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Nigeria’s change of tack over borrowing is leaving debt-hungry investors with too little to feed on, stoking pressure on bond and Treasury bill yields.
Debt issuance guidance published this week show the government’s domestic debt appetite has waned significantly, which hardly is a surprise given that Abuja disclosed plans, last year, to trim domestic borrowing to manage ballooning debt service costs and free up capital to the private sector.
The Debt Management Office (DMO) has successfully raised $3bn (N918 billion) in Eurobonds since November 2017, which would be used to refinance maturing domestic debt obligations of the Federal Government, according to Patience Oniha, the director-general.
“The planned reduction in domestic bond issuance further reflects the FG’s reduced reliance on domestic borrowings post the successful Eurobond issue and we expect yields on FGN bonds to fall accordingly,” analysts at Chapel Hill Denham said in a note to clients.
The Lagos-based investment bank expects total borrowings for Q1-2018 will be 52 percent lower relative to Q1-2017, on the assumption that the federal government allots N70 billion as planned in March.
“Given the faster-than-expected reduction in domestic borrowings, we now expect total borrowings via domestic bond issuance at N270 billion in Q2-2018 (N90 billion monthly average) versus N300bn previously.
We now expect the FG’s local borrowings at N1.07 trillion as against N1.25 trillion previously, implying a reduction of 30% from the total of N1.53tn in 2017,” the note penned by Tajudeen Ibrahim and Aderonke Akinsola said.
Average T-bills and bond yields fell by 9bps and 22bps respectively yesterday in reaction to indications from the published T-bills calendar and bond auction circular, with analysts predicting a 75 basis point decline in the coming months, according to a BusinessDay poll on 12 economists.
The recently published Q2-2018 T-bills auction calendar indicates that the Federal government is looking to redeem T-bills worth N482.24 billion (US$1.58 billion) between 13 March and 31 May 2018.
The total redemption will be implemented via a reduction of the total value of T-bills to be rolled over at each bi-weekly primary market auction (PMA) over the 3-month period relative to the “no sale” approach adopted in December 2017.
The Tbill issuance calendar has been followed by a bond issuance circular for the month of March, in what is more of the same regarding the government’s waning appetite for domestic debt.
The plan is to issue N70 billion in 5-year, 7-year (new issue) and 10-year bonds in March, 44 percent below the lower end of the bond offer range for the month as published in the Q1-2018 bond issuance calendar.
That’s the lowest amount on offer since December 2015 when some N50 billion was offered.
Average bond yields fell 16 basis points Tuesday.
Other than fewer primary market auction issuances in the second quarter, there are a lot of catalysts to ensure yields stay depressed within that period, according to Wale Okunrinboye, a fixed income analyst at Ecobank Group, pointing to other factors from declining inflation to an expected cut in benchmark interest rates this year.
“Analysts are already revising their models to reflect lower discount rates on fixed income assets,” said Okunrinboye, who says single digit inflation is a possibility as early as the month of November as fuel prices wane.
“Bond traders are trying to avoid maturities in the second quarter,” worried about the yield outlook for that period, he said.
Inflation figures published Wednesday by the National Bureau of Statistics showed price growth slowed to 14.33 percent for the thirteenth straight month, for the month of February. Though it remains well above the CBN’s 6-9 percent target.
The apex bank has left rates at a record 14 percent since 2016 to fight inflation and attract portfolio investors.
A rate cut appears more likely in May, which is in line with the CBN governor’s earlier guidance of a rate cut before July 2018.
A BusinessDay poll of 12 economists’ mirrored expectations for a 100 basis points cut on sustained inflation moderation, relative FX stability and stronger economic growth in Q1-2018.
Nigeria, Africa’s largest oil producer, can afford to issue less debt this year as its revenue position has improved from 2016’s lows, thanks to higher global oil prices and local production.
By issuing less debt, the government is also trying to ease up the liquidity squeeze created last year, in recognition of the need to stimulate cash flow ahead of the elections in 2019, according to Oluwamuyiwa Oshin, the managing director at investment firm, Unicorn Capital.
“That will inspire confidence in the system,” Oshin said by phone.
