Nigeria’s N850 Billion Domestic Borrowing and Local Implications

At the Nigeria Treasury Bills (NTB) Primary Market Auction, held on the 29 April, 2020, the Debt Management Office of Nigeria (DMO), through the Central Bank of Nigeria (CBN), successfully rolled over N131.53 billion or $365.36 million worth of Nigeria Treasury Bills (NTB) across the 91, 182- and 364-days tenor. The auction result indicates that total subscription on the 1yr bill (364 day) was N148.99bn, with a range of bids from 3.38% to 12.80%. The stop rate cleared at 3.84% – true yield of 4.00% (16bps lower when compared to previous auction) at which a total of N71.07bn was allotted on the 1yr bill.

This decline in the stop rate on the 1yr bill to 3.84% is the lowest we have seen since 9th Sept 2010 when a 1yr bill cleared at 3.78%.

The timing of this auction coincided with the news that the Senate had approved the request of the FGN to borrow N850 billion from the domestic market as against borrowing the same from the foreign market. Although this has not been finally approved with the president’s signature, this news may have triggered some expectation of a higher yield at the auction considering the wide range of bids for the 1yr bill.

Borrowing $2.36 billion (N850bn) externally through Eurobond issuance would have been very expensive. Investors would have factored Nigeria’s credit ratings downgrade, the Coronavirus pandemic effect on our economy, with our reliance on crude oil export for foreign exchange earnings, the pressure on our foreign reserves and exchange rates, and the most devastating situation in crude pricing; which has seen the NNPC struggling to sell our very sweet Qua Iboe crude (Brent) oil even at a discount of $10 a barrel, about $7 per barrel below production cost, if we accept that our crude oil production cost per barrel is $17.

Most bond traders forecast that investors would have priced Nigeria’s new Sovereign yield at 15.25% on account of the current situation numerated above and amid concerns on dollar liquidity when more productive activities resume after this COVID-19 pandemic subsides.

Therefore, the current low yield environment in Nigeria means the DMO can borrow this amount locally at a single digit. Going by the trend on 1yr bill, the DMO can over 6 auction sessions raise N850 billion at an average cost of 5.55%, I do expect the lowest bid rate for the 1Yr bill to increase by at least 100bps should the DMO opt to raise this amount using the 1yr NTB next month.

The decision by the apex Bank in 2019 to differentiate the NTB segment for debt/borrowing from the OMO bills issuance strictly for liquidity management and exclusion of local corporates participation has led to the current low yield environment. The positive effect has been felt by banks in the last quarter from increases in net interest income mainly from their increased low-cost deposits and higher treasury bills yield.

However, this is about to change, as disposable income reduces as a result of months of non-productive activities within the economy occasioned by COVID-19 pandemic, lockdowns and restrictions, the cost of funds is expected to head north.

Interestingly, the prospect that its cheaper for the Federal Government of Nigeria to borrow internally to fund her deficit budget is a testament to the resilience of the Nigerian financial and capital markets amidst this COVID-19 global pandemic. The results of painstaking resolve by the FMDQ, the Financial Market Dealers Association (FMDA), CBN, SEC, FDHL-training, and others, over the years to deepen our markets and provide capabilities in the financial and capital market is yielding results.

The very active FMDQ E-bond (fixed income securities secondary market) which cannot be tamed by this COVI9-19 pandemic has created viable opportunities for Nigeria’s local corporates to contribute to nation building, while expanding investment opportunities across all sectors of the economy.

The expected increase in cost of funds will likely drive yields upwards to maintain positive spread that can sustain liquidity for economic activities in different sectors of the economy to reduce the adverse effect of the expected recession. The monetary authority should consider reverting to using OMO bills to manage liquidity and pressures on the foreign exchange market rather than the current situation of using the CRR. This could be temporary pending improved dollars inflows. This will also benefit Nigeria’s local corporates who have remained committed when their counterparts-FPI’s take flight from Nigeria.

With Nigeria’s current inflation rate, foreign reserves, and melancholy economic prognosis, liquidity is key to restarting the economy and reduce the effect of the COVID-19 pandemic. Nigeria’s treasury-bond market price efficiency means the market is in a better situation to manage liquidity more effectively. This liquidity is vital to all segments of the money market and capital market, including non-sovereign securities.

The current widening yield differentials between the primary auction issuance of NTB and OMO Treasury bills (NTB-3.84% Vs OMO- 12.64%) is not efficient and does not reward our local corporates who have remained steadfast with our economy. Market forces of supply and demand within the OMO bills space with participation of local corporates can close this widening gap and provide the optimal liquidity position to continuously manage inflation, foreign exchange pressures, and ensure price stability.

As positive news keeping coming in on the possibility of a vaccine for COVID-19, it’s only a matter of time before the FPI’s started returning to emerging markets, and, as more capabilities are developed, especially in our manufacturing sector, Nigeria should be able to depend less on external influences for economic growth and development.