Will Nigeria’s rate hike impact local debt market?

Nigeria's local debt market is bracing for impact following the recent decision by the Monetary Policy Committee of the Central Bank of Nigeria to raise the Monetary Policy Rate by 100 basis points to 14 per cent. Egie Akpata, the Chairman of Skymark Group, shared insights in a recent CNBC Africa interview on how this development will filter into the debt capital market. According to Akpata, the pricing of corporate debt instruments, including commercial and foreign bonds, is expected to rise in response to the rate hike. While the Monetary Policy Rate does not solely determine pricing, market liquidity plays a crucial role, with recent negative liquidity trends influencing the market dynamics. The central bank's focus on curbing inflation through tightening money supply is anticipated to further drive up the pricing of these debt instruments. The International Monetary Fund's projection that central banks will continue to raise rates until 2023 underscores the likelihood of sustained upward pressure on debt instrument pricing. Akpata highlighted the challenges faced by African countries issuing Euro bonds amidst a global environment of low to negative interest rates. While African Euro bonds have provided relatively attractive yields compared to European counterparts, the increasing yields on US Treasuries and high-quality high yield securities are diverting investor interest away from African instruments. This shift in investor sentiment has led to downward price pressure on some African Euro bonds, raising concerns about potential defaults and debt restructuring in the region. The looming specter of debt sustainability in African markets, particularly in the face of declining investor confidence, poses a significant threat to financial stability in the region. Akpata emphasized the distinction between local currency debt, which can be managed through government policy measures such as tax adjustments and devaluation, and foreign currency debt, which presents a greater risk due to its dependence on export performance. While Nigeria's local currency debt remains sustainable, foreign currency debt, particularly in the form of Euro bonds, requires careful monitoring and proactive debt management strategies. The recent economic challenges faced by countries like Zambia serve as a cautionary tale, highlighting the potential consequences of unsustainable debt levels and faltering export revenues. Akpata called for a reassessment of the notion that foreign currency debt is cheaper than local currency debt, stressing the importance of aligning debt strategies with long-term economic sustainability. As Nigeria navigates the second half of the year, uncertainties loom over the performance of the capital market, with equities demonstrating mixed trends and interest rates on an upward trajectory. The upcoming elections and potential policy shifts by the central bank are expected to impact market sentiment and investment decisions. While the Nigerian consumer market has shown resilience, the debt market faces challenges amid tightening liquidity and rising interest rates. Akpata cautioned against excessive reliance on foreign currency debt and urged for a prudent approach to debt management and economic policy. As African countries strive to address debt sustainability and bolster investor confidence, proactive measures and prudent fiscal policies will be crucial in safeguarding financial stability and promoting sustainable growth in the region.