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Research Indentifies Major Factors in Growth of Structured Credit Market

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A new survey from Aeon Investments, the London based credit-focused investment company, with institutional investors in Europe and the US who collectively have around $574 billion in assets under management, reveals the major factors behind more professional investors increasing their allocation to structured credit.

When asked for their top three reasons for this trend, 44% selected greater innovation in the structured credit market, followed by 40% who included greater transparency in the sector.

This was followed by an improving regulatory environment, which 31% of professional investors included in their top three reasons for more professional investors increasing their allocation to structured credit; 22% cited the fact that they can offer attractive yields, which have become even more appealing given the current difficulties in the fixed income market, and one in five (20%) selected the sector’s growing focus on ESG. Some 13% cited structured credit’s ability to offer attractive diversification benefits as one of their top three reasons.

Which structured credit sectors will see the biggest increase in asset allocation from investors?

In terms of which areas of the structured credit market is likely to see the biggest inflows from investors over the next 18 months, 63% anticipate allocations to products focusing on residential real estate will see an increase, and 63% also expect this from those investment vehicles focusing on commercial real estate. Some 49% of respondents expect an increase in investment inflows into structured credit vehicles focusing on consumer credit such as student loans, auto credit/leases, compared to 11% who anticipate a decline. The corresponding figures for flows into structured credit vehicles concentrating on specialist areas of corporate finance such as commercial aviation, shipping, and trade receivables, is 42% and 12%.

Evgeny van der Geest, Managing Director, Aeon Investments said: “In recent years, the structured credit market has seen huge developments in terms of maturity and transparency, and this trend continues to gather pace. This, coupled with a growing desire to diversify portfolios and the search for yield, means more professional investors are increasing their allocation to structured credit investments.”

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Nigerian Banks Boost Private Sector Support by 74.98% in Early 2024

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Nigerian banks have significantly increased their support for the private sector with loans and other forms of credit to the tune of N375.78 trillion in the first five months of 2024.

This represents a 74.98% rise from the N214.76 trillion recorded in the same period last year, according to the Central Bank of Nigeria (CBN).

The data from the CBN highlights a consistent growth in credit to the private sector, underscoring the banking sector’s critical role in driving economic stability and expansion.

This surge in private sector support includes loans, trade credits, and other account receivables, illustrating a robust and dynamic banking sector committed to bolstering the national economic agenda.

A closer examination of the figures reveals that credit to the private sector climbed by 65.9%, or N29.52 trillion, to reach N74.31 trillion in May 2024, compared to N44.79 trillion in the corresponding period of 2023.

The monthly breakdown showed that April’s credit stood at N72.92 trillion, while March and February recorded N71.21 trillion and N80.86 trillion, respectively.

February’s figures marked the highest contribution within this period, followed closely by January’s N76.48 trillion.

This significant increase in private sector credit comes on the heels of a recent report on capital importation, indicating that Nigerian banks are attracting substantial foreign investment.

According to the National Bureau of Statistics, capital importation into Nigeria rose by 2.62% to $1.09 billion in the fourth quarter of 2023, up from $1.06 billion in the previous year.

Leading this charge were Stanbic IBTC Bank, Citibank Nigeria, and Rand Merchant Bank, which facilitated the highest levels of capital importation.

The production and manufacturing sector emerged as the largest beneficiary of capital inflow, receiving $450.11 million, or 41.35% of total capital imported in Q4 2023.

The banking sector followed with $283.30 million (26.03%), and the financing sector with $135.59 million (12.46%).

Financial experts at Cordros Capital have attributed this upward trend to the CBN’s reinforcement of the loans-to-deposits macro-prudential ratio for Deposit Money Banks.

This regulation encourages banks to maintain a healthy balance between deposits and loans, fostering a stable financial environment conducive to lending.

An International Monetary Fund (IMF) study on bank balance sheet strength during financial crises found that banks with robust balance sheets were better positioned to maintain lending during economic downturns.

This finding underscores the importance of strong capital buffers, which the CBN Governor, Dr. Olayemi Cardoso, has emphasized in the ongoing recapitalization efforts aimed at strengthening Nigerian banks to support the country’s ambitious $1 trillion economic target.

Dr. Cardoso stated, “Additional capital not only provides a substantial buffer for banks against potential economic challenges but also enhances their capability to support massive economic growth and compete globally. The ongoing recapitalization will empower our banks to drive sustainable growth and achieve our national economic goals.”

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Nigeria’s Debt Service Outstrips Spending Amid Low Foreign Direct Investment

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Nigeria’s fiscal landscape is facing unprecedented challenges as debt repayments now exceed both recurrent and capital expenditures.

Tilewa Adebajo, CEO of The CFG Advisory, stated these pressing issues during his presentation on “Nigeria’s Fiscal Environment in an Era of Monetary Policy Tightening” at the Finance Correspondents Association of Nigeria (FICAN) bi-monthly forum in Lagos.

According to Adebajo, Nigeria’s debt burden has surged to $130 billion, with 95% of the country’s revenue now allocated to debt servicing.

This development raises concerns about the sustainability of the nation’s fiscal policies and the potential for a debt default akin to those seen in Ghana, Zambia, and Ethiopia.

The National Bureau of Statistics (NBS) reported that Nigeria’s public debt stock soared from N97.34 trillion in December 2023 to N121.67 trillion in March 2024.

Despite allocating N8.7 trillion for capital expenditure in the 2024 budget, only N1.32 trillion is directed towards infrastructure development, highlighting the severe underfunding of critical sectors.

