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Improved Demand at the Latest Bond Auction – Coronation Economic Note

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The Debt Management Office (DMO) held its monthly auction of FGN Bonds on Monday (16 October ’23). It offered N360bn but raised N334.8bn through re-openings of 14.55% FGN APR 2029, 14.70% FGN JUN 2023, 15.45% FGN JUN 2038, and 15.70% FGN JUN 2053 bonds.

The participation level (demand) at this auction increased by 31.7% m/m to N383.1bn compared with N290.9bn recorded in September ’23. The bids for the 10, 10, 15, 30-year benchmarks were allotted at the marginal rates of 14.90%, 15.75%, 15.80%, and 16.60% respectively.

The bid-to-cover ratio stood at 1.2x.

The demand at this auction reflects improved system liquidity. This is in sharp contrast with September’s bond offering which recorded a relatively lower subscription of N290.9bn.

Inflows from FGN bond coupon payments, NTB maturity, and FAAC payout within the period boosted system liquidity as it outweighed outflows from NTB auctions. We note that market liquidity stood at N448.8bn while call, overnight and repo rates closed within the range of 1% – 6% as money market rates moderated on Friday (13 October ’23; i.e., the previous working day before the auction).

Looking ahead, we expect relatively healthy system liquidity in the coming months (November and December 2023) largely due to inflows from FGN bond coupon payments and NTB maturities. Based on our estimates, these maturities and coupon payments collectively amount to N1.2trn.

We note that demand was significant for the longer-tenure bonds (JUN 2038 and 2053 bonds) given their attractive yields (15.80% and 16.60% respectively). However, negative real interest rates (currently -7.95%) due to elevated inflation continue to dampen investor’s sentiments toward investing in FGN bond instruments.

The latest inflation report by the NBS shows September’s headline inflation increased by +92bps to 26.70% y/y. We understand that the new CBN Governor has not ruled out further rate hikes as a mechanism for combating inflationary pressures. Another moderate rate hike in the near-term is not far-fetched.

Domestic institutions remained the core participants at this bond auction. According to the latest monthly report released by Nigeria’s Pension Commission (PENCOM), the assets under management (AUM) of the pension industry increased by 18.7% y/y and 1.8% m/m to N17.1trn in July ‘23. FGN bonds accounted for 62.8% of total assets under management.

The DMO is set to raise a maximum of N4.8trn in FY 2023 through FGN bond issuances.

However, YTD, it has raised N4.6trn (meeting 95.8% of its target). Overall, we maintain our stance that the FGN is likely to exceed its domestic borrowing target of N7.04trn by end2023.

In a separate report, the DMO disclosed that it offered N150bn but raised N350bn through the issuance of its sixth Sovereign Sukuk Bond. The interest rate for the 10-year instrument was pegged at 15.75% per annum.

We note that the bond was oversubscribed as demand stood at N652.8bn. According to the DMO, the funds raised would be channeled towards the construction and rehabilitation of critical infrastructure projects such as roads and bridges across the country.

Over the next one month, we see mid-curve FGN bond yields in the secondary market around 14.9% – 15.5% at the short-end of the curve and yields at the longer-end of the curve between 15.0% – 16.5%

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Domestic FGN US Dollar Bond: A Novel Initiative to Transform Nigeria’s Economic Landscape

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By Ifiok Bassey

From the inception of the President Bola Tinubu administration, the fact was not lost on many Nigerians that the road to economic recovery wasn’t going to be an easy one – certainly, not in the state the new administration met it.

If expectations for something of a miracle were high, it was perhaps due to the urgency of the attention the situation required.  About 15 months down the road, it cannot be said that there is nothing to encourage the belief that the country is on the right track.

If anything, there is something to talk about the president’s vision, boldness and political will to take tough decisions, but with the certainty of achieving positive outcomes.

Feelers coming out regarding the $500 million Federal Government of Nigeria Domestic Bond offer that ran from August 19 to 31 2024 indicate an overwhelming response with strong possibility that it may have been significantly oversubscribed, far exceeding initial expectations, underscoring the strong confidence that Nigerians both individual and institutional investors have in the Nigerian economy and the leadership of President Bola Tinubu administration.

