INDUSTRY experts at this year’s International Rating Webinar shared divergent views on why Nigeria and other African countries take external loans to fund their developmental projects.
The webinar, ‘Navigating Economic Uncertainties: The Role of Credit Rating Agencies,’ was organised by DataPro Limited, a Nigerian rating agency.
It highlighted the roles credit rating agencies play in ensuring transparency, accountability and efficiency in countries’ financial sectors and the extent to which macroeconomic conditions influence rating opinion.
Speaking on reasons African leaders seek foreign loans, the group managing director of Metropol Ratings, Kenya, Sam Omukoko, said external loans would not favour import-dependent countries.
He opined that external borrowings make sense when a country’s proceeds from exports exceed its imports, otherwise, the country would face foreign exchange risk.
“That usually provides a very convenient mechanism and because external borrowing is usually at a lower interest rate, then you get the advantage of borrowing at a lower interest rate compared to the domestic market,” Omukoko reasoned.
He explained that if a country had sufficient export proceeds to service external loans, borrowing became a much better option for the government rather than going to the internal market.
But if a government is seen to be borrowing heavily from the domestic market, it would be competing with the private sector, Omukoko stressed.
He argued that the private sector needed funds to invest in manufacturing, agriculture and other developmental purposes.
“When that competition is high, it also pushes interest rates high. Then, the private sector begins to attract borrowing at a very high rate and that sort of impacts on the cost of borrowing and ultimately the returns that these institutions can make,” Omukoko said.
The chief operating officer at DataPro, Oladele Adeoye, explained that sometimes the government pursued what he called quantitative easing to give more room for local borrowers.
On his part, the group managing director of DLM Group, Sonnie Ayere, took a different standpoint.
He believes that the government should borrow more from the domestic market, noting that in the worst scenario, it could print the local currency to pay back.
He said as opposed to taking foreign loans against export proceeds where a country does not decide the price of its export, external borrowings become a problem.
“The ability to service debt internally is better than when you put yourself in the hands of the IMF (International Monetary Fund),” he added.
Nigeria’s external debt worsened to N56.02 trillion or $42.12 billion in the first quarter of the year, compared to N38.22 trillion or $42.495 billion as of December 31, 2023, The ICIR reports.
Its domestic debt also surged to N65.65 trillion or $49.35 billion from N59.12 trillion or $65.73 billion in December 2023.
Further discussions at the webinar were centred on the pivotal role credit rating agencies play in promoting investors’ confidence and complementing the public and private sectors in ensuring government policies aimed at achieving economic objectives are realised.
Responding to a question on the extent to which macroeconomic conditions influence rating opinion, Omukoko said the fundamental challenge of a rating agency was to determine an entity’s probability of default on financial obligations.
He said to overcome the challenge, rating agencies should develop a systematic methodology that has the right tools and data to come out with an intended result.
The Metropol Ratings boss pointed out that rating agencies’ role was to evaluate the borrowing capability of a government or a corporate organisation.
He noted that the macroeconomic condition prevailed on the interest rate and had a significant impact on the ability of any borrower to service the debt.
He added that when borrowings are dollar-denominated, repaying such a loan posed problems.
“I think that Nigeria is conducive, it is a difficult terrain but there are opportunities,” the managing director of Chapel Hill Denham, Kemi Awodein, said in her submission.