Investment in government securities in Kenya and Ghana is an attractive choice for investors as yields on Treasury Bills (T-bills) and Bonds are higher than the rates on fixed deposit accounts.
Average T-bills rate in the sub-Saharan Africa countries stood at 11.10 percent as of November 26, over 10 times higher than the 0.15 percent recorded in the T-bills auction conducted Wednesday by the Central Bank of Nigeria (CBN) on behalf of the Federal Government of Nigeria.
According to data by the Bank of Ghana (BoG), the interest rate on Ghana’s 91-day T-bills stood at 14.06 percent as of November 23 while the 182-day maturity and 364-day bill were 14.12 percent and 16.97 percent, respectively. A higher return compared to the country’s estimated 11 percent on fixed deposit accounts.
T-bills auction result from the central bank of Kenya shows that interest rate on the 91-day government security was 6.70 percent as of November 26, while the 182-day and 364-day bills reported interest rates of 7.15 percent and 8.09 percent, respectively. Return on fixed deposit accounts in the East African country is estimated at 7 percent per annum.
In Nigeria, Africa’s largest economy, limited attractive instruments and the policy by the central bank, which prevents domestic investors from participating in its open market operations (OMO) auction, have sent yields to record lows.
While N295.33 billion worth of unsuccessful bids were recorded at the recent T-bills auction by the CBN, the apex bank settled its stop rates at 0.02 percent, 0.09 percent and 0.15 percent for the 91-day, and 182-day and 364-day maturities, a further decline from the previous auction stop rates of 0.04 percent, 0.15 percent, and 0.30 percent.
With an inflation rate that accelerated to 14.23 percent in October, the highest in 31 months, the real return on T-bills in Nigeria plunged further in November to -14.08 percent.
“Savers who have to earn below inflation rate returns on their savings would see the value of their money eroded. Thus, by the time repayments are made, the purchasing power of the saved money would be lower, which implies lower income, lower demand and lower output,” Ayorinde Akinloye, a research analyst at CSL Stockbrokers Limited, said.
The stop rates reported in the auction results from the Nigerian treasury bills primary market for the week, 25, November 2020 is the least BusinessDay has reported since it started tracking the data in August 2016.
“These rates will soon go into 10 digits 0.0000000001%,” Ayodeji Ebo, senior economist/head, research and strategy, Greenwich Merchant Bank, said, noting that the low yields may mean “free funds for the government.”
While a seven-year government bond in Ghana has an interest of 20.50 percent, a longer 10-year bond in Nigeria is 4.39 percent. Interest offered by Nigerian commercial banks is 1.25 percent per annum, which comes with the condition that the depositor would have to make at most three withdrawals in a year.
“I’m sure with Nigeria’s low yield environment investors are already looking at alternative markets. Ghana and Kenyan are the closest and are even more attractive,” a Lagos-based analyst said.
Breakdown of Nigeria’s T-bill auction results reveals that even though interest on Nigeria’s government debt instrument waned when compared with the previous primary market performance, the Wednesday sale was oversubscribed by more than two times with most demand on the 364-day paper.
The CBN sold N150.6 billion worth of bills but investors were willing to put in N445.93billion, almost two times more than what the apex bank allotted.
For the 91-day paper, the apex bank sold N20.37 billion worth of bills and N19.16 billion was allotted on the 182-day bills, while bills valued at N111.07 billion were sold on the 364-day paper.
Further analysis of the Wednesday auction result shows that the 91-day paper was oversubscribed by N36.92 billion. Investors were willing to subscribe to the N20.37 billion the apex raised with N57.29 billion.
While investors were willing to subscribe to the 182-day instrument with N54.81 billion, the CBN only allotted N19.16 billion, leaving N35.65 billion worth of unsuccessful transactions.
Despite attracting the most bids, the 364-day paper was allotted N111.07 billion worth of bills, almost two times less than the N333.83 billion investors were willing to invest in the longer-term instrument.
“The government uses this policy as an opportunity to reduce borrowing cost but the major risk of financial repression is that it discourages savings, which will have major consequences in terms of capital formation on the economy and could increase pressure on the exchange rate and external reserves,” Omotola Abimbola, a macro economist at Chapel Hill Denham, said.
