Nigeria spends so much on borrowing and it’s becoming worrisome for the oil-dependent nation as crude oil prices fell short of expectation. But attempts to curtail the trend coupled with mounting global risks are putting a sour taste in the mouth of offshore investors seeking higher rates.
The FGN through the Debt Management Office sold only N15.03 billion across three instruments offered at the August 2019 Federal Government of Nigeria (FGN) Bond auction on Wednesday, the first undersubscription in two years.
Similarly, a N110 billion auction conducted Thursday by the Central Bank of Nigeria (CBN) via Open Market Operation (OMO) was rejected by investors as their demand for higher rates was not met.
“The government sold very little because they wanted to keep the interest rate very low,” said Omotola Abimbola, a macro and fixed-income analyst at Lagos-based Chapel Hill Denham. “They are wary of the fact that Nigeria is facing high borrowing cost.”
The total inflow available to fund the federal government 2018 budget in the first three quarters of the year stood at N2.81 trillion. Out of this amount, the total debt service within the period was N1.81 trillion, indicating a debt service-to revenue ratio of 64.5 percent, data obtained from the Budget Office of the Federation show.
This implies for every N100 Nigeria generated as revenue in the first nine months of 2018, about N64 was used in servicing existing debts.
“We expect the ratio to settle at 65 percent at year-end,” said Abimbola.
The debt service to revenue was largely driven by local debt settlement of N1.57 trillion, which represents 86 percent, as against N195.36 billion spent for external debt service during the review period.
Crude oil accounts for over 90 percent of Nigeria’s foreign exchange earnings and more than 70 percent of its revenue, implying the nation remains susceptible to shocks in the prices of the commodity in the international market.
Brent Crude, the international oil benchmark against which Nigerian oil is priced, last week fell below the country’s crude price projection of $60 a barrel in 2019 approved budget on the trade spat between the United States and China. This further blared warning sounds of mounting risks in Nigeria’s economy.
As a result, offshore investors sold off Nigeria’s local currency assets, a move that drove yields higher in the secondary market, both in the treasury bills (T-Bills) and bonds. Average discount rates rose by 74bps to 14.53 percent due to increased selloff and tight system liquidity in the T-Bills market on Thursday, while average bond yield inched higher by 4bps to 14.73 percent.
To address the worrisome amount spent to service domestic debt in the country, the DMO is adopting cost-effective approach such as reducing local debt and increasing external borrowing in line with its debt management strategy which was unveiled in 2016.
A move in that direction means the government would not be interested in borrowing at expensive rates to meet its financial obligation evident at the August 2019 FGN bond auction where investors, particularly offshore players showed weak demand across all instruments offered.
“DMO was not comfortable selling above where it cleared the auction and market players wanted higher yields,” said Nnamdi Olisaeloka, a fixed-income analyst at Zedcrest Capital Ltd.
“The expectations are that yields should keep trending higher towards year-end, and when yields get to attractive levels, investors will meet their demands for the bonds at the secondary market.”
The government aimed to raise N145 billion across 3 instruments comprising 5-year, 10-year and 30-year re-openings. However, only N95 billion total subscriptions were recorded, implying the DMO undersold at a bid-to-cover ratio of 0.7x as against 2.1x recorded in the previous month.
Similarly, an analysis of CBN’s N110 billion auction seen by BusinessDay shows that the short and long term maturities recorded no sale, while the medium-term bills were not bid for at all by investors.
Reacting to the development, Ayodeji Ebo, managing director, Afrinvest Securities Limited explained, “The “no sale” was due to demand for higher rate by investors for the short and long term maturities while the “no bid” for the medium term bills was due to more attractive rates in the secondary market.
“We expect the CBN to raise OMO rates at the next auction if the trend persists,” Ebo said in response to BusinessDay.
The OMO simply means the buying and selling of government security, which enables a central bank to control the supply of money in the banking system.
HOPE MOSES-ASHIKE & OLUWASEGUN OLAKOYENIKAN
