Financial experts have sounded a warning to Nigerian companies seeking foreign-denominated loans to have a rethink as global economies responded to hyperinflation with aggressive monetary policy tightening.
As the impact of the Russia-Ukraine war continues to fuel inflation globally in a way not seen in decades developing nations are responding by jacking up interest rates.
The United States Federal Reserve recently raised its target interest rate by three-quarters of a percentage point to combat a disruptive rise in inflation, while also forecasting a weakening economy and growing unemployment in the months ahead.
Nairametrics reported that the rate hike is the biggest by the Federal Reserve since 1994, and it came after recent data indicated little headway in the country’s inflation fight which has topped 8%. The United Kingdom also increased its interest rates by 0,25% to 1.25% warning that inflation rates in the country could hit 11%.
Impact on the Nigerian Firms with FX Liabilities
Economic analysts are expressing concerns that the hike portends more trouble for Nigerian firms who took or intend to assess dollar loans and also the country with huge debt.
The recent uncertainties around the US inflation surge are transcending into a global financial shock that import and market-dependent economies like Nigeria with huge foreign debt, would hardly escape its negative impact.
For example, Nigerian banks rely on foreign-denominated loans to beef up their forex liquidity.
- Access Bank’s US$500 million Eurobond at a yield of 6.125% with maturity, September 2026 and Ecobank’s US$350 million Eurobond at a yield of 8.75% with maturity, June 2031 are still currently running the few instances of Nigerian firms with dollar loans.
- However, with the recent development, some firms with the intention to raise additional or more Eurobond may have to tarry due to unfavourable yield environment.
- Analysts who spoke with Nairametrics believe that the development may shrink profits and dividends of these companies with dollar liabilities they may declare in near terms following the increase in the U.S interest rate. This is because the cost of servicing the loan, especially the floated ones will increase.
- It is also expected that the increase will have a multiplier effect on the companies which may force them to cut jobs thus increasing the nation’s unemployment and poverty rates respectively.
What the analysts are saying
Mr. Victor Chiazor, Head of Research and Investment, FSL Securities Limited said with the increase in interest rate, it is expected that the companies with dollar liabilities will experience a drop in profit as the borrowing cost will rise and impact negatively on their bottom line.
- “We will look out for drop in earnings for those who borrowed using floating interest rate. Those who will be affected more are those that borrowed using floating interest rate as against fixed interest rate. Floating interest rates will continue to adjust as interest rate adjust in advanced economy. For example, Londons interbank Libor rate fluctuates automatically the interest rate which goes up as against fixed interest rate which is amortised,” he said.
Chiazor noted that some Nigerian banks have Eurobonds but most of them borrowed using a fixed rate.
He explained that the series of hikes in interest rates for most advanced economies is expected to stall access to the Eurobond market for corporate entities as they will have to raise these debt instruments at a much higher coupon rate compared to previous auctions which will lead to higher interest payments.
- “Luckily, most corporate entities raise Eurobonds with fixed coupon rate which helps them in planning their interest payments for the tenor of the debt instrument as against a few years ago when most companies raised Eurobonds with a floating interest rate which would have significantly impacted on their interest payments as their interest expense would have continued to rise as interest rate inches higher.
- “Also the likes of Zenith bank just finished paying off its US$500 million Eurobond which matured in May 2022 as well as UBA which also paid off its US$500 million Eurobond which matured in June 2022, may be forced to stay action on any plans to raise additional capital via the Eurobond market due to the rising interest rates as they will have to pay a higher coupon than the 7.375% (Zenith) and 7.75% (UBA) coupon paid for the previous offer,” he said.
Managing Director, Sincere Investment Limited, Chief Eugene Ezenwa said:
- “As far as interest rate has a direct impact with loans, what it means is that those companies are likely to pay more in servicing those loans. It will have a very negative impact on the firms and the economy in general. It will affect even our foreign reserve; it has a multiplier effect because the dollar is an international currency. It will hit hard on the bottom-line of companies”.
Managing Director Crane Securities, Mr. Mike Eze noted that the increase in U.S interest rate will affect the companies with exposure to dollar loans immensely.
- “Those firms with dollar exposure will be paying higher interest rates, even the importation of materials will be higher, it will have a spiral effect in the system. It will lead to a downsize in terms of strength of labour; importation will reduce and that will spiral over their return on investment and their income and dividend will drop. Unless the rate is reversed some of these companies will either pay no or fewer dividends. It is also possible that those with higher exposure may also slip into negative bottom-line,” Eze said.
Ayodeji Ebo, Managing Director/Chief Business Officer, Optimus by Afrinvest said:
- “Borrowing cost is expected to increase on new loans, also the cost of the existing loans may be reviewed once is floated base. For most firms, the cost of goods produced will likely go up, especially those whose demand is inelastic. It is not going to affect the existing Eurobond because the interest on them have been determined unless they want to borrow newly”.
CBN also warning against dollar loans
The Central Bank of Nigeria (CBN) recently told manufacturers whose revenues are naira- denominate not to take dollar loans.
Instead, the apex bank pledged it will continue to provide naira funding, advising that where the revenue stream is in naira, then Dollar loans should be avoided.
- The CBN Governor, Godwin Emefiele made the remark during a facility tour of Tolaram Group projects manager of the Lagos Sea Port under construction.
- “So, for any entrepreneur that wishes to do business in Nigeria, we will provide naira funding and will always advise that particularly if your revenue stream is in naira, such company should avoid taking dollar loans. Take cheap naira loans at a single-digit interest rate with two years moratorium,” he said.
- Emefiele said the CBN will continually encourage people to take advantage of such loans to drive industrialisation in Nigeria and get a manufacturing business back alive again.