Bonds: States not generating enough revenue should stay within 60% threshold – Capital Assets boss
Following the economic down-turn in the country in 2016 that resulted in zero activity in the primary equities market, recent data from the debt office shows that the bond market was not spared in the lull as only few companies were able to access the market to raise fund both in the domestic and international space. Mr. Ariyo Olushekun, Vice-chairman/CEO, Capital Assets Limited, spoke to Financial Vanguard on the issues involved. Excerpts:
By Nkiruka Nnorom
ONLY seven companies and one state government (Lagos State) was able to access the domestic bond market last year to raise money and only Access Bank accessed the International Capital Market during the same period. What does it tell about the state of capital market?
It is not necessarily a negative sign for the market. First of all, for bonds, many of the States are having issues with paying salaries and because of that, it will not make sense for them to be coming to the market now. Their chances of success is limited. As things improve, they can come. Lagos State was able to come because the State is in a class of its own, meaning that it is resilient and it has very good record of servicing its bond obligation. So because of that, it can come and its chances of success is really good.
What of the corporates, it was only seven that were able to access the domestic bond market. Does it not have anything to do with regular issuing of FGN bonds and the yield on FGN bonds?
No, I don’t think so. Even last year was better than previous year. The state of the market was not really good; the market was down. Not many companies could raise money and because of the exchange rate also which was not really stable until recently, it became difficult for foreign investors to come in, even for some local investors. This is because every investor will have an option. ‘Do I keep my money in foreign currency, do I keep my money in other assets or do I bring it to the market. If I bring it to the market and even if I make significant gain like 50 per cent for instance, if the exchange rate goes above 50 per cent, of what essence is it?’ So, that was why the market did not move as expected. Now stability is setting in and there is improvement, I expect to see more issues in the bonds space any time from now. As a result of the stability in the exchange rate, more funds are coming in and even the market that was going down is becoming stable. We actually recorded some significant gain and it is like the market has come back to life.
Apart from the stability in exchange rate that you talked about, what other things will
trigger accessibility of more issuers to the bonds market?
Once investors’ interest improves and I think it is improving, you will see more companies coming back to the market. The economy itself, you know government now has an Economic Recovery and Growth Plan, that makes it easy for companies to plan.
The Association of Issuing Houses is calling for reduction in the Internally Generated Revenue, IGR, threshold for State governments to raise bonds from 60 per cent to about 30/40 per cent to allow more of them access the bonds market. What is your stand on this?
People have different opinions and views. Those who think so are looking at the fact that the Internally Generated Revenue, IGR, for the States are never stable. So, if a state is serious, the IGR will keep improving, which means for that kind of State, you cannot say that the threshold will remain at 60 per cent of last year because the expectation is already getting better.
For States that are not generating enough IGR, for that kind of State, you cannot argue that they should relax the 60 per cent threshold. It still boil down to a particular State and how it is doing with respect to revenue generation.
Will it be safe to reduce the threshold since some of the States were recently bailed out by the Debt Management Office?
There is nothing bad in doing that when the state of things is improved, because the performance of the State with regards to revenue generation will be an issue. For a State that is not improving its revenue generation, this kind of thing will even put the State in bigger problem, but for State that is doing well in improving its revenue generation, then it is not bad because you cannot be bordering it with 60 per cent of last year.
So, I think the threshold can be reduced, it should be reduced, but every State will still have to be appraised based on its internally generated revenue.
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