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Fixed-income investors to earn more on FG’s debt overshoot

Nigeria’s risk of recording its biggest budget deficit next year may be a blessing in disguise for fixed income investors, as government borrowing is expected to trigger a spike in interest rates, according to BusinessDay’s finding.

Like in the past five years, if Nigeria’s unrealistic revenue trend persists next year; it would need to increase its debt profile, an opportunity for investors whose real return on investment has been in the negative.

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

“The huge budget deficit in the 2022 budget signals that the government will borrow more next year, hence rates should move up given the liquidity in the system,” Ayo Ebo, senior economist/head, research & strategy, Greenwich Merchant Bank said.

Since 2016, Nigeria has attained an average of 55 percent revenue performance, the reason analysts have criticised 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 analysed 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.

Read Also: FG plans new borrowing to finance 2022 budget deficit

A BusinessDay poll of five analysts collectively agreed that they expect to see yields on bonds and Treasury Bills (T-Bills) trend higher next year. They, however, could not give exact figures, explaining that it was difficult to project.

“I expect the FG’s huge deficit finance plan will pressure the debt market leading to a spike in interest rates,” said Ayorinde Akinloye, associate investment research at United Capital plc.

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

Breakdown of the T-bill primary market auction (PMA) revealed that the CBN through the DMO allotted N187.24 billion worth of bills across all tenors. Accordingly, stop rates remained unchanged on the 91-day (2.50%) while the 181-day bill rose to 3.50 percent from 3.40 percent and the rate on the 364-day bill fell from 7.50 percent to 7.25 percent.

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 13, 2021, showed that they only reported N71.31 billion worth of unsuccessful transactions.

The failed bids, the amount investors were willing to invest, but not accepted by the CBN, stood at a record high of over N282 billion in June and N86 billion in August 2021.

Notably, demand at the auction was relatively weak, with a total subscription of N187.24bn – one of the lowest levels since April 2021.

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 5.2 percent, 6.75 percent and 9.5 percent on the 91-day, 182-day and 364-day bills, respectively but the apex bank lowered rates across the three tenors to 2.5 percent, 3.5 percent, and 7.25 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 N68.45 billion the shorter 91-day and 282-day bills were oversubscribed by a combined N2.86 billion.

The CBN planned to raise N5.24 billion for the shorter 91-day bill but investors said they were willing to subscribe with N5.08 billion. The apex bank eventually issued N 4.22 billion, N1.02 billion less than the CBN’s initial offer.

Investors were willing to bid with N 7.80 billion for the N8.79 billion offered for the 182-day bill, N990 million more than what the CBN planned to raise. The apex bank was able to raise N 6.95 billion, N1.84 billion less than its initial offer.

While the CBN offered to raise N107.62 billion through the longer 364-day Treasury bill, investors said they were willing to invest more with N 480.15 billion. The apex bank later raised N176.07 billion. The apex bank issued N 68.45 billion worth 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, Ebo 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.”

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