International Monetary Fund has said that Nigeria has a large exposure to nonresident holders of domestic debt, particularly with central bank bills. At a briefing on Fiscal Monitor in Washington Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department IMF said “as we understand the Central Bank bills, there is a lot of higher redemptions or has to deal with more rollovers of those in the coming quarters, and so managing those risks, particularly with respect to local currency debt and the behaviour of nonresident investors is very important.
“Both domestic and external debt markets are important for economic growth and economic development, and both markets should be well developed; but, of course, any borrowing has to be managed in a responsible manner. There are both costs and benefits. So borrowing can be helpful for economic growth and investment, but it can also be dangerous when negative shocks hit. So we have done a lot of work at the Fund on debt sustainability and debt management, and we have a host of recommendations of how to manage debt in a responsible manner.
“Local currency borrowing could be preferred in some cases, but it is not a panacea. The guiding principle, as Tobias mentioned, is also prudent debt management. Over the summer, local currency flows have been more volatile, and Nigeria was not an exception to that. Nigeria has a large exposure to nonresident holders of domestic debt, particularly with central bank bills; and then as we understand the central bank bills, there is a lot of higher redemptions or has to deal with more rollovers of those in the coming quarters, and so managing those risks, particularly with respect to local currency debt and the behaviour of nonresident investors is very important. On investment flow the IMF said “So flows of investment to Sub-Saharan Africa have been strong and are expected to reach record highs this year, so global financial conditions are favourable to countries such as Nigeria at the moment. Issuing bonds in hard currency and in domestic currency is currently possible because of the favourable global financial conditions. Of course, it is key what countries such as Nigeria are doing with those borrowed funds, and as Evan was pointing out already, undertaking structural reforms to develop the economy is key.
On global financial stability the IMF said “So the banking system is safer today. There is more capital and more liquidity in the banking system, and stress tests are commonly done across jurisdictions. At the same time, vulnerabilities in the non-bank financial sector are building, so there is a growth of credit intermediation in the non-bank financial sector, and corporate vulnerabilities are rising. So what we urge policymakers to do is to contain underwriting standards for those non-financial corporations at the issuing stage. This could be done by a number of policy tools. Let me elaborate a little bit on what can be done to contain corporate sector vulnerabilities.
“First, just to step back and maybe comment a bit on the 19 trillion USD number. This is our estimate of debt at risk, which we define as debt owed by non-financial firms with weak debt repayment capacity; that is, that do not have enough earnings to cover interest payments. That is not necessarily debt that will default immediately, but these are firms that would be at risk of distress in a significant material economic slowdown. So the estimate that we provide in the report is for eight major economies, including the United States, China, Japan, and several European economies, in a material downturn, which is about half of the severity of the global financial crisis. The reason why this number is large — and the number is, indeed, large — is because of, I would say, three things. I would highlight three things. First, corporate debt levels have increased in major economies over the last decade, significantly. Total corporate sector debt in these eight major economies now stands at about 51 trillion US dollars, and that compares to about 34 trillion in 2009, so this is a significant increase.
“Second, corporate vulnerabilities are already elevated in a number of major economies. In some of them, debt at risk is already at about 25 percent of total corporate debt; and, of course, in an adverse scenario, it rises fast and further. And what is particularly notable is that, even though the shock is only half the severity of the global financial crisis, in many of those countries, debt at risk rises to the same level as we have seen during the financial crisis or even exceeds those levels. So that tells us that there are quite a few weak non-financial firms in these economies that are still able to roll over debt and continue to accumulate debt because of very low interest rates. But, of course, the concern is that in an economic downturn, these firms may come under pressure. They may experience difficulty in servicing their debt, and would have to deleverage. And so when they deleverage, they cut back on investment and employment, and that exacerbates the recession, what we have seen during the euro area crisis.
“To answer your question on what can be done, as Tobias already mentioned, it should be done through a combination of more stringent supervision, particularly of credit assessment practices and lending practices of banks, which is what supervisors, presumably, already do. But perhaps there are some areas where more attention is needed, like in regional banks that are more exposed to small- and medium-sized firms. And if corporate debt is viewed as reaching systemic levels, then macro prudential tools can be activated as well, including sectoral tools, such as additional risk weights or additional capital buffers on bank exposures to corporates. If the main source of credit is not banks but, rather, non-bank financial intermediaries, then this is somewhat more complicated because there are fewer policy tools to address that. But, again, greater, more rigorous supervision is needed, more disclosure perhaps by these financial intermediaries to allow a more comprehensive assessment of risks by both investors as well as supervisors. Of course, there are other tools that can be considered as well; for example, some criteria on the credit quality of securities that different financial intermediaries can invest in, and so on so forth. Let me stop here”.
