Nigeria’s 2017 budget preparations are underway, with Finance Minister, Kemi Adeosun, announcing on Monday that Nigeria needs to concentrate more on “stimulating growth” instead of reducing inflation. Therefore, there will be more focus on capital projects. To achieve this, she said while speaking to CNBC Africa, the Central Bank of Nigeria (CBN) would have to lower interest rates so the government could borrow locally, to reduce its debt-servicing costs. This new policy has led to some new questions.
Nigeria has struggled to fund this year’s budget thanks largely to the global fall in oil prices. Last week Thursday, the Nigerian debt office announced that it was looking to raise $ 1 billion dollars from Euro-bonds by mid-December 2016, to fund capital projects in the 2017 Budget. “All borrowing would be used for capital projects. In raising the money we are ensuring that local transaction partners, local banks, must be involved,” Abraham Nwankwo, Director-General, of the Debt Management office, told the media. His statement echoed Mrs Adeosun’s that Nigeria would have to sell some of its assets to both international and local players. However, the worth of those bonds and assets are being called into question.
Standard & Poor’s (S&P), one of the world’s leading index providers and independent credit ratings has downgraded Nigeria’s rating further from ‘B+’ to ‘B/B’, also called Junk status. Junk status is five levels below investment level, and brings Nigeria, Africa’s second-largest economy, in the same rank as Kyrgyzstan and Angola. To put it mildly, it means Nigeria is a very risky place for foreign investors. Professional investors looking to buy bonds would be prohibited, by policy, from investing in junk countries. It’s amazing no-one is really talking about this. South Africa has been dreading this status, while Brazil’s junk status earlier this year further condemned its recession-hit economy. Who would invest in bonds and assets from a country with junk investment status?
In a statement released by the ratings organization last week Friday, S&P said: “Nigeria’s economy has weakened more than we expected owing to a marked contraction in oil production, a restrictive foreign exchange policy, and delayed fiscal stimulus…servicing costs as a percentage of general government revenues are high and rising.” Fitch had already downgraded Nigeria’s ratings earlier this year too.
This new development should be a setback to the government’s much-espoused talk of bringing foreign investment, which has reduced drastically in the past two years. In the past year, foreign investment has fallen by $2.1 Billion as at the end of July 2016 from the same period in 2015.
Furthermore, capital importation into the country in Q2 only was about $ 1 billion, a sharp increase from that of the first quarter. This means the CBN policies, most especially the flexible Forex policy enacted during that period, probably yielded the expected result. CBN also raised interest rates to 14% in July, which favours foreign investors than domestic banks and the borrowers.
The CBN will announce its new interest rates on Tuesday morning, and it could surely recognize the elephant in the room, which is Nigeria’s new “junk” status by sovereign credit ratings. Experts say CBN would likely not reduce interest rates. Reducing the interest rates would not favour foreign investors but would encourage borrowing in local banks from both individual businesses and the government.
Increased borrowing is on the cards for the Nigerian government, and that might not be in the best interest of anyone. Nigeria should fight recession and implement capital projects hand-in-hand; one should not have precedence over the other. Increased foreign investment is just one way to fight the recession.
