FG’s Domestic Borrowing to Rise as CBN Halts Funding – Report
Nigeria will look deep into its local debt market for borrowings in order to part-finance its N5.6 trillion budget deficit as indication emerged that the Central Bank of Nigeria (CBN) has turned off funding support.
In the fiscal year 2020, analysts estimated that the Nigerian government borrowed approximately N2.5 trillion via this backdoor means from the apex bank.
Fitch Ratings also caution policymakers about deficit monetisation, saying it may raise macroeconomic instability in the country that is already growth-starved.
“If truly the policymaker is looking elsewhere to funding short-fall, then, domestic borrowing is expected to rise -still cheaper compare to Eurobond rates”, an Economist told MarketForces Africa.
Though, in the last two years, domestic borrowing appears to be cheap following low interest rates on government securities in the fixed income market.
In a new report, analysts at ARM Securities noted spot rates uptick as the Central Bank of Nigeria (CBN) seeks to attract foreign investors amidst scarcity of foreign currencies in the country.
In its updated fixed income market outlook for 2021, ARM Securities explained that there have not been rollovers in the open market operations (OMO) as expected.
Federal Government has a domestic borrowing target of N2.34 trillion and have only issued N373 billion of new borrowings so far, analysts said.
The firm however said it seems that the FG is going to stop relying on the backdoor funding from the CBN, which has been a reliable source of financing the last few years, after international organizations raised concerns about the process.
“The expectation now is that the FG would turn to more domestic borrowing to plug the hole left by the CBN turning off its financing tap”, ARM Securities said.
Over the first two months of the year, it said the CBN has offered N1.07 trillion at OMO auctions which is about 50% of the N2.14 trillion that matured over the same period, sold N1.03 trillion.
It added that the rise in the stop rates (the 1-year rate is up 430bps YTD to 10.1%) has been faster than anticipated.
The investment firm analysts indicated they had expected the CBN to keep rates lower for longer to reduce their borrowing costs.
Rather, the firm said it seems the monetary policy authority focused more on attracting foreign investors and their precious FX hence the hike in the stop rates.
More importantly, ARM Securities said there has been lower demand at the Nigerian Treasury bill and bond auctions.
It said little interest has been present at these auctions which analysts think has been coming at higher rates.
The report stated that this has meant that the Debt Management Office (DMO) has been unable to sell its total offerings at the auctions.
What Debt Management Office sold came at higher rates than what they probably would have expected”, the ARM Securities detailed in the report.
Analysts explained that this has led to increases in the average stop rate at both the bond market with 413 basis point increase and NTB auctions reporting 309 basis point rise year to date.
“What is helping the investors case, as they push back against the low rates and demand higher rates at the auction, is the awareness the FG needs to ramp up their borrowing”, ARM Securities said.
Analysts said going to the market to borrow even half of that on top of the original borrowing target would have huge implications for yields.
It was noted that investors pushing back in the auctions resulted to higher primary market stop rates which has led to an upward repricing of secondary market yields.
“Additional borrowing, to what was initially budgeted; would increase the supply of fixed income instruments which would make the high liquidity in the system less of an issue thus supporting higher yields”.
ARM Securities said, “Barring any further surprises, the expectation now is for higher yields in 2021”.
Highlights from last month Bond
Yields on fixed income instruments continue Northward amidst rising inflation rate which has weakened returns.
The renaissance in the bond market carried on into 2021 as the average bond yield rose 104 basis points above January record to print at 8.49% in February.
Despite the overall monthly rise, fixed income analysts said they saw downticks during the first and last weeks of the month, with yields declining by 7 and 14 basis points respectively.
“This was probably a result of investors taking up buying positions in response to expanding yields seen across the curve”, ARM Securities stated.
Specifically, in the first week, demand was directed towards the Mar-2036 and Feb-2028 instruments which shed 42 and 35 basis points respectively.
Meanwhile in the fourth week, the Mar-2025 (-181bps) and Jan-2026 (-145bps) attracted the highest demand.
Fixed income analysts said amongst individual bonds, the largest monthly selloffs were observed in the Apr-2029 (+188bps), Jul-2030 (+169bps) and Feb-2028 (+161bps) papers.
Demand still subdued at bond auctions:
At the primary auction, just as in January, the Debt Management Office (DMO) once again offered a total of N150.00 billion across the 10-year, 15-year and 25-year instruments.
The offer attracted some level of demand with a subscription rate of 1.26x as total subscription came at N189.5 billion, although lower than January’s subscription rate of 1.95x.
The total sold in February came in at N202.55 billion which is more than the offered amount and also more than what was sold in January valued at N170.36 billion.
However, analysts said 60% of that N122 billion sales occurred via non-competitive allotments compared to 28% or N48 billion in January’s auction.
Meanwhile, the average stop rate jumped 254 bps to 11.1%.
Overall, it is noted that the upward pressures on yields generally reflects the expansion at the primary market.
Nigerian Treasury bill yields Recovered further
In a similar trend to what analyst said they saw in the bond space, the average yield on Nigerian Treasury bill firmed 44bps to 1.49% in February
Analysts said anchoring the rise were upticks in the 182-day (+102bps) and 360-day (+90bps) bills.
At the two auctions that took place during the month, the DMO offered a cumulative N298.00 billion worth of treasury bills, the same amount that matured in February.
At the first auction, N 169.78 billion was offered but N130.88 billion was sold, despite a total subscription of N198.7 billion -subscription rate of 1.17x- while average stop rate rose 105bps to 2.33%.
At the second and final auction, the DMO offered N128.21 billion, while total subscription was down to N192.06 billion, resulting in a subscription rate of 1.49x.
Meanwhile, the average stop rate rose once again, this time by 134bps to 3.67%.
OMO issuances remain low:
In the OMO space the CBN continued to wind down their balance sheet by reissuing only a fraction of the total maturity at auctions.
A total of N746.12 billion (Jan: N460 billion) was sold over the four auctions that took place in February, despite a total offering of N780 billion (Jan: N455 billion), while N1.1 trillion worth of OMO bills matured ((Jan: N1.04 billion).
Notably, the Central Bank hiked the one-year stop rate by 436bps to 10.1% (467bps across all tenors to an average of 8.53%), a move aimed at retaining the interest of foreign investors.
Consequently, this saw yields in the NTB space trend higher on the back of selloffs, as investors switched their attention to the higher yielding OMO bills.
FG’s Domestic Borrowing to Rise as CBN Halts Funding – Report