How much rate hike can Nigeria's markets absorb?

The recent decision by the Monetary Policy Committee of the Central Bank of Nigeria to implement a moderate 50 basis point rate hike has sparked a discussion among analysts about the reactions from investors in the country's local debt market. Egie Akpata, Chairman of Skymark Partners, joined CNBC Africa to share his insights on the implications of the rate hike and the future trajectory of Nigeria's markets. Akpata noted that the rate hike was somewhat anticipated, as the Central Bank Governor had previously indicated that rates would continue to rise in response to increasing inflation rates both locally and globally. However, with Nigeria's policy rate, the NPR, currently at a record high of 18%, there are concerns about the sustainability of further hikes and the potential negative impact on the economy. One key question that emerges from this discussion is the extent to which the NPR can realistically increase and how it relates to inflation rates. Akpata highlighted the delicate balance between raising rates to combat inflation and avoiding excessive borrowing costs that could stifle economic growth. While some countries have seen policy rates exceed inflation levels, Akpata suggested that such a scenario may not be practical for Nigeria in the short term, given the current record level of the NPR. The conversation shifted to the local debt capital market, where the implications of the rate hike are closely observed. Akpata explained that market interest rates, driven by liquidity, play a significant role in determining borrowing costs for both government and corporate issuers. While federal government rates have peaked around 16%, corporate issuers may face constraints if rates continue to rise. The potential for commercial papers to exceed 20% could deter major borrowers from entering the market, leading to a crowding out effect that prioritizes government borrowing over private sector lending. The discussion also touched on the banking sector, specifically the recent takeover of Union Bank by UBS and the implications for bondholders of the 81 bonds. Akpata reassured investors about the safety of bank bonds in Nigeria, citing CBN approval requirements and the absence of defaults in the sector. Looking ahead, the prospect of further rate hikes and inflationary pressures is expected to impact growth prospects in Nigeria. With the possibility of subsidy removal and revenue challenges looming, policymakers will need to strike a balance between containing inflation and stimulating economic growth. Akpata emphasized the importance of coordinated efforts between the government and the central bank to manage borrowing costs effectively and support sustainable growth in the long term. While high interest rates may persist in the near term, there is an expectation that they will eventually need to be reduced to foster economic recovery and stability. As Nigeria navigates the challenges posed by rising rates and inflationary pressures, stakeholders will be closely monitoring policy developments and market dynamics to assess the impact on investments and overall economic performance.