‘Sufficient Liquidity Exists to Finance FG’s Local Borrowing Plan’
Analysts at Chapel Hill Denham think there is sufficient liquidity in the fixed income market to finance Federal Government’s domestic borrowing plan as contained in 2021 budget proposal.
However, the firm is of the view that government foreign borrowing plan may be a tall ambition, thus expects the Federal Ministry of Finance to propose debt substitution exercise in 2021.
The detailed of the proposed budget shows that government would borrow N2.1 trillion apiece from both foreign and domestic market to finance budget deficit.
On Friday, the financial system liquidity opened substantially higher at N1 trillion from N386 billion.
This reflects the impact of Open Market Operations (OMO) maturities totaling N567.69 billion at yesterday’s trading session.
Nonetheless, interbank money market rates increased, on the back of provisioning by banks for the retail foreign exchange auction.
The Open Buy Back (OBB) and Overnight (OVN) rates rose by 3.35% and 3.58% to 4.00% and 4.88% respectively.
Analysts at Chapel Hill Denham expects funding pressures to remain benign next week, supported by OMO maturities estimated at N370 billion.
In the fixed income market, sentiments remained largely bullish due to the liquidity backdrop.
At the front end of the curve, Chapel Hill Denham said the Nigerian Treasury Bill benchmark curve was unchanged at average of 1.42%.
Meanwhile the OMO benchmark curve compressed by 9 basis points to 1.57%.
Similarly, bonds remained in favour, as yields on the benchmark bond curve fell by an average of 12bps to 5.91%, reflecting interests in intermediate (-23bps to 6.05%) and long (-24bps to 8.34%) term bonds.
Over the near term, we think the liquidity backdrop is still supportive of low yields in the fixed income market, particularly as substantial bond coupon payments are scheduled towards the end of the month.
Analysts said the Budget Office provided more information on the 2021 budget proposal to explain how the spending plan would be financed.
It was noted that government plans to access funds from domestic and foreign sources which are split equally at N2.1 trillion apiece.
However, analysts at Chapel Hill Denham said they think the external borrowing target is ambitious, and expect the Ministry of Finance to propose a debt substitution exercise in 2021.
“Nonetheless, we think the domestic market has sufficient liquidity to finance the domestic borrowing leg of deficit financing”, the firm stated.
In a related development, analysts said primary market activity is set to resume next week with a scheduled Nigerian Treasury Bill auction.
The Debt Management Office is expected to offer N104.9 billion across three tenors (N8.8bn of 91-day, N3.5bn of 182-day and N92.5bn of 364-day bills) to partly rollover N124.9bn maturing bills.
The last auction closed at 1.08%, 1.49% and 2.80% respectively, and analysts expect rates to clear slightly lower given the strong liquidity backdrop.
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‘Sufficient Liquidity Exists to Finance FG’s Local Borrowing Plan’
