The Central Bank of Nigeria (CBN) has repaid a total of N340 billion ($1.1bn) worth of treasury bills on Thursday instead of rolling them over, in a move designed to lower government borrowing costs.
They included N131.4 billion worth of treasury bills issued by the Debt Management Office (DMO), while the balance was in open market operation (OMO) bills issued by the central bank.
The DMO had said it will repay treasury bills maturing on Dec. 14 and Dec. 21 totalling N198.03 billion.
Thursday’s payoff increased banking system credit to almost N500 billion, lowering overnight rates to one percent from five percent last week.
There is mixed outlook for Treasury bill yields next year as bond traders’ fall over one another to pile cash into government debt, convinced yields which have fallen recently, are bound to slide further.
Yields on treasuries held up across the board at around 10 percent on Thursday. They fell to 7 percent after the repayment plan was announced this week.
The development spooked fixed income markets as investors rushed to cover short positions with significant buying across the yield curve, resulting in average declines of 190bp and 60bp in Nigerian Treasury Bills (NTBs) and FGN bond yields respectively during the week.
The DMO sold N108.66 billion worth of naira-denominated bonds maturing in 2021 and 2027 at an auction on Wednesday.
It issued N50billion of 2021 debt at 13.19 percent, from 14.79 percent at the previous auction in November. The same tenor bond closed at 13.11 percent on the secondary market on Wednesday.
A total of N58.66 billion naira worth of the benchmark bond maturing in 2027 was issued at 13.21 percent, compared with 14.8 percent in November. The 2027 paper closed at 13.23 percent on the secondary market on Wednesday.
There were early forecasts for a slump in interest rates on government debt instruments in line with the DMO’s refinancing plan which was targeted at freeing up space in the bond market for corporates, as the government tries to rebalance its debt mix, manage ballooning domestic interest payments and fix its inverted yield curve.
Johnson Chukwu, managing director of Lagos-based financial advisory, Cowry Assets, points to high inflation and a likely underperformance in government revenue as probable factors to keep yields from falling steeply.
“The factors driving lower yields are temporary,” Chukwu told BusinessDay.
“Inflation is still 15 percent and the CBN has only temporarily stopped the auctioning of Open Market Operations (OMO). If they return next year, rates will move north,” Chukwu said by phone.
“Meanwhile if government fails to achieve its revenue target and is forced to deal with a bigger budget deficit, it is likely to raise debt,” Chukwu added.
Hammered by the plunge in oil prices and production, Nigeria soon turned to debt to finance its annual budget even as the central bank resorted to OMO auctions to limit money supply and tame rising inflation.
The government plans to resume Tbill auctions in January, while traders see OMO auctions resuming next year.
Despite retaining the MPR at 14 percent over 2017, monetary policy was tightened further as the CBN moved to limit money supply growth with aggressive net OMO bill issuances of NGN937bn at elevated nominal rates of 18-22% over the first half of 2017 (2016 total: NGN1.41trn).
Alongside issuances of mandatory stabilisation securities of (NGN529bn) in H1 2017, pre-funding requirements for CBN FX market interventions and an asymmetric approach to weekly Cash Reserve Ratio (CRR) computation for banks, CBN tightening drove an inversion of the NGN yield curve and a contraction in monetary aggregate.
“We expect interest rates to fall further in the coming months. On monetary policy, it is likely that the CBN’s monetary policy committee reduces banks’ cash reserve requirement and cut rate earlier than March 2018, if the USD/NGN stability is sustained and inflation remains benign,” said Tajudeen Ibrahim, head of research at Chapel Hill Denham.
“The CBN has allowed a build-up in system liquidity (+N439.72bn today), given the absence of OMO bills in recent days, despite the rising NGN liquidity induced by the maturity of OMO bills, FAAC inflow, and refund of unsuccessful FX bids.
“The downside risk to our expectation on interest rates is a possible mop-up of liquidity by the CBN via OMO bills or stabilisation securities,” Ibrahim said in a late note on Dec. 12 to clients.
According to the DMO, T-Bills accounted for 30.23% of the total domestic borrowings of N12.5tn (12.2% of GDP) as at 30 September 2017 vs. DMO’s target of a maximum of 25%.
Nigeria had issued a dual-tranche USD3 billion Eurobond in November 2017 out of which USD2.5 billion is to part-finance the deficit in the 2017 Appropriation Act and the balance of USD500 million is for the refinancing of domestic debt.
LOLADE AKINMURELE, ENDURANCE OKAFOR & MICHAEL ANI
