Connect with us

Markets

Foreign Debt, Democracy and Checks and Balances

Published

on

dollar
  • Foreign Debt, Democracy and Checks and Balances

Democracies have been on the wrong end of the publicity stick in recent decades. The rapid economic expansion in relatively autocratic countries like China, Singapore, and South Korea in the 1970s has implanted the idea that democracies might not be best suited for rapid economic growth. Of course, most conveniently ignore the autocracies like Zimbabwe, Venezuela, and Cuba where things go horrible wrong.

Still within this context, the argued advantage for democracies is they prevent the worst from happening. While they may not allow too much flexibility in policy, they prevent the kinds of disastrous decision-making that lead to economic collapse. In essence, the “check and balances” prevent policy makers from theoretically destroying the economy through bad decisions.

Nigeria has been a democracy since 1999. At least we have been a democracy in the sense that we have elections, there is rule of law, and there are institutions that are supposed to guard and protect Nigerians and their future. You can argue about how democratic we are in practice but at least we are somewhat better off than we were thirty years ago. Our freedom house score, a ranking of democracies, is 50, which is a bit of a way from the ideal democracy at 100, but is also not as bad as the least democratic countries which have scores around one. The question then, in terms of our democracy’s ability to prevent policy makers from making the worst decisions, is “are we really democratic?”

We can think of this question in the context of the recent debt debate. Just a quick recap, in the face of collapsing revenue due to the crude oil price crash in 2014, the federal government continued its spending spree, opting to bridge the gaps with debt instead. The result has been an acceleration in debts to the point where debt servicing costs now consume about sixty percent of actual revenue. Not satisfied with the precarious situation, the federal government is proposing to continue the spending boom, and is looking to raise an additional $5.5bn from external sources.

Ironically, we have been in this situation before, when we were not a democracy, but during the era of military dictatorships. In the 1980s, faced with the same scenario of collapsed crude oil prices, the military regimes opted to keep the government spending policy going and closed the gap with debt instead. The early 1980s were the period of “jumbo” loans from various external sources. In hindsight we know those decisions were bad as the loans were frittered away, and the debt went on to cripple the activities of government for the next two decades. The country would not get out of that problem until the debt forgiveness deal in 2005, almost 25 years later.

We were not democratic back then and the institutions which should have prevented that outcome did not really exist. There was no debt management office to monitor and publicize actual debts. There was no national assembly to check the actions of the military regimes. The civil society and press were also not in very good shape, in terms of their ability to go against the military regimes.

This time around we are democratic and have all these institutions. Will we end up with the same scenario, with debt problems that cripple government for decades, or will our institutions act to ensure a different and better outcome this time around?

The federal government typically thinks in four years cycles, and on issues such as long term debt problems, it is expected that they will lean towards the path of immediate benefits and not think too deeply about the longer term costs. This is where the other institutions, who are theoretically supposed to take a longer-term view of things, have to stand up and demonstrate that they know their role in democracies. Specifically, the national assembly is the institution charged with protecting the long-term interests of Nigerians and they must demonstrate that we are indeed a democracy, and we are capable of avoiding the worst decisions.

The question of whether this new request to seek for $5.5bn in foreign loans is economically sound or not is not really what is at stake. The real matter is ensuring that we do not fall into the same debt spiral like we did under the military in the 1980s. If we do, then it would mean that our democracy is really only just on paper.

• Nonso Obikili is an economist currently roaming somewhere between Nigeria and South. The opinions expressed in this article are the author’s and do not reflect the views of this medium.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade long experience in the global financial market.

Continue Reading
Comments

Markets

Finances of International Oil Companies Suffered in the Second Quarter

Published

on

oil jerk

Finances of IOCs Plunged Amid COVID-19 Pandemic in the Second Quarter

Global leading oil companies suffered substantial losses in the second quarter, according to their various financial statements published in recent weeks.

On Thursday, Royal Dutch Shell posted $18.9 billion loss in the second quarter of 2020, far below the profit of $3.5 billion posted in the same quarter of 2019.

This, the company attributed to the plunge in global oil prices in 2020 due to the COVID-19 pandemic. Shell warned that oil demand remained uncertain, adding that it had cut its exploration plans for this year from about 77 wells to just 22.

This was after the price of Brent crude oil plunged to $15 per barrel during the peak of COVID-19 pandemic while the price of West Texas Intermediate crude oil dipped to -$37 per barrel, the lowest on record.

Also, the company said it has reduced its capital expenditure for the year from the initial $25 billion to $20 billion amid a plunge in revenue and demand for the commodity.

Similarly, ExxonMobil reported a $1.1 billion loss, its biggest decline on record. The oil company also announced it would be lowing spending by 30 percent in 2020 to about $23 billion.

Among the various oil companies posting negative financial statements for the quarter was Chevron Corporation, the company reported $8.3 billion decline in the second quarter of the year. The lowest ever posted by the oil giant in almost three decades.

Chevron, therefore, warned that the havoc caused by COVID-19 pandemic in the energy sector might continue to weigh on earnings.

“While demand and commodity prices have shown signs of recovery, they are not back to pre-pandemic levels, and financial results may continue to be depressed into the third quarter of 2020,” Chevron’s Chairman and Chief Executive Officer, Michael Wirth, said.

Continue Reading

Markets

Oil Halts Bullish Run as US Oil Inventories Rises Than Expected Last Week

Published

on

Crude oil

Oil Caps Gain as US Oil Inventories Rises Than Expected Last Week

Oil prices halted its bullish run on Wednesday after data from a group known as the American Petroleum Institute (API) revealed that U.S. crude inventories expanded by 7.5 million barrels last week, higher than the expected 2.1 million barrels.

