FG urged to adhere to fiscal responsibility provisions
With the barrage of negative ratings as regards the nation’s economic outlook in the last few weeks, the nation can record meaningful growth if the Federal Government adheres to fiscal responsibility provisions and desists from funding responsibilities beyond its resources, experts have said.
This is in addition to making concerted and practical efforts to move away from funding deficit projects as well as restructuring existing debts to extricate the country from the current debt trap.
Global leading rating agency, Standard & Poor’s has affirmed Nigeria’s credit rating at “B-/B” but turned negative on its outlook, citing increasing risks to the country’s debt servicing capacity over the next two-to-two years.
This comes about a week after another rating firm, Moody’s Investors Service downgraded Nigeria’s sovereign credit rating further to ‘Caa1’ from ‘B3’ and changed the outlook to ‘Stable’.
Experts believe that the downgrade reflects the parlous state of the nation’s financial system.
According to them, the dislocation is coming from the fiscal rascality of the federal government, which has continued to deepen the nation’s fiscal deficit through domestic and foreign borrowing and raiding the apex bank through ‘Ways &Means’, which has ultimately worsened the inflation rate.
Specifically, Vice President of Highcap Securities, David Adonri described the negative rating as a calamity.
According to him, aside from the fact that investors will develop apathy on Nigeria’s sovereign bond due to fear of default, the value of naira is expected to depreciate further because of shortage of dollars to shore up the currency value.
He pointed out that this would attract a high-risk premium on Nigeria’s bond in the Eurobond market.
“Nigeria is in a debt trap, the country needs to issue new sovereign debt to service existing one. If we do not have new issuance, sovereign default is imminent. This might trickle down to the domestic financial market thereby worsening domestic financial instability.
“The capital market is driven by macro economic conditions. If the macro indicators are bad, it would adversely affect the capital market. A lot of corporates will not have hard currency to drive their operations and the cost would be huge.”
Furthermore, he pointed out that foreign investments in the equities market are likely to wane while liquidity would be insufficient to sustain market performance.
Adonri stressed the need to diversify the economy from import dependence that requires hard currency financing to a self-reliant one that would utilise the domestic factors of production to drive economic growth.
Former President of the Chartered Institute of Bankers of Nigeria (CIBN), Dr Uche Olowo said if there is no policy change to rejig the economy, the negative sentiments from the rating would further worsen the country’s already low foreign direct investments, resulting in a further decline in foreign capital inflows.
However, he pointed out that with right policies that would help plug loopholes, leakages and reduce corruption to the barest minimum, positive sentiments would be restored.
Chief Executive Officer of Wyoming Capital and Partners, Tajudeen Olayinka said once a country suffers a rating downgrade by an accredited rating agency in the status of S&P, it affects prices and yields placed on financial instruments issued by economic agents in that economy.
According to him, investors willing to hold bonds issued by the government and corporate bodies would demand for higher yield to compensate for the perceived higher risk premium associated with such instruments.
He urged the government to allow the economy to run a normal course of adjustment, discontinue with fuel subsidy and Ways and Means advances securitisation to reposition the economy on a sustainable growth.
“More affected are debt instruments that immediately attain junk status in the global financial space. Accordingly, the cost of capital goes up in the economy, as a greater number of foreign investors stay away from participating in the country’s financial markets.
“Naturally, immediate impact would be felt in the foreign exchange market, as the Naira exchange rate suffers further depreciation or devaluation. The downgrade is not good for the economy. It is unacceptable to securitise CBN’s Ways and Means Advances. It is an early warning sign that the federal government may no longer be able to service its debts,” he stated..