Again, the private sector is at risk of being crowded out by government borrowing in 2019 in bad news for an economy still struggling to find its feet after a scathing recession.
Expectations for a higher yield environment this year implies higher borrowing costs for corporates.
The yield expectations are being driven by rising interest rates in developed markets which could force the hand of the Central Bank of Nigeria (CBN) to raise interest rates in order to compete favourably for capital.
Yields are also tipped to rise if the federal government fails to meet its revenue target for the third straight year as that will widen the budget financing gap which would in turn boost local bond supply and bid yields higher.
The Federal government’s 2019 budget has a N2.3 trillion deficit and is predicated on revenues of N7 trillion.
Both scenarios are threatened by disappointing revenues which naturally feeds into a wider deficit that will leave the government with limited options than to borrow.
Capital expenditure bore the brunt of disappointing revenues in the past two years but 2019 will give the government less wriggle room given the spike in recurrent expenditure which cannot be easily made away with like capital spending.
Non-debt recurrent expenditure alone will hit N4 trillion this year. If government revenue is to perform as it did in 2017 or 2018 where only 50 percent of the target was met, then worker salaries, overhead costs and statutory transfers will be higher than total revenue, before considering capital expenditure and debt servicing.
The total non-debt recurrent expenditure will equate to 128 percent of the government’s projected N3.5 trillion revenue for the year. N3.5 trillion is half of the N7 trillion 2019 revenue projection.
What that implies is that the government would have to borrow just to maintain an over bloated bureaucracy. Add capital expenditure as well as debt servicing obligations and the government will need to borrow even more, thereby crowding out the private sector.
After a record breaking 2017 for government bond yields which peaked at 18 percent, 2018 saw yields fall to 14 percent on average amid lower inflation rate and reduced bond supply from the federal government which tweaked its debt strategy to borrow less domestically in favour of external debt.
However, there are signs of a higher yield environment in 2019 and those signs started flashing as early as late 2018.
Rising global interest rates which sparked sell-offs in emerging markets and political uncertainty that coloured the second half of the year, saw the Central Bank of Nigeria push yields higher in the fourth quarter of 2018 using Open Market Operations (OMO) auctions, to attract foreign portfolio investors and tame inflation ahead of the system liquidity that accompanies campaign spending in an election year.
The OMO auctions laid down a marker for fixed income yields, with one-year government Treasury Bills rising as high as 17 percent while average bond yields rose nearly 200 basis points to 15 percent.
The aggressive monetary tightening adopted by the CBN is expected to continue this year on the back of higher inflation expectations and rising interest rates in the United States and other developed markets.
The price stability mandate of the CBN means if inflation rises, interest rates are likely to be raised. The apex bank relied heavily on raising interest rates in the latter part of 2016 when inflation soared to a high of 18 percent. The CBN hiked benchmark rates to 14 percent from 11 percent over that period and that’s where it has stayed for nearly two years now.
The outlook for higher interest rates in the United States and sustained foreign capital outflow this year will only pile more pressure to the CBN to tighten even further.
The consensus forecast for interest rates in 2019 is a 50-basis hike to 14.5 percent. The Monetary Policy Committee is scheduled to hold their first meeting of 2019 this January.
The IMF tips the Nigerian economy to expand 2.3 percent this year.
Although still in a tepid posture, the economy is gradually recovering from recession. The economy expanded by 1.81 percent in the third quarter of 2018, up from 1.5 percent in previous quarter, but still below 1.91 percent recorded in the first quarter. The country’s growth rate still falls short of population growth rate of 2.6 percent, implying that the economy needs stimulus policies to make growth sustainable and inclusive.
LOLADE AKINMURELE
