FSDH Merchant Bank Limited has called on the Federal Government and corporate organisations to implement measures to counter the negative implications of low interest (easy money) regime prevailing in the global economy.
The company made this call in the August 2019 edition of its Monthly ‘Economic and Financial Markets Outlook’, warning that the low interest rate regime, which is driven by expansionary policies in developed and developing economies in a bid to stimulate economic growth, can be reversed anytime leading to high interest rate and the risk of capital flight.
Speaking at the media presentation of the report, Head of Research, FSDH Merchant Bank, Mr. Ayo Akinwunmi, stressed that while the low interest rate regime makes it cheaper for governments and corporate institutions to borrow, it should not be seen as an opportunity to increase deadweight debt, but as an opportunity to access long-term funds that can be used to improve the wellbeing of the economy in order to generate increased revenue for all the economic agents.
He said: “Individuals, companies and governments can now borrow money both from the domestic and foreign financial markets cheaper than in the last few months. FSDH Research has observed that many banks and other credit providers in Nigeria have recently begun aggressively pushing credit to their customers.
“The Federal Government of Nigeria is refinancing maturing debt obligations and taking on new debt at cheaper rates because of the low interest rate environment.
“Foreign Portfolio Investors (FPI) are aggressively investing in fixed income securities in Nigeria with reasonable yields because of the low interest rates in advanced countries and the expectation of a further interest rate cut, particularly in the US.
“FSDH Research warns that the current developments in the global financial market may change, leading to rising interest rate and possible capital flight, particularly from developing countries. Therefore, companies and countries need to build buffers to protect themselves.”
Highlighting measures to explore the benefits of the easy money condition for long term growth, Akinwunmi said: “Companies may wish to issue debt capital at this moment to expand business operations and create additional lines of business that can generate improved earnings for them.
“When the financial market becomes tight again with rising interest rates, companies may then modify their capital structure in favour of equity capital and hopefully their earnings would have grown in order to eliminate the dilutive effect of increased equity capital on return-on-equity “In doing this, it may be important to provide forex hedging mechanism for foreign loans.
The FGN may also take advantage of the current low interest rate to access long-term debt and channel it specifically towards building the capacity of the economy to generate more revenue.
“Investment in infrastructure, security, education, healthcare and other social safety net will improve the productivity of the country and provide an opportunity for government to generate future tax revenue.
‘‘This strategy will increase the stock of foreign exchange in the country and may reduce inflation rate.”