The recent rally in bonds, which has seen yields falling, has sent Nigerian borrowing costs to two- year lows, helping to ease financing costs for the nation’s growing debt pile.
Nigeria’s Federal Government (FG) has plans to issue approximately N534 billion worth of new bonds in 2013 (excluding rollovers to refinance maturing issues) compared with the N752 billion issued in 2012, according to data from budget proposals.
Nigerian bond yields have collapsed across various tenors, as inflation for January printed at single digits and offshore flows increase from investors playing the carry trade, due to Nigeria’s inclusion in the JP Morgan Bond index.
“As long as USD/NGN remains stable, we suspect decent foreign capital flows into FGN bonds will persist, especially because those are the highest-yielding instruments in the GBI-EM index,” Samir Gadio, an emerging markets strategist at Standard Bank, London, said in recent research note.
“The domestic positioning at the long end will also contribute to further yield compression, with the possibility that rates may even break the 10 percent level for some time.”
The yield on Nigeria’s 10 year domestic bonds due 2022 has fallen by 532 basis points (bps) to 10.44 percent last Friday, from 15.94 percent a year ago, according to Financial Markets Dealers Association (FMDA) data.
The nation’s inflation rate fell to 9 percent in January from 12 percent in December, the lowest level since April 2008, the National Bureau of Statistics (NBS) said last month.
The last time Nigerian debt was trading at this level, with 10-year yields around 10 percent, was early March 2011.
The decline in bond yields is helpful because it means the Debt Management Office (DMO) can lock in lower coupon payments for its monthly bond issuances.
The DMO sold N105 billion of 5, 7, 10 and 20 year bonds at a marginal rate of10.83 percent, the lowest in more than two years, at its monthly debt auction last February.
The FG earmarked N543 billion, for domestic debt service in 2013, according to data from the federal budget.
Domestic debt service accounts for 14.4 percent of total federal retained revenue in the 2012 budget, and as much as 31.7 percent of the non-oil component of the total.
Debt service payments have spiked from below N200 billion a year in 2007, to over N550 billion in 2011.
FGN bonds made up 61.44 percent of the domestic debt stock of N6.5 trillion at the end of 2012.
Nigeria’s budget deficit is forecast at about 2.17 percent of gross domestic product (GDP) in 2013, down from 2.85 percent in 2012.
Total debt may reach 14.8 percent of GDP this year.
The decline in bond yields is helpful because the cost of domestic debt service has mushroomed in recent years, leaving less money for infrastructure and other needs.
The 2012 debt service payment cost the Nigerian treasury N559.6 billion, more than the budget allocation to Works, Power, Agriculture and Water Resources, combined.
Other factors may also curb domestic borrowing costs, favouring a continued positive outlook for the domestic bond market.
“Improved budget management, including the sweeping of surplus balances into a Treasury Single Account and the establishment of a N100bn sinking fund to repay maturing domestic debt, should cap domestic borrowing costs,” Razia Khan, regional Head of Research, Africa, at Standard Chartered Bank, said in a note on Nigeria’s 2013 outlook, released in January.
PATRICK ATUANYA
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