EGIE AKPATA : There’s Little Impact of Election Preparation on Financial Market Activities

EGIE AKPATA : There’s Little Impact of Election Preparation on Financial Market Activities

Egie Akpata is chairman of Skymark Partners Limited, a proprietary investment firm.He has extensive experience in financial markets, having worked at BMO Financial Group in Toronto, Deutsche Bank AG in New York, United Capital PLC, and UCML Capital Ltd, where he is a director. An active player in the local capital markets, Akpata has closed transactions in debt and equity capital markets and mergers & acquisitions worth over N3 trillion in the past 14 years.  Amid the frenzy in the milieu lead-up to the general election, Akpata speaks with Kunle Aderinokun on wide-ranging issues in the economy, including the current monetary policies of the Central Bank of Nigeria, country’s ratings by Moody’s Investors Service, debt status, inflation, and 2023 budget. Excerpts:

Political activities in the country have reached the fever pitch. What are the effects on the financial markets?

Surprisingly, the upcoming elections seem to have little impact on activities in the financial markets. For example, the NGX All Share Index is up over 4per cent in January alone. There have been many new commercial paper issuances at interest rates lower than in December indicating falling short-term rates despite the upcoming elections. Even the Naira has been more or less stable in the parallel market. It is possible that after several election cycles, the markets have come to believe that the elections will be concluded peacefully and life will go on.

How do you assess the recent monetary policies of the Central Bank of Nigeria?

The CBN is constrained by the limitations of monetary policy in an economy with the structural peculiarities like ours. For instance, global central banks are raising interest rates to fight inflation. CBN has increased MPR by 6per cent this year to a record level of 17.5per cent. But the impact on inflation so far has been minimal.

 Concerns have been raised about Nigeria’s ballooning debt pile. Are you concerned too?

I am not concerned about the actual magnitude of Nigeria’s debt. I am more concerned that there is very little to show for the colossal debt stock. Nigeria can afford to service its debt. Very few countries ever attempt to pay off their debt. Their focus is on paying interest due and refinancing principal on maturity. Surplus funds are best spent developing the land and taking care of its citizens than paying off outstanding debt. Clearly, we cannot continue to grow the debt at the current pace, so the FGN will have to develop strategies to fund its budget without massive borrowing.

Recently, Moody’s Investors Service downgraded Nigeria over revenue and debt crises. How do you react to this?

The outcome is not unexpected since, after the last downgrade in October 2022, Nigeria was put ‘on review for downgrade.’ Surprisingly, this downgrade to Caa1 (the equivalent of CCC+) happened so soon. The analysts at Moody’s probably saw enough negative information to go ahead with another downgrade within three months. I think the next president would be best served to fix some of the weaknesses highlighted in Moody’s rating report.

Does this downgrade effectively mean that Nigeria will not return to the Eurobond market in the foreseeable future?

Before Moody’s downgrade, the finance minister had indicated that Nigeria would not be raising money from the Eurobond market in 2023. The downgrade makes it less likely and more expensive for Nigeria to raise funding in that market. However, if the next president quickly tackles vital economic issues like the petrol subsidy and the US bond yields drop substantially later this year, market conditions could be favourable enough for Nigeria to contemplate a Eurobond issue in Q4.

What is the possibility of Nigeria defaulting on its Naira or USD bonds? 

Remember that Ghana had a similar Moody’s downgrade in February last year and defaulted before the year’s end.

It is doubtful that Nigeria will default on its naira or USD bonds at any time in the foreseeable future. There are fundamental differences between Nigeria and Ghana. Most of Ghana’s debt is in foreign currency, but most of Nigeria’s debt is in Naira. Ghana has $ 13 billion of outstanding Eurobonds, but Nigeria, an economy that is 5x Ghana’s, only has $ 15 billion outstanding. Nigeria’s reserves of $ 37 billion are around the same as a foreign debt of $ 40 billion. But Ghana has an outstanding foreign debt of $ 29 billion, over 4x their foreign reserves of $ 6.6 billion.

Most ratios on Nigerian debt service fail to distinguish between Naira and USD debt. The Naira debt can be rolled over into perpetuity. All the FGN needs to do is keep paying the outstanding interest. This can be done via higher taxes, devaluation, issuing new debt or printing of Naira (ways and means). In reality, inflation and devaluation will take care of most of the Naira debt.

