The good and the bad of NGX proposal for Dollar denominated bonds, stock listings

Nigeria’s stock exchange proposes allowing dollar-denominated bond listings and potentially expanding this to stocks, with the aim of easing foreign currency access for companies in Africa’s biggest economy.

Nigerian Exchange Ltd. is targeting companies operating from the country’s special economic free trade zones and those earning foreign currency, according to its Chief Executive Officer Temi Popoola.

“Our primary objective is to enable these companies to issue bonds denominated in dollars and eventually offer equity in dollars as well,” he said in an interview with Bloomberg.

“It could potentially address the challenges posed by fluctuations in foreign currency.”

Brilliant Move By FG, CBN but can it backfire?

This is a brilliant multidimensional move spearheaded by Wale Edun, the Minister of Finance, in collaboration with the Central Bank of Nigeria (CBN).

Companies in the nation will be able to issue bonds (debt securities) in U.S. dollars rather than the local currency thanks to Nigeria’s proposal to let enterprises list bonds priced in dollars on the stock exchange. This effort aims to assist these businesses in overcoming their difficulties in gaining access to hard cash, which is frequently in great demand for imports, international trade, and other overseas responsibilities.

It would draw overseas investors interested in buying these bonds if companies were permitted to list dollar-denominated bonds on the stock exchange. Foreign currency would then enter the nation as a result, helping to increase the dollar supply. The country’s foreign exchange reserves may benefit when more foreign money flows into the economy as a result of these investments, helping to meet the demand for dollars.

This approach could help mitigate the high dollar rate in the country by increasing the availability of dollars and reducing the pressure on the local currency. It would also provide companies with an additional avenue to raise funds for their operations, expansion, or other financial needs. However, the success of this strategy would depend on various factors including investor confidence, economic stability, and overall market conditions.

READ ALSO:NGX proposes dollar-denominated bond, stock listings, issue warning

Now, the advantage and disadvantages

Advantages:

1. Allowing firms to list dollar-denominated bonds can attract foreign investors who are more comfortable dealing in their own currency. This influx of foreign capital can boost the economy and provide funds for development projects.

2. By increasing the supply of dollars in the country through these bonds, the exchange rate might become more stable, reducing the fluctuations that can lead to high dollar rates.

3. Companies can raise funds more easily by issuing bonds in a major international currency like the dollar. This can help them finance their operations and expansion plans.

4. The option to issue dollar-denominated bonds offers companies a way to diversify their funding sources, reducing their dependency on domestic borrowing.

Disadvantages:

1. Dollar-denominated bonds expose companies to currency risk. If the local currency depreciates significantly against the dollar, the repayment burden in local currency terms can increase, potentially leading to financial difficulties.

2. Issuing dollar-denominated bonds can be more expensive due to higher interest rates and potential legal, regulatory, and administrative costs associated with international listings.

3. Companies become subject to global market sentiments and economic conditions, which can impact the pricing and demand for their bonds.

4. Allowing dollar-denominated bonds could lead to a significant outflow of dollars from our country, potentially affecting the foreign exchange reserves.

5. If not managed carefully, a sudden influx of foreign currency from these bonds could disrupt the balance of payments and create macroeconomic imbalances.

In conclusion, the success of this proposal depends on how well it’s implemented, regulated, and managed to mitigate the potential disadvantages while maximizing the benefits.

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