IMF: Dollar Loans Pose Currency Risks For Nigeria, Others

The International Monetary Fund (IMF) has said dollar loans remain, though the bond market come with heavy implications for emerging markets, like Nigeria, including putting the local currency at risks.

IMF Director, Monetary and Capital Markets Department, Tobias Adrian, who made this known in a report released at the weekend, said borrowing in foreign currencies in international bond markets can leave these countries exposed to volatile exchange-rate movements.

Nigeria was adjudged to have missed the boat this time last year when it was slow to come to the market with a Eurobond issue. In the first month of last year, Ghana and Gabon issued a total of $3 billion in Eurobonds between them before Nigeria could get to the market.

Nigeria has been absent from the new issue market for over two years.

Nigerian Eurobonds are not over-supplied and the country has a good track record in paying back both interest and principal. In January, for example, Nigeria paid back the principal of a $500 million Eurobond.

Last November, Ivory Coast became the first sub-Saharan African sovereign to issue a pandemic-era Eurobond.

Kenya and Nigeria had also seen their spreads narrow close to pre-pandemic levels, though others found the premium was still 10 per cent above those levels.

Adrian said to avoid risks from currency fluctuations, many had invested large resources in recent years to develop local-currency government bond markets.

He said: “Paychecks for teachers, new hospital equipment, social assistance programmes, and other public expenditures – all depend to large extent on governments’ ability to fund them. When governments – particularly those in emerging and developing economies – need money to pay these and other goods and services, they often turn to bond markets, where they interact with investors seeking to buy government bonds.”

According to Adrian, these bond markets can have a wide range of benefits.They can form the basis of a robust financial system to support growth, and the productive use and allocation of savings. They can help finance budget deficits in a non-inflationary way. And they can facilitate cutting taxes in tough economic times and support the use of other counter cyclical fiscal policy measures.

A local-currency bond market can also make an economy more resilient to sudden movements in foreign capital flows.

Moreover, local-currency bond markets can support effective monetary policy and act as an important information source for policymakers. They serve as the cornerstone of the development of domestic financial markets by providing risk-free benchmark rates. When they are developed, these markets become more stable and less risky sources of funding-an important factor in making debt more sustainable.

The Institute of International Finance (IIF) said Sub-Saharan African governments were returning to international capital markets this year with Ghana, Kenya and Nigeria to issue bonds as investors once again are expected to embrace more risk.

Emerging market bond issuance has sprung back to life after the fallout from the coronavirus pandemic roiled global markets in the spring and saw bond sales from many developing nations grind to a halt.

Yet, frontier markets – smaller and often riskier emerging markets – had still some catching up to do, the IIF said in a note to clients.

High-yield frontier market sovereign issuers have been accessing international capital markets, accounting for nearly 30 per cent of issuance in the second half of the year, the IIF said in the note.

The association expects that more high-yield frontier market issues will “look to access global capital markets to lock in lower borrowing costs, as their domestic markets might find it hard to absorb additional issuance”.

But with some frontier markets such as Zambia trying to renegotiate their debts with creditors, investors will be very much focused on debt dynamics, the IIF said.