How Nigeria plans to tap into domestic markets

Nigeria's Minister of Finance, Budget and National Planning, Zainab Ahmed, has revealed that approximately 50% of Nigeria's fiscal deficit will be covered by domestic borrowing, despite the country's staggering debt stock of nearly 40 trillion Naira. With the government facing a significant budget shortfall of around 6 trillion Naira this year, there is a pressing need to explore various avenues for borrowing to bridge this financial gap. Sam Chidoka, the CEO of Kairos Capital, sheds light on the implications of this burgeoning domestic debt market and the potential impact on interest rates in an exclusive interview with CNBC Africa. Chidoka highlights the importance of domestic borrowing as a means to fund the budget deficit, emphasizing the role of institutional investors in driving demand for government securities. With assets under management exceeding 13 trillion Naira, these professional investors play a crucial role in financing the government's borrowing requirements. The domestic market offers greater flexibility and control for the government in managing interest rates compared to foreign borrowing, where rates are subject to external market forces. As the government seeks to ramp up borrowing in the domestic market to meet its funding needs, there are concerns about the potential impact on interest rates. Chidoka acknowledges that the natural expectation would be for rates to rise with increased borrowing activity, particularly in the short-term debt segment. However, he points out that the government and regulatory bodies have mechanisms in place to influence rates and ensure stability in the market. In light of the current scenario where one-year Treasury bill rates hover around 4.9% to 5%, Chidoka discusses the outlook for interest rates and the factors that could drive changes in the market. While acknowledging the likelihood of rates trending upwards, he emphasizes the need for real positive returns for investors, considering the prevailing inflation rate and the need to attract capital to government securities. Looking ahead, Chidoka suggests that rates could see an increase of a few hundred basis points in the best-case scenario, especially in the short-term yield curve. He explains that as rates adjust at the shorter end of the market, there may be a corresponding impact on longer-term rates, signaling an adjustment in asset pricing across the board. The dynamic interplay between government borrowing needs, investor expectations, and market forces underscores the delicate balance that stakeholders navigate in the domestic debt market. While the government aims to secure affordable financing to service its existing debt burden, investors are equally focused on generating returns for their funds, such as those managed by Pension Fund Administrators (PFAs). In conclusion, as Nigeria treads the path of increased domestic borrowing to address its fiscal challenges, the evolution of interest rates will be a key aspect to monitor. The potential uptick in rates could reflect a rebalancing of risk and return dynamics in the market, paving the way for a recalibration of investment strategies across various asset classes.