In the wake of multiple interest rate hikes by the Central Bank of Nigeria (CBN), the cost of borrowing has surged considerably, prompting Nigerian corporates to shy away from the capital market.
Between January and May 2024, the CBN raised the monetary policy rate (MPR) by a staggering 750 basis points to 26.25%, significantly impacting the cost of capital for businesses as well as the government.
Interest rate hikes have been part of the CBN’s strategy to combat rising inflation and stabilize the national currency, which is currently at record highs.
Notably, Nigeria’s inflation rate surged to 34.19% (Over 28-year high) in June 2024, while the naira currently trades over N1,500 against the US dollar.
However, this aggressive monetary policy has led to higher borrowing costs for corporates, mirroring the surge in government securities. As a result, companies have adopted a cautious stance towards participating in the capital market.
The repercussions of this cautious approach are evident in the declining figures for new listings of commercial papers and corporate bonds. Data from the FMDQ revealed that in the first five months of 2024, new listings of commercial papers dropped by 22.6%, from N843.62 billion in the corresponding period of 2023 to N653.1 billion. This significant decline reflects the increased cost of financing, which has deterred companies from seeking short-term debt instruments.
The situation is even more pronounced in the corporate bond market. New listings of corporate bonds plummeted by a staggering 97.6% in the same period, amounting to just N6.65 billion, underscoring the reluctance of companies to take on long-term debt amidst soaring interest rates.
Manufacturing and telcos are already plagued with losses
The cautious participation of corporations in the capital market can be attributed to the need to remain competitive in an environment where the cost of borrowing is substantially higher. With interest rates at such elevated levels, the cost of servicing debt becomes a significant burden, potentially eroding profit margins and stifling growth initiatives.
- This is further exacerbated by the rising cost of production, coupled with FX-related losses, especially for manufacturing and telecommunication companies.
- Notably, analysis of the financials of top consumer, industrial goods, and telecommunication companies on the NGX, showed that the cost of sales skyrocketed by 86.8% year-on-year in Q1 2024.
- In the same vein, the companies recorded a combined FX revaluation loss of N1.3 trillion in Q1 2024 compared to the N37.9 billion loss recorded in the corresponding period of 2023.
- According to data from Nairalytics, the companies posted a combined net loss of N600.8 billion in Q1 2024, in contrast to the N322 billion profit reported in Q1 2023.
Moreover, the elevated cost of debt affects not only the corporates’ ability to finance new projects but also impacts their existing debt obligations. Companies with floating-rate debt instruments are particularly vulnerable, as their interest expenses increase in line with the CBN’s rate hikes.
This trend has broader implications for the Nigerian economy. The capital market plays a crucial role in providing long-term financing for businesses, which is essential for economic growth and development. When corporates retreat from the capital market, it constrains their ability to invest in expansion, innovation, and job creation.
Additionally, the decline in corporate debt issuance may lead to a reduced diversity of investment options for institutional and retail investors. With fewer corporate bonds and commercial papers available, investors might have to rely more heavily on government securities, which could lead to a less dynamic and vibrant capital market.
Experts have also noted their anticipation of a decline in corporate debt market participation. According to Victor Onyema, Lead of portfolio Management at Norrenberger Asset Management Limited (NAML), the high yield on risk-free instruments has significantly impacted the ability of companies to raise debt capital at minimal cost.
- “As expected, corporates are finding it very tough to raise capital or rather afford the high cost of capital. With the average COC around 26-30% on short papers (Commercial papers), corporates are scratching their heads on how to keep their operations going,” he said
- “With the FGN issuing Treasury bills at 24-26% yields and Bonds at 20-21% levels (10 years) corporates are under pressure to provide a premium on the presumed risk-free rate. This has led to a lot fewer issuances by corporates this year. We expect this to continue until interest rates taper down,” Victor also added.
Bottom line
It is imperative for policymakers to strike a balance between controlling inflation and maintaining a conducive environment for corporate financing.
While the CBN’s interest rate hikes are aimed at stabilizing the economy, there is a need to consider the broader impact on corporate financing and the capital market.