Despite 6th successive slowdown in inflation rate, Nigeria’s negative real return increases

Nigeria’s inflation rate has slowed for the sixth successive month to September. The slowdown however does not provide much relief to fixed income-investors reeling from a negative real return.

While the slowdown is good news for investors as it tends to increase real return on investment, the decline in Treasury Bills (T-bills) rates, which has dropped marginally in the last three auctions to October 27, leaves investors with little to cheer.

The investment return on Nigeria’s one-year treasury bill dropped to 6.99 percent at the last auction in October, from a near 10 percent of 9.15 percent on July 14 2021, the inflation rate on the other hand was 16.63 percent. That leaves a real return, the difference between the expected return on investment of an asset and the rate of inflation, at -9.64 percent.

When the same was inputted for the 7.5 percent recorded for the 364-day bill for September, it reported a negative real return of 9.17 percent, lower than the October’s -9.64 percent.

However, compared with the -14.47 percent level it was in January 2021, the October figure is higher by more than 500 basis points.

While investors are taking note of the shrinking negative real return, market analysts said Nigeria’s negative real return is deterring foreign investors who in search of high returns are exploring the opportunities in neighbouring markets with positive real returns.

“The negative interest rate environment is bound to deter foreign investors as there are several alternative countries in the Emerging and Frontier Market landscape with more attractive real return on investments,” Ayorinde Akinloye, Associate Investment Research in United Capital plc said.

T-Bills rates, the interest the Nigerian government pays investors for borrowing their money, has remained relatively low this year.

Breakdown of the last T-bill primary market auction (PMA), revealed that the CBN through the DMO allotted N235.04 billion worth of bills across all tenors. Accordingly, stop rates remained unchanged on the 91-day (2.50%) and the 181-day bill (3.5) 3.50 percent and the rate on the 364-day bill fell from 7.250 percent to 6.99 percent.

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Analysis of the auction result showed that investors’ appetite for the less risky federal government instrument has dropped to one of its lowest levels on record.

While fixed-income investors usually oversubscribe for the short-term investment instrument by hundreds of billions of naira, analysis of the result for the week traded October 27 2021, showed that they only reported N92.08 billion worth of unsuccessful transactions.

The failed bids, the amount investors were willing to invest but were not accepted by the CBN, stood at a record high of over N282 billion in June 2021.

With a total subscription of N235 billion worth of T-bills, the demand at the last auction was relatively weak.
Dampened investors’ interest in the risk-free government instrument amid failed attempts to get high returns from the short-term papers forced investors to redirect their funds to the more attractive banks’ placement and commercial paper (CP), according to BusinessDay findings.

Investors bid at rates as high as 5.5 percent, 6.75 percent and 8.5 percent on the 91-day, 182-day and 364-day bills, respectively at the last auction but the apex bank lowered rates across the three tenors to 2.5 percent, 3.5 percent, and 6.99 percent, respectively.

The Breakdown of the auction result for the last transaction in the tenth month of this year showed that investors’ appetite for the longer 364-day bill remained higher than the 91-day and 182-day bills.

While the 364-day bill with a higher interest rate was oversubscribed by N89.47 billion the shorter 91-day and 282-day bills were oversubscribed by a combined N2.61 billion.

The CBN planned to raise N3.17 billion for the shorter 91-day bill but investors said they were willing to subscribe with N3.99billion. The apex bank eventually issued N 2.68 billion, N490 million less than the CBN’s initial offer.

Investors were willing to bid with N 3.32 billion for the N2.02 billion raised for the 182-day bill, N1.3 million more than what the CBN planned to raise. The amount raised by the apex bank, however, was lower than its initial offer of N6 billion by 3.98 billion.

While the CBN offered to raise N140.87 billion through the longer 364-day Treasury bill, investors said they were willing to invest more with N 432.81 billion. The apex bank later raised N230.34 billion. The apex bank issued N89.47 billion worth of more bills.

According to market analysts, the decline in the unsuccessful bids reported by fixed income inventors is proof that the volume of funds interested in the short-term debt instrument is finding its way into other investment assets.

Citing where investors are redirecting their investment, Ayo Ebo, Head, Retail Investment, Chapel Hill Denham said “a lot of corporates have been issuing commercial paper at attractive rates.” This is coupled with “placement with banks that also comes at an attractive return.”

On the yield’s expectation, Akinloye said “we expect heavy government borrowing to keep the long-term yields tracking higher.”

However, the likely increase in the demand for the government short term treasury may lead to further rate decline, according to analysts.

Checks by BusinessDay show that Nigeria’s risk of reporting its biggest budget deficit on record next year may be a blessing in disguise for fixed income investors as government borrowing is expected to fuel a spike in interest rates.

Like in the past five years, if Nigeria’s unrealistic revenue trend persists next year, the cash-strapped largest economy in Africa would need to increase its debt profile, an opportunity for investors whose real return on investment have been in the negative.

The Federal Government is targeting revenues of N10.13 trillion and a deficit of N6.258 trillion in 2022.

Since 2016, Nigeria has attained an average of 55 percent revenue performance, the reason why analysts have criticized the government for raising the bar each year despite obvious challenges in attaining revenue targets.

The shortfall between actual revenue receipt by the Federal Government and projected revenue worsened when a global collapse in oil prices happened in 2014.

The Federal Government’s actual retained revenues stood at N3.727 trillion in 2014, as analyzed from data by the Budget office of the federation. This value represented a shortfall of N4 billion from the N3.731 trillion projected in the 2014 budget.

The same trend followed in 2016, 2017, 2018 and 2019 when variations between actual and budgeted revenue stood at N2.03 trillion, 3.5 trillion N3.2 trillion and N5.58 trillion, respectively.
After the pandemic spurred a budget revision in 2020, the revenue shortfall hit N1.42 trillion with revised revenue of N5.365 trillion and actual revenue at N3.937 trillion.

If the case is the same next year, Nigeria could be looking at a revenue of about N5.57 trillion and a budget deficit of about N10.82 trillion at the end of the fiscal year, almost the size of the country’s entire budget in 2020.

“I expect the FG’s huge deficit finance plan will pressure the debt market leading to a spike in interest rates. However, investors who are avoiding long-term debt instruments (bonds) are likely to lock their funds at the short-end of the curve (NT-bills) which should spur demand and consequently decline in short term rates,” Akinloye said.