“The current debt levels are unsustainable,” Adebajo warned. “With an additional $10 billion from the 2024 budget deficit, we must commence discussions on restructuring both domestic and external debt to avoid severe economic repercussions.”

Nigeria’s economic indicators paint a grim picture. The country remains in stagflation, grappling with high inflation and stagnant growth.

The introduction of the Nigerian Autonomous Foreign Exchange Market (NAFEM) and the removal of fuel subsidies have boosted the Federation Account Allocation Committee (FAAC) revenues by 130% from May to November 2023, yet these measures have not sufficed to stabilize the economy.

Foreign Direct Investment has plummeted to under $1 billion, the lowest in history. Power transmission and distribution infrastructure remains poor, stifling industrial growth and economic productivity.

The macroeconomic situation has deteriorated over the last seven years, with GDP shrinking by an estimated $180-200 billion, now standing at $390 billion.

Adebajo emphasized the dire need for structural reforms. “Nigeria requires a GDP growth rate of 8-10% to sustain its population of 200 million. Current growth at 3% is insufficient, with 135 million Nigerians trapped in poverty and 40% unemployment,” he noted.

“Dwindling reserves and increasing credit default swap premiums have led to a Caa1 junk bond rating status.”

Despite these challenges, Adebajo expressed cautious optimism. “The fundamentals of the Nigerian economy remain sound. However, poor economic leadership has stifled growth. With a new, highly rated economic management team in place, there is hope for significant improvement if reform policies are implemented sincerely and effectively.”

Adebajo proposed several solutions to address the economic crisis:

  1. Debt Restructuring: Engage creditors to restructure and extend debt maturities, allowing for manageable repayments and reduced interest rates.
  2. Fiscal Discipline: Reduce non-essential government spending, eliminate wasteful subsidies, and enhance public service efficiency.
  3. Revenue Expansion: Broaden the tax base, improve collection, and introduce new revenue streams such as value-added tax (VAT) and property taxes.
  4. Transparency: Increase transparency and accountability in government spending to build public trust and attract foreign investment.
  5. Monetary Policy: Maintain tight monetary policies to combat inflation and attract foreign investment.
  6. Competitive Exchange Rate: Stimulate exports and reduce import reliance by maintaining a competitive exchange rate.
  7. International Collaboration: Leverage regional and international partnerships for financial assistance, expertise, and market opportunities.
  8. Public Engagement: Engage with the public, businesses, and civil society to garner support for economic reforms.

Adebajo concluded with a call for action, stressing the importance of commitment from the new economic management team to drive the necessary reforms and steer Nigeria out of its current economic quagmire.

“The success or failure of our economy hinges on their ability to deliver on reform policies and achieve sustainable GDP growth targets,” he asserted.

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Nigeria’s Public Debt Hits N101tn as World Bank Loans Soar to $4.95bn

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Nigeria’s public debt has breached the N101 trillion mark, driven by a substantial influx of loans from the World Bank totaling $4.95 billion over the past twelve months.

This surge in borrowing has raised concerns about the country’s ability to service its growing debt obligations amidst economic challenges exacerbated by the COVID-19 pandemic and fluctuating global oil prices.

As of December 2023, Nigeria’s debt stood at approximately N97 trillion, according to data from the Debt Management Office (DMO).

The recent borrowing spree has propelled this figure to N101 trillion, reflecting a rapid escalation in the country’s indebtedness.

The loans from the World Bank are earmarked for various developmental projects, including critical sectors such as power, women empowerment, education, renewable energy, and economic reforms.

These initiatives are part of Nigeria’s broader strategy to enhance infrastructure, socio-economic development, and institutional reforms aimed at bolstering long-term growth and resilience.

The breakdown of the World Bank funding includes $750 million allocated for power sector financing aimed at improving electricity generation and distribution, which remains a persistent challenge in Nigeria.

Another $500 million is dedicated to women’s empowerment programs, focusing on expanding opportunities and economic inclusion for women across the country.

Also, $700 million has been allocated to support education initiatives, particularly for adolescent girls under the Adolescent Girls Initiative for Learning and Empowerment project.

This funding seeks to enhance access to quality education and empower young girls in Nigeria.

Moreover, the World Bank has committed $750 million to the Distributed Access through Renewable Energy Scale-up project, aimed at increasing electricity access through renewable energy solutions.

This initiative targets over 17.5 million Nigerians who currently lack reliable electricity.

The largest tranche of $1.5 billion is designated for Economic Stabilisation to Enable Transformation Development Policy Financing Programme. This funding is intended to bolster fiscal revenues, expand social safety nets, and support economic diversification efforts to reduce dependency on oil revenues.

Despite these investments aimed at driving economic growth and improving living standards, concerns linger over Nigeria’s ability to effectively manage its escalating debt burden.

The country’s debt servicing costs have risen significantly, diverting resources away from critical sectors such as healthcare, education, and infrastructure development.

Critics argue that while external financing is necessary for development, the government must ensure transparency, accountability, and effective utilization of borrowed funds to avoid the pitfalls of previous debt mismanagement.

There is also a growing call for stringent fiscal discipline and reforms to enhance revenue generation and reduce dependency on borrowing.

President Muhammadu Buhari’s administration has defended the borrowing, asserting that it is crucial for bridging infrastructure gaps, stimulating economic growth, and creating job opportunities.

However, stakeholders emphasize the need for prudent debt management and sustainable economic policies to safeguard Nigeria’s financial stability and long-term prosperity.

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