The federal government spent the lowest amount it has in six years to service debt raised through Treasury Bills last year thanks to a low-interest-rate environment that crashed borrowing costs.
This comes as investors of fixed-income instruments were left with nothing to cheer after higher inflation amid a low-interest-rate environment meant they settled for a negative real return on their assets.
The interest payment on Nigeria’s fixed income instrument, particularly treasury bills fell to N318.04 billion, the lowest in six years, according to data analyzed by BusinessDay from the Debt Management Office (DMO).
That’s a decline of 9.7 percent and 50.4 percent from the N352.3 billion and the N640.68 billion, spent servicing T-bills in 2019 and 2018 respectively.
The decline in interest was despite T-bills sales hitting a three-year high of N3.44 trillion in the period, a pointer to how the low yields helped the government in paying less as interest on the short-term instruments than it would have paid if rates were much higher.
2020: A year of cheap debt
From bonds to treasury bills down to commercial papers, returns on virtually all instruments in Nigeria reached new lows last year with investors getting little or no real value for their investments.
Read Also: Nigeria’s inflation leaves T-Bills investors with little to cheer
The initial trigger of the huge plunge in the interest rate of assets was an October 2019 directive from the CBN barring non-bank domestic investors from investing in OMO bills.
The apex bank action which came in the wake of limited asset classes sparked excess liquidity as the funds that could have found their way into OMO bills were invested more into bonds and treasury bills. And since an inverse relationship exists between the price of an asset and the interest rate, the excess liquidity triggered higher demand for the asset, pushing up the price while yields fall.
Nigeria sold T-bills worth N3.44 trillion in 2020, the highest in three years, up 22 percent from the N2.8 trillion sold in 2019 as the low-interest-rate environment gave the government enough legroom to raise cheap debt which is used to plug ballooning deficits in the budget.
Although lower than 2019 levels, Nigeria’s bond sales at N706.08 billion in 2020 was higher than the N132.9 billion and N13.6 billion sold in 2018 and 2017 respectively.
The slight fall in Nigeria’s bond sales in 2020 compared to 2019, is not unconnected to the fall in dollar sales in the period due to the pandemic as investors were unable to repatriate their assets, thus hurting fresh investments in the long-dated instruments.
Large corporates joined the train in raising cheap debt to bolster shrinking cash flows affected by the pandemic. Debts raised by corporates last year, commercial papers and corporate bonds combined, rose to a six-year high of N1.14 trillion from N671 billion in 2019.
Equities also benefited from the low-interest rate regime with investors flooding into the market with the hope to get returns higher than prevailing interest rates.
The market returned 50 percent, becoming the best performing stock market on a global scale, with domestic institutional and local investors rising to the occasion to cover the massive exit of foreign portfolio investors.
Interest rates are creeping up
From a record low last year, interest rates are reversing upward, forcing investors to rebalance their portfolios more from equities into fixed income instruments.
Interest rates on bonds have hit double digits while yields on treasury bills have crept to 7 percent.
While this meant investors are still stuck in a negative real interest rate regime when compared vis-a-vis with an inflation rate that quickened to 17. 33 percent in February, the current interest on T-bills is an uptick when compared to the near-zero returns which the short-term instrument rewarded investors last year.
Although the forecast of 10 economists pooled in a BusinessDay survey, points to rates on treasury bills reaching 9 percent, it is still unclear how far the yields will rise before the Central Bank intervenes.
The Federal Government is looking to borrow to plug N5.6 trillion in the 2021 budget with which 72 percent of the borrowing will come from domestic sources.
