Experts Says Senate’s N22.7tn Loan Approval May Raise Bond Rates
The securitisation of the Central Bank of Nigeria’s N22.7tn Ways and Means advances to the Federal Government by the Senate may push the interest rates of future debt securities higher, capital market analysts have said.
The Senate had recently approved the extra-budgetary spending of the Federal Government, about one month before the expiration of the regime of the President Muhammadu Buhari.
The decision of the upper legislative house has however elicited varied reactions from experts and stakeholders in the economy.
In the capital market, some experts have said that the perception that the government is unable to meet its debt obligations will drive up interest rates in the debt market.
The Chief Executive Officer of Arthur Stevens Assets Management, Tunde Amolegbe, said apart from boosting the capitalisation of the debt market, interest rates on future debt securities issues would go up.
“The rate on the bond may be issued at a higher interest rate, and since the government interest rate serves as a base rate, subsequent bond rates by corporations may also increase due to the public’s perception that the government is unable to service its debts. In other words, the interest rate on future debt securities issues could be greater,” he said.
In his submission, investment professional, Ayodeji Ebo, stated the fixed income market might experience high yields if the incoming government limits reliance on CBN’s Ways and Means and goes to the debt market.
Ebo said, “If the new government limits their support via Ways and Means by the CBN, then we should expect more borrowings due to the budget deficit of over N10tn which will lead to high yields in the fixed income market.”
Bashing the CBN and FG for the advances, which he called a financial crime, capital market operator and Executive Vice Chairman of Highcap Securities Limited, said, “Since the earlier illegal advances to FGN were inflationary, it will reverse inflationary pressure on the economy. However, FGN will now contend with a higher debt obligation to the investing public which it cannot afford to default on.
“These W&M advances have been recklessly and criminally undertaken by FGN and CBN making this government a misfit in financial management. They are now passing this financial mess to the future generation. Yet, nobody is brought to justice for this huge public financial crime.”
For professor of Capital Market, Uche Uwaleke, said, “Be that as it may, it’s important that going forward, adequate safeguards are put in place to ensure that CBN’s Ways and Means are curtailed due to its negative impact on the general price level. The relevant provisions of the CBN Act should clearly stipulate the conditions under which debt limits can be breached, the process which should involve approval by the National Assembly as well as stiff sanctions for breach of the limits provided in the Act without following due process,” he said.
Meanwhile, the Debt Management Office has said that the repayments of principal to service the loans from the Central Bank of Nigeria through the Ways and Means Advances will begin in four years’ time.