A challenging issuance calendar for the DMO –FBN Capital

The Debt Management Office (DMO) has released its provisional issuance calendar for third-quarter (Q3) 2015, and seeks to raise (gross) between N180bn ($900m) and N240bn ($1.21bn) from the sale of FGN bonds.

It is selling the existing five-year and 20-year benchmarks (15.54% Feb ‘20s and 12.15% Jul ‘34s) each month. The DMO is not this quarter reoffering the ten-year benchmark (14.20% May ‘24s), for which the bid in June fell as low as N36bn.

The DMO has the unenviable task of issuing the calendar amid fiscal uncertainty. The 2015 budget was finally signed off by the last president. To an extent, the market was bought into the idea that the new administration will bring greater fiscal discipline.

We expect that it will deliver but not in time to make a marked impact in Q3. There could be a supplementary budget ahead of the full exercise for next year. The idea broadly is to meet spending pledges by the plugging of leakages. We caution that, as the leakages were not created overnight, so they cannot be immediately stemmed.

The DMO has a new challenge in the form of apparent investor fatigue. After a healthy recovery in demand in both April and May 2015, the total bid in June dipped again to N131bn. Perhaps the delayed FAAC distribution was to blame.

The FGN’s budget proposals project net domestic borrowing (essentially the DMO) of N624bn. In H1 2015 the monthly FGN bond auctions raised N450bn (gross). We take a conservative position on planned deficit financing from property sales, privatization and even signature bonuses. The DMO’s contribution is therefore likely to set to rise above the proposals.