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East African Bond Exchange Set to Revolutionize Kenya’s Debt Market

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The upcoming launch of the East African Bond Exchange (EABX) heralds a transformative era for Kenya’s debt market and promises enhanced liquidity, transparency, and growth opportunities.

Terrence Adembesa, CEO of EABX, envisions exponential development in Kenya’s bond market, which currently lags behind international standards in terms of size and activity.

Kenya, boasting the third-largest economy in sub-Saharan Africa, sees corporate debt issuance at a mere 0.2% of its GDP, a fraction compared to Asian economies where it ranges between 20% to 30%.

EABX aims to address this gap by providing a platform for efficient trading of government domestic debt and facilitating improved pricing mechanisms.

With the potential to trade three to four times the existing 5 trillion shillings ($31 billion) of outstanding liabilities, EABX holds promise for invigorating the Kenyan debt market.

It seeks to empower issuers with better pricing strategies while providing investors with enhanced visibility and cost savings.

The exchange, scheduled to commence operations in the first half of the year, received bids totaling approximately 2.6 billion shillings, surpassing its 2 billion shillings target.

The Kenya Bankers Association and UK-backed development agency FSD Africa collectively hold a majority stake of 52% in EABX, signifying strong support and confidence in its potential impact.

EABX’s roots trace back to 2009 when the Bond Market Association initiated efforts to establish a self-regulatory organization for the fixed income market.

As EABX prepares for its debut, it aspires to extend its footprint beyond Kenya, facilitating trading in fixed-income securities across East African Community member nations, including Tanzania, Uganda, Rwanda, Burundi, Democratic Republic of Congo, South Sudan, and Somalia.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Federal Government Falls Short: Raises N1.5tn at February Bond Auction

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The Federal Government’s February bond auction fell short of its target as it raised N1.5 trillion instead of the planned N2.5 trillion.

The Debt Management Office (DMO) announced this shortfall in a press release on Tuesday. The auction included bonds maturing in 2031 and 2034, with a combined offering of N2.5 trillion.

Despite the lower-than-expected outcome, the DMO highlighted significant investor interest with total bids reaching N1.9 trillion, the highest recorded in any single FGN Securities Auction.

The 2031 bond received allotments totaling N873.53 billion, while the 2034 bond saw allotments amounting to N621.38 billion, making for a total allotment of N1.495 trillion.

The government’s decision to raise funds through bonds reflects its ongoing efforts to meet financing needs and attract both local and foreign investors.

However, the shortfall indicates a potential mismatch between the government’s funding requirements and investor appetite.

While the auction outcome signifies continued investor confidence in Nigerian securities, it also underscores the importance of closely monitoring government borrowing and fiscal management strategies to ensure sustainable debt levels and investor trust in the market.

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Federal Government Targets N2.5tn in Second FGN Bonds Auction of 2024

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In its second Federal Government of Nigeria (FGN) bonds auction of 2024, the Federal Government aims to raise N2.5 trillion.

The Debt Management Office (DMO) announced this in a circular released on Wednesday.

The auction consists of two tranches: N1.25 trillion with a maturity date of February 2031 and another N1.25 trillion with a 10-year tenor.

FGN bonds are integral to the domestic borrowing strategy of the Federal Government, forming a significant part of its fiscal policy.

Last year, the government raised approximately N7.06 trillion from the fixed-income market, indicating a reliance on debt instruments to finance budgetary requirements.

The government’s borrowing plan for 2024 forecasts new borrowings to hit N7.83 trillion, reflecting ongoing fiscal challenges and the need for capital injection into critical sectors.

President Bola Tinubu previously sought National Assembly approval for external borrowings totaling about $8.69 billion and €100 million for the period spanning 2022 to 2024.

The latest FGN bonds have a face value of N1,000, and their interest payments are typically semi-annual.

The auction underscores Nigeria’s ongoing efforts to manage its fiscal obligations while addressing the nation’s developmental needs amidst evolving economic conditions and debt dynamics.

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DMO Raises N418.2bn in FGN Bonds Auction, Demand Reflects System Liquidity – Coronation Economic Note

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The DMO held its monthly auction of FGN Bonds on Monday (29 January ’24). It offered N360bn but raised N418.2bn through re-openings of the 16.29% FGN MAR 2027, 14.55% FGN APR 2029, 14.70% FGN JUN 2033, 15.45% FGN JUN 2033, 15.45% FGN JUN 2038.

The bids were allotted at the marginal rates of 15.00%, 15.50%, 16.00%, and 16.50% respectively. The bid-to-cover ratio stood at 1.45x compared to 3.24x recorded in the December auction.

The demand at this auction primarily reflects system liquidity triggered by FAAC allocation and
coupon payments. Notably, market liquidity was reported at N210.4bn on Friday (the working day
before the bond auction).

Call, overnight, and repo rates closed within a range of 7% – 19% as rates in the money market moderated. There was significant demand for longer-tenured bonds, such as the JUN 2038 bonds (N90bn was offered, demand was N311.9bn while N266.7bn was allotted).

Domestic institutions were the core participants at the auction. According to the latest monthly report by the National Pension Commission (PENCOM), FGN bonds held by pension fund administrators as at end- December ’23 increased by 24.2% y/y to N11.5trn from N9.2trn.

The PENCOM report shows that FGN bonds accounted for 62.4% of total assets under management (AUM).

December’s headline inflation increased by +72bps to 28.92% y/y. We expect to see another uptick when the NBS releases its January figure. Our view is partly hinged on exchange rate volatility which is contributing to higher prices for imported goods.

Insecurity in specific regions is disrupting supply chains, leading to shortages and increased costs for essential goods. Rising fuel prices, influenced by changes in the global oil market, are having downstream effects on transportation and production costs.

The first MPC meeting under the tenure of the new CBN Governor, has been scheduled for 26th
and 27th of February 2024, we anticipate continuous monetary policy tightening, given elevated
inflation levels.

Based on the FGN 2024 Budget, the fiscal deficit is estimated at N9.1trn which is 3.88% of the
2024 estimated nominal GDP. The deficit is expected to be financed by new borrowings of N7.8trn
(N6.1trn from domestic sources, and N1.8trn from external sources). We expect domestic fixed
income yields to remain elevated.

For FGN bonds, we currently see yields at the mid-curve around 15.9% -16.3% and between 16.6% – 18.6% at the longer end of the curve over the next 3 months.

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