Economic analysts are expressing concerns over the United States interest rate hike, noting that it portends more trouble for Nigerian firms who took or intend to assess dollar loans and also the country with huge debt.
The rate hike is the biggest by the Federal Reserve since 1994, and it came after recent data indicated little headway in the country’s inflation fight.
Mr. Victor Chiazor, Head of Research and Investment, FSL Securities Limited said with the increase in interest rate, it is expected that the companies with dollar liabilities will experience a drop in profit as the borrowing cost will rise and impact negatively on their bottom line.
“Floating interest rates will continue to adjust as interest rates adjust in an advanced economy. For example, London’s interbank Libor rate fluctuates automatically the interest rate which goes up as against fixed interest rate which is amortised,” he said.
He explained that the series of hikes in interest rates for most advanced economies is expected to stall access to the Eurobond market for corporate entities as they will have to raise these debt instruments at a much higher coupon rate compared to previous auctions which will lead to higher interest payments.
“Luckily, most corporate entities raise Eurobonds with fixed coupon rate which helps them in planning their interest payments for the tenor of the debt instrument as against a few years ago when most companies raised Eurobonds with a floating interest rate which would have significantly impacted on their interest payments as their interest expense would have continued to rise as interest rate inches higher.
Managing Director, Sincere Investment Limited, Chief Eugene Ezenwa said: “As far as interest rate has direct impact with loan, what it means is that those companies are likely to pay more in servicing those loans. It will have a very negative impact on the firms and the economy in general. It will affect even our foreign reserve; it has a multiplier effect because the dollar is an international currency. It will hit hard on the bottom-line of companies”.
Managing Director Crane Securities, Mr. Mike Eze noted that the increase in U.S interest rate will affect the companies with exposure to dollar loans immensely.
“Those firms with dollar exposure will be paying higher interest rates, even the importation of materials will be higher, and it will have a spiral effect in the system. It will lead to a downsize in terms of strength of labour; importation will reduce and that will spiral over their return on investment and their income and dividend will drop. Unless the rate is reversed some of these companies will either pay no or less dividend. It is also possible that those with higher exposure may also slip into a negative bottom-line,” Eze said.
Ayodeji Ebo, Managing Director/Chief Business Officer, Optimus by Afrinvest said: “Borrowing cost is expected to increase on new loans, also the cost of the existing loans may be reviewed once the base is floated.
For most of the firms, the cost of goods they produce will go up especially those that their demand is inelastic. It is not going to affect the existing Eurobond because the interest on them have been determined unless they want to borrow newly”.
The Central Bank of Nigeria (CBN) recently told manufacturers whose revenues are naira- denomination not to take dollar loans.
Instead, the apex bank pledged it will continue to provide naira funding, advising that where the revenue stream is in naira, dollar loans should be avoided.