The bond is expected to boost Nigeria’s foreign reserves and help in stabilization of the exchange rate. It would add fillip to the success already recorded through several measures that include the “willing buyer”, “willing seller” of the Central Bank of Nigeria.

Without doubt, this is a bold attempt by the administration to think outside the box in the effort to source for foreign exchange without resorting to borrowing, and a clear demonstration of Tinubu’s leadership.

It has been an added advantage that the president has Mr. Wale Edun, Minister for Finance and Coordinating Minister for the Economy – a man who has brought his wealth of experience to bear on his assignment – as the driver of this initiative.

Edun has leveraged on his international background as an investment and finance expert in the way he has handled the administration’s economic policies. This is evident in the manner he has pioneered this novel transaction.

The outcome of the exercise resonates with the optimism he expressed at a roadshow in Lagos to unveil the bond a few days before its commencement.

The minister had expressed hope of a positive response by investors because of its attraction, which include low risk, high return, as well as safety and security, considering it would be listed on the FMDQ and the Nigerian Exchange Limited.

Edun also hinged his optimism on the successes already recorded with the administration’s economic policies, believing the bond offer would go the same way.

“We are already seeing success with the combination of monetary and fiscal policies, which is attracting foreign portfolio investments (FPIs),” the minister had said.

“Additionally, foreign direct investments are starting to increase, particularly in the oil and gas sector. More foreign exchange leads to higher reserves and a stronger exchange rate, which can reduce inflation and, consequently, interest rates. This creates opportunities for borrowing, investing, increasing productivity, creating jobs, and reducing poverty.”

By attracting substantial investment through the bond offering, the government is also reinforcing its fiscal strategy aimed at reducing reliance on external borrowing while promoting domestic investment. This approach is designed to create a more sustainable economic environment, where increased reserves, a stable exchange rate, and lower inflation can lead to long-term growth and prosperity.

The success of the domestic bond offer has opened a new vista for African financial markets to focus on domestic and diaspora sources for mobilization of resources for the much-needed development of the continent. This is necessary against the background of the unpleasant outcomes some countries have had in the attempt to get foreign funding for their developmental needs.

In Nigeria, the dollar-denominated bond has proved to be another veritable source of raising funds for Nigeria by Nigerians all over the world, as it was open to them as well, apart from Nigerians resident in the country who have domiciliary accounts, foreigners residing in the country, and institutional investors. With the success recorded in the exercise, there may be need for another bond of this nature in the life of the current administration.

The bond is going to usher in a win-win situation for everyone – the government, investors and Nigerians, generally. It is going to provide a source of funding for the government’s social development initiatives in several sectors such as healthcare and education, as well as infrastructural projects that would benefit all Nigerians.

Bassey, a public affairs commentator, lives in Uyo

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Nigeria’s Domestic Dollar Bond Offers New Opportunities for Savvy Investors

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The Federal Government of Nigeria’s newly introduced domestic dollar bond is creating a buzz among investors, particularly those in the diaspora and retail sectors.

Offering a 9.75% coupon rate, the bond opens fresh avenues for those seeking stable returns in dollars, with a minimum subscription amount of just $10,000.

This move is part of a broader $2 billion program to be raised in four tranches of $500 million each, and it’s already drawing considerable interest from Nigerians both at home and abroad.

For Jamiu Agah, a Lagos-based information technology consultant earning in dollars, the new bond is a game-changer.

Agah, who earns $50,000 annually working remotely for a U.S.-based tech start-up, had been eyeing investment in Nigerian Eurobonds but was deterred by the high minimum subscription amount of $200,000.

The domestic dollar bond, however, slashed his wait time to zero by lowering the entry barrier to $10,000, making it much more accessible.

Agah is not alone in this shift. The bond has captured the attention of a broad range of Nigerian investors seeking to diversify their portfolios with dollar-denominated assets.

According to Chuka Nwachukwu, Group Head of Assets and Liability Management at United Bank for Africa (UBA), participation in the bond has been “highly encouraging,” particularly among Nigerians in the diaspora.

“They see it as a unique opportunity to invest in Nigeria while still securing returns in dollars,” Nwachukwu said.

Beyond its lower entry point, the bond’s appeal also lies in its attractive returns compared to traditional Eurobonds. With a 9.75% coupon, it outpaces the 9.58% yield on Nigeria’s $1.25 billion Eurobond, which matures in 2029.

