Nigeria has been classified among three sub-Saharan African countries where borrowing costs for governments and businesses have risen in the last five years due to policy weaknesses, unfavourable market conditions, and inflation.
Moody’s Ratings, an international rating firm, hinted at this in its latest study, published on Monday, September 15.
It stated that Nigeria, South Africa, and Kenya have had to contend with high interest rates compared with their advanced counterparts, compounded by limited sources of capital.
“Sub-Saharan African economies have substantial funding needs for development. However, limited equity capital and high debt costs remain key barriers despite access to funding broadening over time.
“Three of the largest markets—South Africa (Ba2 stable), Kenya (Caa1 positive), and Nigeria (B3 stable)—face a combination of structural weaknesses that keep borrowing costs high and will take time to address,” Moody’s stated.
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The rating firm suggested that a more effective policy framework will be required to support lower debt financing costs, stressing that borrowing costs are high across the board, although debt costs in South Africa are lower than in the other two markets.
It indicated that debt costs for banks, non-financial companies, and sovereigns have increased in all three markets alongside higher policy rates during the past five years but said banks have withstood the increase by actively repricing assets.
“While concessional lending from development partners helps lower foreign currency debt costs, it has not fully offset high local and foreign market interest rates,” Moody’s pointed out.
Inflation and others are fuelling borrowing costs.
Moody’s noted specifically that in Nigeria, high inflation and limited savings raise the country’s costs.
While sovereigns and banks have mitigated high market borrowing costs through lower-cost funding sources, the rating firm said companies are less able to do the same.
It noted, however, that Nigeria’s financial markets are better at channeling funds to companies than Kenya’s, partly because competing demand from the sovereign’s funding needs is lower.
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“Recent reforms aim to establish robust financial markets, especially for foreign exchange, and strengthen monetary policy transmission channels, but are starting from a low base. Future efforts to deepen financial markets, boost confidence, and tackle corruption may help gradually lower borrowing costs,” Moody’s explained.
It reiterated that a more effective policy framework would support lower debt financing costs.
“Sub-Saharan African economies face major development funding needs, hindered by limited equity and high debt costs, despite gradually improved access to external and domestic funding. In the three largest Sub-Saharan African markets by number of private-sector debt issuers we rate—South Africa, Kenya, and Nigeria—structural weaknesses persist, keeping debt costs high and requiring time to resolve.”
Borrowing costs on international markets
According to Moody’s, credit spreads over United States Treasuries have eased since 2022 for lower-rated Kenya and Nigeria but remain around 500 basis points.
“Local currency borrowing costs have also fallen but remain high, especially in Nigeria and Kenya, driven by domestic policy rates and structurally low savings as well as weak policy credibility and monetary transmission.
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A borrower’s cost of debt mostly reflects a country’s interest rate environment but also the mix of funding sources it can rely on.
It said some aspects of a borrower’s funding mix could help limit costs, stating that low per capita income countries like Kenya and Nigeria could access funding from official lenders on more concessional terms, helping lower the average cost of debt.
These funding flows, however, tend to be small, in part because lending conditions are stringent.
It stressed further that the interest rates banks and non-financial companies pay are highly influenced by a country’s policy rates and sovereign borrowing costs, though market specificities could loosen the link.
“In all three countries, banks mostly rely on deposit funding, with a component of savings and term deposits, which makes their cost of funding sensitive to policy-rate movements.
“Companies typically borrow at local policy rates plus a margin, which depends on their credit quality,” Moody’s said.
It explained that while banks are sensitive to a country’s interest rate because their profitability largely relies on the differential between the average interest rate earned on their assets and that paid on their liabilities, the degree of this sensitivity depends on the mix of assets and liabilities.
Alex is a business journalist cum data enthusiast with the Pinnacle Daily. He can be reached via ealex@thepinnacleng.com, @ehime_alex on X