The Nigerian government has historically met all its bond obligations, and there is no reason why that stance should change now. The side effects of a bond default on the government and the economy are just not worth any so-called ‘savings’.

Moody’s also downgraded nine Nigerian banks shortly after the Nigeria downgrade. How would this impact the Nigerian banking system and overall economy?

The sovereign ceiling concept triggered the downgrade of these banks. Banks in Nigeria cannot have a higher rating than the Nigerian government. There is around $ 4 billion of Nigerian banks and corporate Eurobonds outstanding. They start to mature in October 2025. These issuers might find it more difficult or expensive to raise USD funds in the Eurobond market in the future since they now carry an effective CCC+ rating.

Before the Moody’s ratings, the IMF reviewed Nigeria’s GDP growth rate from 3.5 percent to 3 per cent. From the prism of an economic analyst who clearly understands the domestic markets, what could be responsible for this?

These numbers are projections so any marginal movement is not particularly significant. What is important is that growth at these levels would not lift many Nigerians out of poverty since the population growth rate is around 3per cent. We need GDP to grow well over 5per cent to raise the standard of living of Nigerians.

S&P just revised their Nigeria outlook from stable to negative. What are the implications of this action?

This change in outlook has little impact since they kept Nigeria’s rating at B-. Moody’s already downgraded Nigeria to Caa1 (equivalent of CCC+) a week earlier so the market works with the lowest rating and now views Nigeria as a CCC-rated country. This S&P report raised a number of similar issues covered by the Moody’s ratings report. However, if the next government does not immediately address key concerns raised around debt sustainability, petrol subsidy and foreign exchange regime, S&P is likely to downgrade Nigeria to CCC+ before the end of 2023.

What advice would you give the incoming administration on the country’s fiscal and monetary management in the economy?

I think the next president must make tough decisions in the first month of office while he still has a lot of public and market goodwill. The obvious first thing is to end the subsidy on petrol. The reality is that every Naira spent on petrol subsidy is effectively borrowed. Nigeria cannot afford it. After the debt default in Ghana, the next president must formally rule out any possibility of Nigeria restructuring, renegotiating, or defaulting on local or foreign debt. The new president working with the CBN, needs to quickly implement FX reform by moving towards a more flexible regime that would reflect the market and encourage foreign inflows of FX into Nigeria.

What are the 2023 plans for Skymark Partners and its related companies?

Our sister company, UCML Capital Limited, has been repositioned and refocused to remain a leading investment banking firm. Skymark Partners will continue to be an issuer in the debt capital markets while implementing our strategic growth plans for 2023.

What is your outlook for the corporate debt capital markets in 2023?

2022 was a record year for corporate bond issuance, with N744 billion raised in that market. It would be difficult to surpass that record in 2023 due to higher average bond yields driven by the crowding out of the private sector by the FGN as it tries to fund the massive deficit with a target of N7 trillion from the local bond market. However, unlike in 2022, where two sponsors were responsible for N530 billion of bond issuances, I expect the market to be less concentrated in 2023.

2022 was also a record year for commercial paper issuances, with N733 billion raised. I expect that record to be broken in 2023 as more first-time issuers come to the CP market and established issuers focus on short-term funding until bond yields subside.

As it stands and from all indications, the economy is in crisis. Do you think the 2023 budget, as passed, can lift the economy out of its crisis?

I am not sure what you define as a ‘crisis.’ The economy is growing even though at a subdued pace. The FGN budget is relatively small relative to the economy and has limited ability to lift it through its budget substantially. I assume that the new president will propose a supplementary budget in Q3. Hopefully, that budget will be more impactful on the Nigerian economy.

How do you think the economic managers could tackle inflation, which has maintained an upward trend for several months?

Inflation seems to have peaked and came down marginally in December. This is likely the beginning of a gradual downtrend in CPI. But this is partly due to the base effect rather than any specific action from the government or central bank. Unfortunately, there is a limit to what monetary policy can do to tackle inflation in Nigeria. Significant efforts need to be made by the federal government to tackle structural impediments in the economy that cause inflation—things like power, roads, human development, etc.

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