Investors are enticed by the combination of stability and higher returns, especially amid Nigeria’s economic reforms, which have been driving confidence in the country’s financial markets.

The bond is open to a diverse group of investors, including foreign institutions, Nigerians living abroad, and those within the country.

It presents an appealing alternative to Eurobonds, particularly for retail investors who have played an increasingly significant role in Nigeria’s capital markets.

Retail investors accounted for over a third of total domestic trading in 2023, and their appetite for diversified investment opportunities continues to grow.

This development is seen as a positive step towards rebuilding confidence in Nigeria’s financial system, particularly in light of past restrictions on domiciliary accounts, which had eroded trust in local banks.

The new Central Bank of Nigeria (CBN) Governor, Olayemi Cardoso, has introduced policies aimed at restoring confidence, helping to bolster the appeal of the domestic dollar bond.

For savvy investors like Agah, this bond represents a strategic way to hedge against the volatility of the naira while earning stable, dollar-denominated returns.

As demand for the bond continues to rise, it’s clear that this new financial instrument is opening doors for a wide range of investors seeking to tap into Nigeria’s evolving economic landscape.

With just one week of primary trading completed and five more days to go, the domestic dollar bond is poised to solidify its place as a cornerstone investment for Nigerians, both locally and internationally.

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Nigeria Launches $2 Billion Dollar-Denominated Bond for Local Investors

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Forex Weekly Outlook March 6 - 10

Nigeria has initiated a $2 billion dollar-denominated bond program targeting domestic investors to bridge infrastructure finance gaps.

The program, arranged by United Capital Plc, is designed to attract investments from Nigerians both at home and abroad as well as local pension firms, and aims to raise funds from “domiciliary accounts, diaspora remittances, and foreign investments.”

The first series of the bond program opened on Monday, offering $500 million with a five-year tenure.

This bond issuance is part of a broader strategy to tap into domestic resources amid unfavorable conditions in the international Eurobond market.

As Africa’s most populous nation, Nigeria is seeking to leverage local funding sources to finance its ambitious $18.1 billion spending plan for 2024, which includes a substantial budget deficit of 9.8 trillion naira.

The government has emphasized the importance of domestic borrowing to meet its financial obligations, particularly in light of global economic uncertainties.

The bonds are structured to be accessible to Nigerians residing within the country and abroad, with specific eligibility criteria that exclude recent cash deposits into domiciliary accounts.

Only funds that have been held in domestic accounts for at least 30 days before the bond issuance will qualify for participation.

The decision to issue dollar-denominated bonds locally comes as Nigeria grapples with challenges in accessing the international Eurobond market, where market conditions have been less favorable.

This local bond issuance is seen as a strategic alternative to raise the necessary capital to support the country’s infrastructure projects and other critical needs.

United Capital Plc, the lead arranger of the bond, highlighted the importance of this initiative in an emailed statement, noting that the bond program is not only aimed at raising funds but also at boosting investor confidence in the Nigerian economy.

The bond is expected to provide investors with a stable, long-term investment option while contributing to the country’s development goals.

“This bond issuance underscores the Nigerian government’s commitment to mobilizing domestic resources for national development,” said United Capital Plc. “By targeting funds from domiciliary accounts, diaspora remittances, and foreign investments, the program seeks to engage a broad spectrum of investors and ensure that the nation’s infrastructure needs are met.”

The bond offering is part of a broader fiscal strategy that includes both domestic and international borrowing to finance the government’s approved 2024 budget. With a spending plan of 28.8 trillion naira and a deficit of 9.8 trillion naira, the Nigerian government is exploring various avenues to secure the necessary funding.

This dollar bond program represents a critical step in addressing the country’s financing challenges, particularly in a global environment where traditional borrowing options are becoming increasingly constrained.

As the first series of the bond opens, all eyes will be on investor response and the potential impact on Nigeria’s financial markets and broader economy.

The success of this bond issuance could pave the way for further domestic financing initiatives, helping Nigeria reduce its reliance on external borrowing and strengthen its financial independence.

The program also aligns with the government’s broader economic goals, which include diversifying revenue sources and ensuring sustainable economic growth.

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