The South African bond market is vibrant and one of the largest and leading emerging bond markets in the world with enhanced efficiency and safety and is reputed to be the most liquid in the world with a yield curve spanning between 25 to 30 years.
Some of the measures by the South African authorities to develop their bond market and improve liquidity in the market include the establishment of the Bond Exchange of South Africa (BESA) in 1982, which was later acquired by the Johannesburg Stock Exchange (JSE Limited) in 2009 for R240 million and converted into a public company which was rebranded as JSE Debt Market, appointment of Primary Dealers Market Makers (PDMM) by the government in 1998 and the development of an active Repo market. Repo or Repurchase Agreement is the lifeline of the bond market: It is the sale of securities with an agreement for the seller to buy back the securities at a later date, with the repurchase price greater than the original sale price, and the difference effectively representing interest called repo rate.
The party that originally buys the securities effectively acts as a lender, the original seller effectively acting as a borrower, using their security as collateral for a secured cash loan at a fixed rate of interest. A repo market is critical in the bond market because it create equilibrium in the supply and demand for trading government securities and other securities. Besides, the South Africa regulatory frame work ensured that the bond market moved from OTC to exchange-traded in order to eliminate or lessen some risks inherent in OTC such as counter party risks and settlement risks.
The Nigerian bond market is fairly developed with outstanding maturities ranging from 3 to 20 years but activities are focused more on the domestic primary market and Over-the Counter (OTC), mostly at Financial Market Dealers Quotation (FMDQ), with very limited secondary trading at the Nigerian Stock Exchange. The bond market in Nigeria was moribund for 14 years before it was reactivated in 2003 when the Federal Government returned and issued 3-year, 5-year, 7-year and 10-year bonds to raise N150bn. Investors preferred the 3-year bond which was oversubscribed 8.75 per cent. And in 2005, the Debt Management Office (DMO) started regular monthly issuance of N70bn FGN bonds, translating to N840bn per annum. For five years, government received a total of N4.2trn.
In 2008 tenor of FGN bond extended to 20 years, the longest tenor debt instrument ever offered in Nigeria. It provides for better asset/liability match and reduces roll-over and refinancing risks. Total bond market capitalization in 2013 was N5trn (US$30.98bn).
Some measures taken by the Securities and Exchange Commission (SEC) to strengthen the bond market include the appointment of 10 market makers for bonds, introduction of securities lending and collaboration with the Efficient Securities Market Institutional Development (ESMID) to streamline the process of bond issuance which includes rules on book-building, shelf registration, revision of the tax regime aimed at eliminating tax discrimination against investors in corporate and sub-national bond.
There has been growing interest in the Nigerian domestic bond market. There are presently 56 listed bonds with FGN bonds constituting 67 per cent. Two blocks of Sovereign bonds (dollar denominated)-10-year $550 million bond and 5-year $550 million bond worth US$1bn were also issued in 2013 to finance infrastructure development – laying of pipelines to supply gas to power plants.
The papers were oversubscribed four times, a reflection of the sanguine outlook for the Nigerian economy. The yield for the 10-year bond is 6.37 per cent and 5.125 per cent for the 5-year paper. Also, there are 14 Sub-national or state governments bonds in the market which includes Kogi (N5bn) – the smallest, Lagos (N187bn – the biggest and most liquid), Osun (N30bn including N11.4bn Sukuk), Kwara (N17bn), Niger (N15bn), Kaduna (N8.5bn) and Gombe (N20b). Others are Edo (N25bn), Benue (N13bn), Ebonyi (N16.5bn), Ondo (N27bn), Ekiti (N25bn), Bayelsa (N50bn), Imo (N18.5bn) and Delta (N50bn) valued at N415bn, while corporate bonds total N148.5bn.
In addition, two triple A multilateral agencies, the International Finance Corporation (IFC), the private sector arm of the World Bank, and African Development Bank (AfDB), issued supranational bonds. While IFC issued its ‘Naija Bond’ worth US$450 million and filed for Medium-term notes (MTN) of US$1bn, AfDB filed US$1.5bn MTN programme.
JP Morgan Chase Emerging Markets also included the FGN bonds in its Government Bond Index, making it the second African country after South Africa to be a part of the index. But it was expunged recently.
UK’s Barclays also included 13 FGN bonds worth US$13.9bn in its Emerging Markets Local Currency Bond Index in 2013. Both inclusions (JP Morgan and UK Barclays) reportedly triggered the inflow of $1.5 billion into FGN bonds.
Arize Nwobu
Nwobu is assistant director/head, research and technical, Chartered Institute of Stockbrokers (CIS).