This surged in oil inventories damped the recent increase in oil prices brought about by the renewed hope in COVID-19 vaccines and the 750 billion Euro ($859 billion) stimulus announced by the European Central Bank (ECB) to prop up economies – within the region – affected by the COVID-19 pandemic.

Brent crude oil, against which Nigerian crude oil is priced, rose to $44.86 barrel per day on Tuesday before pulling back to $43.80 on Wednesday during the London trading session.

UKOilDaily 5

The US West Texas Intermediate (WTI) crude oil rose as high as $42.48 per barrel on Tuesday before hitting $41.31 a barrel on Wednesday following the release of the data.

“Crude’s rally hit a brick wall after the API report showed a sharp rise in stockpiles and on President Trump’s warning that the coronavirus pandemic in the U.S. is likely to worsen,” said Edward Moya, senior market analyst at OANDA in New York.

“The crude demand outlook just got a double whammy with what could be the biggest rise in stockpiles since late May if confirmed by the EIA report tomorrow and on Trump’s downbeat virus briefing,” Moya said.

The official crude oil inventories data would be released on Wednesday by the US Energy Information Administration (EIA).

Continue Reading

Markets

Sub Saharan Africa Mergers and Acquisition Hits US$10.3bn in Q1 2020

Published

on

merger and acquisition 1

Sub Saharan Africa M&A Hits US$10.3bn in Q1 2020

South Africa – Refinitiv today released the 2020 first-half investment banking analysis for the Sub-Saharan Africa. According to the report, investment banking fees in Sub-Saharan Africa reached an estimated US$64.5 million during the second quarter of 2020, half the value recorded during the first quarter of 2020 and the lowest quarterly total since Q1 2012.

Around US$196.1 million worth of fees were earned in the region during the first half of 2020, down 27% from last year and a six-year low with fee declines recorded across M&A advisory, debt capital markets underwriting, and syndicated lending. Debt capital markets underwriting fees declined 45% to US$26.2 million, marking the lowest first half year total for bond fees in the region since 2016. Advisory fees earned from completed M&A transactions generated US$43.4 million, down 50% year-on-year to the lowest first half level since 2005, while syndicated lending fees fell 36% to a six-year low of US$71.5 million. Equity capital markets underwriting fees increased 164% year-on-year to US$55.1 million.

Government & Agency fees accounted for 26% of total investment banking fees earned in the region during the first half of 2020, up from 14% during the same period last year. South Africa generated the most fees in the region during the first six months of the year, a total of US$108.4 million accounting for 55%, followed by Nigeria with 13%. JP Morgan earned the most investment banking fees in the region during the first six months of 2020, a total of US$23.1 million or an 11.8% share of the total fee pool.

As for Mergers and Acquisitions (M&A), the value of announced M&A transactions with any Sub-Saharan African involvement reached US$10.3 billion during the first six months of 2020, 44% less than the value recorded during the same period in 2019, and a two-year low. The number of deals declined 18% over the same period. After just US$424.5 million worth of deals were recorded in April, marking the lowest monthly M&A total since October 2005, activity increased for two consecutive months to reach US$3.0 billion in June, a nine-month high.

Deals with a Sub-Saharan African target declined 76% by value to an eighteen-year low of US$3.2 billion, as domestic M&A within the region declined 71% from last year and the combined value of inbound M&A deals reached just US$1.2 billion, the lowest first-half level in more than two decades. The largest deal involving a Sub-Saharan African target was announced at the end of May – Afrimat’s US$644.3 million acquisition of South African mine operator Unicorn Capital Partners.

Deals in the materials sector accounted for 46% of Sub-Saharan African target M&A activity during the first six months of 2020. South Africa was the most targeted nation, followed by Uganda and Nigeria. Outbound M&A totalled US$3.6 billion during the first six months of 2020, 67% more than the value recorded during the same period in 2019, despite a 22% decline in the number of deals. With advisory work on eleven deals with a combined value of U$1.7 billion, JP Morgan holds to the top spot in the financial advisor ranking for deals with any Sub-Saharan African involvement during the first six months of 2020.

In the Equity Capital Market space, Sub-Saharan African equity and equity-related issuance totaled US$1.5 billion during the first half of 2020, 16% more than the value recorded during the same period last year, but lower than every other first half total since 2009. The number of deals recorded declined by 29% to the lowest first half tally since 2009.

Africa's equity capital marketOnly one initial public offering was recorded during the first six months of the year. Malawian telecoms company, Airtel Malawi, raised US$28.7 million on the Malawi Stock Exchange in February. JP Morgan took first place in the Sub-Saharan African ECM underwriting league table during the first six months of 2020.

As for Debt Capital Markets, the African Development Bank raised $3 billion in a “Fight Covid-19” social bond at the end of March to help alleviate the economic and social impact the Coronavirus pandemic will have on livelihoods and economies in the region. With this deal, and Ghana’s US$3 billion Eurobond in February, Sub-Saharan African debt issuance totalled US$8.9 billion during the first quarter of 2020, the second-highest first quarter DCM total in the region of all-time. Only US$1.9 billion was raised during the second quarter, taking the value raised during the first six months of 2020 to US$10.7 billion, down 14% from last year and a four-year low. Deutsche Bank took the top spot in the Sub-Saharan African bond underwriter ranking during 1H 2020 with US$1.7 billion of related proceeds, or a 16% market share.

Africa's Debt Capital Market Q1, 2020

Africa's M&A Q1, 2020

Africa’s M&A Q1, 2020

Screen Shot 2020 07 16 at 6.25.35 PM

 

Continue Reading
Advertisement
Advertisement
Advertisement
Advertisement

Trending