Experts Opt for Local Currency Deals in Infrastructure Financing.
Capital Market Stakeholders have renewed call for Government to accelerate economic growth through mobilization of domestic currency financing for infrastructure and other capital projects from the Nation’s Financial Market. Besides, they also stressed the need for Federal Government to finance fiscal deficits by borrowing from local Markets.
According to the stakeholders, who spoke in an interview with The Guardian, they argued that a decade of financial crisis in emerging markets has demonstrated that currency markets can be unexpectedly volatile.
They noted that any foreign currency-denominated instrument issued by a local company imposes exchange rate risk on the issuer, as repayment for such instrument is suited for enterprises that earn substantial portion of their income in hard currency.
Furthermore, they opined that local currency financing is in itself an important development objective, especially for sectors that underpin development- infrastructure, housing and smaller businesses.
While some Governments can access International Capital Markets, the development of local Capital Markets, according to them, can increase access to local currency financing and thereby help manage Foreign Exchange risk and inflation better. They maintained that this is a valuable benefit for Governments, since it can allow them to finance fiscal deficits by borrowing from local markets without exchange rate risk.
Therefore, they suggested that Governments at all levels should take advantage of multiplicity of benefits inherent in the Nation’s capital market to facilitate their respective infrastructural projects.
The Managing Director of Chapel Hill Denham, Bolaji Balogun stressed the need for Government to access local sources of capital for infrastructure financing.
“Infrastructure needs to be financed largely in local currency and the U.S. Dollar string risk for Nigeria. To price everything in Dollar-denominated currency is huge risk and the current impact in power on infrastructure owners, Banks, Government and the people is plain to see,” he said.
Balogun explained that the domestic capital markets provide an alternative source of funding for entities in need of funding; noting that the creation of local capital markets is enormously beneficial to Governments attempting to finance development internally.
According to him, capital markets can offer better pricing and longer maturities, as well as access to a wider Investor base. They can also offer funding for riskier activities, and by doing so contribute significantly to innovation in an economy. He noted that the capital market provides variety of financing instruments and Investor categories, which could lead to larger pool of funds than other financing options.
The Managing Director of Centurion Registrars, Basil Aharanwa, also explained that local borrowing especially through the equity market would ultimately fast track the Nation’s development.
“Instead of going outside to borrow money, Government can come to the capital market to borrow money because the money is cheaper and is not tied to a specific period of payment especially when it comes to equity.
“Government can borrow money from shareholders and it is very easy because Government is coming in with a kind of assurance that as long as Government still exists, shareholders will have hope of recouping their Investment and the process of doing that is not cumbersome and the cost not very high.
“This will also help regenerate into developing the system and the country, if for example Government borrows money to build railways, Investors seeing that the money lent to Government is used for railway, they will be happy that the money is used to grow the system that Government borrowed locally and used to develop infrastructure locally.
“The risk of borrowing offshore is very high, though some borrowing from special organisation offshore can attract longer gestation but the best is that you are borrowing internally to develop internally, off shore borrowing has its own impediment and I do not subscribe to it,” he said. An independent Investor, Amaechi Egbo said by issuing foreign currency denominated instruments; the country is exposed to Foreign Exchange risk.
He noted that there are benefits associated to issuing foreign debt but because repayment is in foreign currency, it is suited for enterprises that earn substantial portion of their income in hard currency.
He maintained that the capital market is the market for securities, where companies and Governments can raise long term funds, noting the main function of the capital market is to channel Investments from the Investors who have surplus funds to the Investors who have deficit funds.