The falling price of oil in the global market, prompting government to meet the revenue shortfall through borrowing from the financial market is crowding the private sector out of the domestic debt and credit market.
With oil prices seemingly trapped at below $50 a barrel, experts explain that the risks attendant to key macroeconomic variables, particularly inflation, interest rate and exchange rate stability, will push the government’s borrowing needs and debt-servicing costs higher, and also starve the private sector of funds for real sector investment.
For instance, the N970 billion deficit built into the 2014 budget (which was based on an oil benchmark of $77.5 a barrel) was financed partly with a total of about N950 billion worth of bond sales in 2014.
According to the Debt Management Office (DMO) up to N305 billion is expected to be raised in the first quarter of 2015 through the sale of government bonds to finance the projected deficit of nearly N800 billion.
To bridge the revenue gap, the government usually resorts to increased borrowing from both internal and external sources, using such instruments as treasury bills, treasury bonds, government bonds and Eurobond.
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Analysts at investment banking firm, FSDH Group, wrote that, “Between the oil price of $40 to $45, the FG would need a net borrowing of N1.5 trillion which is almost double of what was initially projected to deal with the deficit. This would crowd-out the private sector from the financial market and increase interest rates (cost of funds).”
The higher interest rates mean it would become more expensive for firms in the private sector to raise funds through corporate bond issuance. At the same time lenders, particularly banks, would be more inclined to lock up their funds in government assets, rather than lend to businesses or even households.
Average yields on the 364-day Nigerian treasury bills rose by a massive 559 basis points to 19.02 percent in December 2014, up from 13.43 percent in November, on the back of the economic headwinds arising from the falling oil prices and devaluation of the naira.
With shrinking oil revenues, government must entice investors, who now face bigger foreign exchange rate and interest rate risks, with higher yields and rates to hold its assets. But the biggest losers, according to analysts, are the private sector agents who are unable to thrive in a high-interest rate environment.
Charles Robertson, Renaissance Capital’s Global Chief Economist and head of the Firm’s macro-strategy unit, in an emailed response to questions, noted that lower yields on government assets could stimulate lending to the real sector.
“It would be good to see the Nigerian banks lending more to SMEs and households (rather than to the government), at some point, lower domestic bond yields, might encourage banks to do this,” he said.
Similarly, Kayode Tinuoye and Kayode Omosebi of UBA Capital agreed that the high interest rate environment witnessed in 2014, which is likely to be sustained this year, did not allow the corporate bond segment to thrive.
“The relatively high rate environments limited corporate bond issuances”, they wrote in a January 26 note.
According to estimates, FG bonds account for over 60 percent of the total bond market in Nigeria.
