Time to review tendency of debt issuance by states, LGs —SEC

By Tunde Oso

The Securities and Exchange Commission (SEC) has urged capital market operators (CMOs) in Nigeria to review the proclivity of issuance of debt instruments by both state and local government agencies.

This advice was given by Bola Ajomale SEC Executive Commissioner, Operations, who represented the Director General at the 2024 International Credit Rating Webinar organized digitally by DataPro Limited on the 10th of October, 2024.

According to the SEC Commissioner: “Irrevocable Standing Payment Orders (ISPOs) from the state government cannot be the only measure of assurance and risk mitigation, CRAs must alter their measurement metrics to accommodate rising risk levels and increasing requirements for sustainability for any instrument raised by a state or quasi-government body.

He further emphasized that another looming situation is the tendency for some State Governments to issue private Bonds guaranteed by the State Government. Not only do these not have any proof of secondary market value they need to be assessed for delivery of the stated project objectives.

He therefore urged participants at the Webinar to explore how to leverage the role of Credit Rating Agencies (CRAs) in driving sustainable economic development in Nigeria.

The fourth in the series, the International Credit Rating Webinar was attended by over 500 participants drawn from Nigeria, USA, Canada, South Africa, Ghana, Gambia, Namibia, Kenya and Rwanda.

In his welcome address the DataPro’s Founder Abimbola Adeseyoju reiterated the purpose of the Webinar as a veritable vehicle to propagate the value propositions of the Credit Rating Institution in Nigeria and the rest of Africa.

According to him, apart from the established role of providing opinion on quality of Asset and Capital, Credit Rating Agencies also serve as a complement to risk management procedure. He went further to canvass that CRAs should serve the common goal of catalyzing the economy, promoting the real sector and creating wealth for a sustainable society.”

In his speech, the keynote speaker at the event, Christian Ruehmer, an accomplished international banking entrepreneur urged banks to support businesses in the real economy.

Ruehmer believes Rating Agencies and Banks share a common goal in ensuring that businesses succeed. To him “Rating Agencies embody the need for robust financial expertise and a deep understanding of a company’s financial standing. At the same time, they provide a product that is trusted and reliable. Banks rely on CRAs to facilitate their work and collaborating with the wider financial sector to offer credible insights into a company’s long-term potential”.

He went further: “A developing country like Nigeria can only grow if it finds a better way to finance domestic companies. And to do this, banks and investors must become more comfortable assessing these companies and that is when Credit Rating Agencies come in”.

Continuing he said ratings should help evaluate Credit Risk before a loan is approved, but they are equally important in monitoring how that risk evolves over time.

He mentioned that approving and disbursing a loan is the easy part but getting repaid is where the real work begins and that is where monitoring and ongoing Ratings play a crucial role.

The panel discussion moderated by the Chief Rating Officer of DataPro Limited Prince Oladele Adeoye had Mr. Sam Amukoko, the Managing Director of Kenya’s Metropol Rating Agency, Dr. Sonnie Ayere, Group Managing Director of DLM Capital Group and Mrs. Kemi Awodein, Managing Director of Chapel Hill Denham in attendance.

The panelists acknowledged the resilience of Nigerians amidst the present economic uncertain and went further to highlight the need to adapt quickly to new government policies as a survival tactics.
They argued that despite the challenging situation, opportunity for investment abound in Nigeria and the CRAs must provide a clear, realistic outlook for the benefit of investors.

The panelists also emphasized on the importance of developing robust capital markets, pointing out the role that the absence of capital markets in the past played in deepening economic crisis. A well-functioning capital market could help African economies, like Nigeria, withstand external shocks and reduce dependency on foreign debt. The recent moves by the African Union to establish homegrown Sovereign Rating was appraised by the panelists, viewing this as a positive development for both the continent and its economies.

In addressing the critical question of how macroeconomic conditions influence credit ratings, the panelists highlighted the challenges CRAs face in evaluating entities’ ability to meet debt obligations amidst fluctuating economic factors. It was noted that CRAs consider multiple variables, including the cost of borrowing and economic policies, to determine default probabilities and ultimately assign ratings that reflect the economic reality.

The panel emphasized that while no environment is perfect, there are always opportunities, even in challenging times. Nigeria’s infrastructure deficit, population growth, and potential in sectors such as mining have untapped opportunities for investors to generate returns. Despite the difficult terrain, Nigeria remains an attractive destination for investment, with the Commercial Paper sector offering significant prospects. The panel also delved into the balance between domestic and external borrowing.

According to them, external loans often come with lower interest rates but at the cost of external conditionalities. On the other side, however, domestic borrowing in local currency limits default risks and better positions economies like Nigeria to avoid over-reliance on institutions like the IMF. The need for African nations to develop their domestic capital markets was greatly emphasized.

The panel concluded by addressing the role CRAs should play in this period of economic uncertainty, stressing that CRAs must prioritize the interests of investors by providing clear assessments of asset classes and economic conditions, helping investors make informed decisions. The critical role credit rating agencies play in supporting both governments and the private sector is expressed in its ability to provide a transparent view of risks and opportunities in the current economic landscape.

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