Nigerian Govt. Efforts on Debt Sustainability to Subdue Market Rates
The Nigerian government efforts at ensuring debt sustainability is expected to subdue rates on fixed income market instruments in the early part of year 2021, some analysts have revealed.
Though, debt market activities has been projected to rise, but analysts still maintain that excess liquidity will give government strong bargaining power on rates pricing.
In various reports, Broadstreet analysts said they are expecting N5.1 trillion fund from maturing securities to hit the financial system in the coming year.
This is however interpreted to raise liquidity level in the financial system, thus putting a further pressure on yields amidst rising inflation rate.
Meanwhile, it appears year 2020 will close strong as liquidity in the system has maintained stable uptrend at sufficient level to keep rates down.
Collaborating this position, in a note, FSDH said the market will experience increased activities as the deficit of N5.2 trillion in the Federal Government 2021 Budget will be financed mainly by borrowing.
It said despite this, the government’s efforts to achieve debt sustainability, could result in suppressed yields in early parts of the year.
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In its projection, FSDH explained that given the excess liquidity in the market, the government holds a strong bargaining power.
Therefore, the firm is expecting that primary auctions would continue to offer low yields.
However, analysts added that the introduction of the CBN Special Bill could stabilize the fixed income market.
FSDH however projected that corporate bonds and commercial papers will gain further traction as investors scramble for alternative investment vehicles and businesses take advantage of low interest rate environment to raise capital.
With over N5.1 trillion expected to mature in 2021, liquidity in the system will increase further, analysts at FSDH added.
Consequently, yields on CBN Bills alongside other rates are also expected remain low in the early part of the year.
However, FSDH believes regulators will make efforts to increase rates in order to attract foreign capital into the economy.
“This will materialize in the second half of 2021, the firm stated.
In 2020, the Nigerian Bond market was driven the economic impact of COVID-19 as it affected market confidence across the globe and mounting system liquidity arising from series of Open Market Operation instruments maturities without an option to rollover.
According to FSDH, this is as a result of the CBN’s restriction of individuals and non-bank corporates from participating in OMO transactions.
It said these factors led to spike in yields across segments of the market in the first half of 2020
However, with persistent inflow of liquidity, yields began to suppress.
Then, average yields on FGN Bond, NT-Bill and OMO instruments suppressed to 3.88%, 0.10% and 0.09% (as at November 30, 2020) from 9.13%, 4.65% and 13.10% at the start of the year respectively.
It was noted that real interest rate remained negative all through the year which replicated Nigeria’s previous experiences; 2016 Recession and the Global Financial Crisis in 2008/2009.
FSDH hinted that with the introduction of a Special CBN 90-Day Bill, yields on the fixed income market could rebound in 2021.
Negative return at the fixed income segment has been supportive of recent rally at the fixed income market.
FSDH position that the equity market will continue to rally on the back of liquidity in the fixed income space.
Analysts said a sum of N5.1 trillion is already on the slate to mature in 2021; majority of which will find its way into the equity market.
With many businesses returning to full operation in 2021, the potential of listed companies recording profit will also improve the performance of the market.
The firm however noted that foreign participation could remain subdued in the equity market if External Reserves position does not improve.
As the economy recovers, the market will experienced improve activities in the year.
Nigerian Govt. Efforts on Debt Sustainability to Subdue Market Rates
