BusinessDay

Nigeria saves N18.3bn from T-bills interest payment as lower yields crash debt cost

…but analysts say not sustainable

Nigeria is riding on the gains of a repressed yield to bring down the cost of servicing domestic debt, but analysts say the move is unsustainable.

Thanks to an unsustainable low-interest-rate environment, the Federal Government saved as much as N18.3 billion that should have been spent paying investors for money it collected from issuing its short term treasury bills instrument.

That happened after data released by the debt management office put interest on Nigerian treasury bills at N252.9 billion in the nine months period of 2020, down by 6.76 percent from the N271.2 billion servicing interest on the short-term instrument in the same period in 2019.

The declining interest payment on treasury bills shows how the government is benefitting from the prevailing low yield environment to raise cheap debt in 2020, but analysts see a reversal of the trend this year, driven by a host of factors including the desire to attract more dollar inflow from portfolio investors to boost external reserves which suffered a heavy blow from the collapse in oil prices.

“Interest rates would have to go up this year because the low-interest environment is not sustainable,” Bismarck Rewane, MD/ CEO, Financial Derivative Company said.

Last year, the interest rate on most assets particularly those in the fixed income space reached a record low, sparked by excess liquidity in the system after an October 2019 directive by the Central Bank, restricting non-bank local institutional investors from participating in OMO bills, in a bid to boost credit to the real sector of the economy.

The directives have served as a win for investors in Nigerian equities who have seen their investment returned 50 percent last year; and also the government whose debt profile increased to N32.2 trillion at the end of September, with about 62 percent of the funds owed to domestic investors.

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About 73.53 percent or N11.65 trillion of the Federal Government domestic debt was from FGN bonds; N2.72 trillion or 17.17 percent was in Treasury bills instrument; while Nigerian Treasury Bonds, FGN savings bond, Sukuk, Green Bond and Promissory Notes instruments were used to borrow N100.99 billion, N12.56 billion, N362.56 billion, N25.69 billion and N971.87 billion respectively.

The government surely may have saved even more when one considers the effect of the low yield on other instruments which the government also borrowed from. However Businessday decided to consider T Bills alone because it is a short term instrument with returns not exceeding a oneyear period.

This provides a better gauge on the effect of the low yield on government debt financing, as opposed to Bonds that are long-dated.

“The outlook for interest rate will remain low through Q1 2021, according to Yinka Ademuwagun, equity and fixed income research analyst at United Capital. “This is because there is still a large size of OMO, scheduled to mature between now and March next year. But from April, we expect rates to go higher although not to double digits levels,”

“We are also not unaware of any likely return of CRR by the CBN in the new year. When that happens, it will flush the system with liquidity, keeping the rates lower for the rest of the year. So in all, the direction of interest rates for the rest of the year largely depends on what the CBN would do in terms of liquidity management,” Ademuwagun said.

The country slipped into its worst recession since the 80s, contracting by 3.2 percent in the third quarter after first shrinking by 6 percent in the second quarter.

Also, inflation has headed north, accelerating by 14.89 percent in November, caused majorly by rising food prices, and partly by a two-time move by the apex bank to cut down benchmark interest rates to 11.5 percent. A fall in the reserve from the high of $38 at the beginning of 2020, is limiting Nigeria’s ability to defend the naira against the dollar and has caused a two-time weakening of the local currency.

Going forward

Going by the reduction in debt servicing, it appears the Federal Government would want the interest rates to remain low so as to enjoy raising cheap debt locally.

Africa’s largest economy has approved a record high N13.6 trillion budget for the 2021 fiscal year.

To fund the budget, it hopes to rake in as much as N7.89 trillion as revenue from various sources including oil, non-oil as well proceeds from the privatisation of government assets; while the deficit of N5.4 trillion will be financed from a combination of local and external borrowings.

However, with the enticing low-interest rate environment, the government will prioritize local debt over external, as the international market may appear unfavourable in terms of pricing due to inherent risk.

Zainab Ahdmed, Nigeria’s finance minister said the government is uncertain yet on whether it will issue Eurobond this year except otherwise, market conditions are favourable.

The government is also not looking to the International Monetary Fund (IMF) any time soon for any further loan after it got a $3.4 billion emergency support facility from the fund last year to tame the economic and health impact of the pandemic.

According to Zainab, who spoke at a virtual press conference in the presentation of the 2021 budget, Nigeria would in the meantime, work with the World Bank for a $1.5 billion budget support facility.

In light of the above, it is plausible to assume the government will go all out into the local debt market this year so as to enable it to fund the budget.

Godwin Emefiele, governor of the CBN, hinted in November, he will continue with its monetary policy measures aimed at boosting the stock market, by keeping yields on fixed-income assets low.

However, spiralling inflation and a huge drop in dollar inflows from portfolio investors could make him reverse his decision.

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