Tuesday, October 26, 2021

‘Global rate hikes’ll increase Nigeria’s debt service burden’

As Nigeria’s fiscal and monetary authorities bask in the euphoria of successfully raising $4billion through eurobonds, analysts at Financial Derivatives Company Limited (FDC) have said that the looming global hiking cycle will lead to an increase in the debt service costs of the country.

The analysts, who stated this in the “FDC Bi-monthly update” obtained by New Telegraph last Friday, also pointed out that while the success of  its recent Eurobond issuance is making the Federal Government to consider tapping the Eurobond market for more funds, the imminent increase in global interest rates would be negative for commodity dependent countries such as Nigeria given that higher interest rates will result in the strengthening of the dollar, thus making commodities priced in the greenback more expensive to purchase by holders of other currencies.

The analysts stated: “The Eurobond proceeds will help to shore up the external reserves towards $40 billion and this will help strengthen the naira at the parallel market in the short term.

The downside of raising more debt however is the risk of falling into a debt trap as the Eurobond issuance will increase the government’s  external debt stock. As at Q2’21, Nigeria’s external debt was approximately $36 billion.

“The low interest rate environment globally has benefitted emerging markets who are rushing to raise funds from the international debt market before a tightening stance commences in advanced economies and borrowing costs rise.

So far in 2021, Ivory Coast, Nigeria, Senegal, Ghana, Egypt and Kenya are some of the countries that have visited the Eurobond market.

“However, the catch there is that once global interest rates start to increase, the debt ser-  vice burden will rise. For instance, the US Fed has stated that it may commence tapering in November and interest rate hikes may commence sooner than expected. Higher interest rates will make debt repayment more onerous for emerging markets.”

They further stated: “In addition, due to the positive relationship between higher interest rates and the dollar, we expect an appreciation of the green back, which will make commodities priced in the dollar more expensive to purchase by holders of other currencies.

This is negative for Nigeria that is commodity dependent and has an imported inflation rate, which rose to 17.11 per cent in August from 17.06 per cent in July 2021.

A rising imported inflation could alter the ongoing decelerating inflation in Nigeria.”

In a speech from the Sudanese capital, Khartoum, ahead of World Bank and International Monetary Fund (IMF) annual meetings in mid-October, World Bank President, David Malpass, said last Thursday that the debt situation for poor countries could worsen due to volatile commodity prices and higher interest rates.


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