The confluence of an improved fiscal revenue profile and increased USD borrowings are expected to translate to lower naira debt issuance and greater cost sensitivity at monthly bond auctions.
However, analysts think the CBN will try to bridge the paper supply shortfall by maintaining issuance of Open Market Operation (OMO) bills to sterilise excess liquidity in a bid to cultivate offshore participation in domestic debt.
That should prevent yields from falling too low that they lose foreign investor attraction.
On the long run however, bond traders are having a hard time guessing if improving inflationary conditions, a somewhat stable naira exchange rate and the government’s reduced appetite for domestic borrowing are enough to drive yields further south.
The confusion stems from the Central bank’s renewed open market operation (OMO) auctions which have emerged a surprise upside risk to forecasts for lower yields this year.
Decelerating inflation and exchange rate stability make a compelling case for the CBN to reduce OMO auctions- which the apex bank profusely used to defend the naira exchange rate and tame rising inflation in thick of an economic crisis in 2016.
The OMO auctions ensured there wasn’t too much naira chasing scarce dollars at a time when low oil prices and production as well as a slide in foreign investment had taken its toll on dollar liquidity and forced a near 40 percent naira devaluation.
Petrodollars are flowing again with the rise in global oil prices and domestic production as well as improved foreign investments which have been lifted in no small way by the creation of a market-determined fx window (called Nafex) in April 2017, yet the CBN has another reason to continue its OMO auctions.
That reason is the need to create a floor for interest rates to ensure they don’t become too low and less attractive for portfolio investors.
Portfolio inflows accounted for 60 percent of total dollar flows in 2017, indicating its significance to the economy.
Total capital imported into Nigeria more than doubled to a 3-year high of $12.2 billion last year from $5.1 billion in 2016, propelled by a 304 percent surge in portfolio inflows to $7.3 billion compared to the previous year ($1.8 billion), data agency, the National Bureau of Statistics said.
Meanwhile Nigeria ‘s public debt stock rose to N21.725 trillion as at December 31, 2017, with the debt to GDP ratio settling at 18.20 percent, Patience Oniha, Director General of the DMO confirmed on Wednesday.
Figures which she presented to the press in Abuja showed that Domestic Debt for the Federal Government was N12.589 trillion, while the Domestic Debt of States and the FCT stood N3.348 trillion. The External Debt of the Federal Government, States and the FCT, on the other hand, recanted N5.787 trillion, according to her.
The Total Public Debt as at December 31, 2017 represents 18.20 percent of Nigeria’s GDP for 2017. This shows that Nigeria’s debt continues to be sustainable and is well within the threshold of 56 percent for countries in Nigeria’s peer group.
Nigeria’s has embarked on a new Debt Management Strategy, which aims at reducing the ratio of Domestic Debt, which government thinks is costlier, as a share of total debt portfolio, while raising External Debt in a 60 to 40 ratio.
“This target is being achieved,” Oniha said as she briefed the press.
The composition of the Debt Stock as at the end of 2017 showed that External Debt was 26.64 percent of the portfolio, up from 20.04 percent in 2016, while Domestic Debt was 73.36 percent, down from 79.96 percent in 2016.
The government thinks that restructuring its debt portfolio could help it reduce soaring Debt Service Costs, interest rates in the domestic market and improved availability of credit facilities to the private sector.
The DMO repaid N198 billion Nigerian Treasury Bills in December 2017 with the proceeds of Eurobond issuances and has also issued $2.5 billion Eurobonds in February 2018.
“The proceeds are being used to repay maturing domestic debt, starting with N130 billion NTBs repaid on March 1, 2018,” the DG stated.
She said the new borrowings are for financing capital expenditure and stimulating the economy, and that the funds injected through the borrowings strongly supported the implementation of the Federal Government’s Budget which helped the country to exit recession in 2017.
Reacting to concerns over the excessive borrowing by government, the DG maintained, “Nigeria’s debt continues to be sustainable and is well within the threshold of 56% for countries in Nigeria’s peer group.”
ONYINYE NWACHUKWU, Abuja LOLADE AKINMURELE, Lagos
