withdrawal of the operational licence issued to UNIC Insurance Plc.

Although no official reason has been provided for the revocation of the insurance firm’s operating license, NAICOM, however, stated that the decision of the regulator was in the exercise of the powers conferred on it by the enabling laws.

According to a report from the News Agency of Nigeria (NAN), this disclosure is contained in a notice which was issued by the commission in Lagos to the general public and policyholders, where it noted that the revocation of the operational license, RIC 043, is with effect from March 25.

NAICOM, thereafter stated that it had appointed Hadiza Baba Gimba as the Receiver/Liquidator to wind up the affairs of the company.

NAICOM in its statement said, “The general public/policyholders are by this notice required to direct all inquiries and correspondence regarding UNIC Insurance to the receiver/liquidator.

The receiver/liquidator will be dealing with the company’s liabilities in accordance with the provision of Insurance Act 2003.’’

What you should know

  • It can be recalled that NAICOM, for the third time in June 2020, gave insurance firms in the country a one-year extension to meet the recapitalisation obligation that was recently set for them apparently due to the coronavirus pandemic which had disrupted the activities of most insurance companies.
  • Some insurance companies had been going through some bad patches with a good number of them struggling to meet up with their obligations and the recapitalization requirements.
  • The recapitalisation programme requires life insurance firms to meet a minimum paid-up capital of N8.0 billion, up from N2.0 billion previously. In the same vein, general insurance companies are required to raise their minimum paid-up capital to N10.0 billion from N3.0 billion previously.
  • The regulatory capital for composite insurance was raised to N18.0 billion from N5.0 billion previously while reinsurance businesses are now required to have a minimum capital of N20.0 billion from a previous N10.0 billion.

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