Nigeria: To Bridge Budget Deficit, Govt Raised N2.44 Trillion Via Bonds in 9 Months

The federal government in nine months of 2022 raised a sum of N2.44 trillion through the FGN bond market to finance N6.26trillion 2022 budget deficit, the Debt Management Office (DMO) FGN Bond auction results in nine months of 2022 has revealed.

THISDAY analysis of the auction results revealed that investors oversubscribed N3.65trillion out of N1.86 trillion amount offered bond auctions between January and September 2022, representing an increase of 103 per cent bond offer subscription.

Amid oversubscription recorded by DMO in FGN bond market and other debt instruments sales such as Treasury Bills and Savings bonds, the debt office is on track to meet or exceed its domestic borrowing target of N3.53trillion for 2022.

Speaking with THISDAY on FGN bonds oversubscription, the Head Financial Institutions’ Ratings Agusto & Co, Mr. Ayokunle Olubunmi expressed that FGN bonds interest rate is higher compared to investing in the Treasury bills market.

He explained that, “the FGN bonds have no default risk, meaning that it is certain your interest and principal will be paid as and when due. The interest income earned from the securities are tax exempt compared to the treasury bills that expired in January 2022.”

Analyst at PAC Holdings, Mr. Wole Adeyeye also said, “Most investors do away with the stock market and invest in bond market because they have the assurance that the market is the safest of all investments in domestic debt market since it is backed by the Federal Government, and as such it is classified as a risk-free debt instrument.”

He added that, “the deficit in the budget has given room for the government to borrow. The government needs money to finance key projects this year. The money spent on debt servicing is eating deep into the government’s revenue, which makes borrowing an unsustainable form of financing.”

The FGN bonds are debt securities of the Federal Government of Nigeria (FGN) issued by the DMO on behalf of the Federal Government and it has the obligation to pay the bondholder the principal and agreed interest as and when due.

The bond market offers less volatility that assures Pension Funds Administrators (PFAs), and investors of their capital returns albeit with low yield on investment as the marginal rates on 20-Year Bond FGN Bonds that close the September 2022 auction was at 14.5 per cent, below 20.52 per cent inflation rate as of August 2022.

During the September auction, the DMO offered N225billionn but raised N261.5 billion through re-openings of the 2025, 2032 and 2037 FGN bonds. The participation level was slightly lower when compared to the auction held in August.

The bid-to-cover ratio for September stood at 1.1x compared to 1.2x in August. The DMO secured a total bid of N246.44billion during the auction. The bids for the 3, 10 and 15-year benchmarks were allotted at the marginal rates of 13.5per cent (previously; 12.5 per cent), 13.8 per cent (previously; 13.5 per cent) and 14.5 per cent respectively.

According to analysts, the demand for September auction was partly driven by expected inflows of N166billion in coupon payments as well as, improved system liquidity primarily driven by inflows of N185.8billonn in FGN bond coupon payments in the first three weeks of September.

Coronation Merchant Bank’s economic research team predicted a mid-curve FGN bond yields around 13 – 14per cent and yields at the longer-end of the curve between 14per cent – 15 per cent over the next one month.

However, the level of system liquidity (impacted by items such as auctions, CRR debits/refunds, bond/NTB maturities, coupon payments and FAAC allocation) would also influence movement in yields.

Further analysis of the DMO’s FGN bond auction result, February 2022 has one of the amount raised by government, while January has the lowest amount raised.

Out of the N150 offered amount, the DMO raised from investors total N415.42 billion FGN bonds in February from a total subscription of N557.72billion, while in January, N170.64billion was raised out of N325.24billion subscribed by investors.

However, the FGN Bond auction result issued by DMO revealed that the total amount offered between January and June 2022 increased to N1.2 trillion as against N900 billion offered between January and June 2021.

THISDAY gathered that the FGN bonds issued by DMO in the first H1 2022 recorded oversubscription despite mixed interest rates.

The DMO in H1 2022 offered N1.2trillion FGN for subscription and it was oversubscribed by N3.02trillion, which is 39.8per cent or N1.82trillion oversubscription rate.

On the bond market performance last week, analysts at Cordros Research noted that bearish sentiments persisted in the FGN bonds secondary market, as the average yield expanded by 21 basis points to 13.7per cent.

They attributed the bearish sentiment to sell-offs across the mid and long spectrums as investors: ” reacted negatively to the Finance Minister’s debt restructuring comments and took positions in anticipation of the October 2022 bond auction scheduled to hold next week Monday.

“Across the benchmark curve, the average yield contracted at the short (-3bps) end as investors demanded the MAR-2025 (-34basis points ) bond, but expanded at the mid (+50bps) and long (+18 basis points) segments, following the profit-taking activities on the NOV-2029 (+53 basis points) and JAN-2042 (+55 basis points) bonds, respectively.”

The federal government had highlighted that the 2022 budget has debt deficit of N6.26trillion, forcing the federal government to issue new borrowings of N5.012 trillion (of which domestic – N2.506 trillion and foreign – N2.506 trillion); drawdowns on Project-tied Multilateral/Bilateral loans – N1.156 trillion; and Privatisation Proceeds of N90.73 billion.

Speaking on the development, an economist and Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, said the FG had notified the general public of borrowing more in 2022.

“Since we have a deficit of N6.3trillion and you also have an additional subsidiary budget of N4trillion, naturally it has soar up the deficit and it is easier to raise money locally than raising it at the international market. Domestic borrowing is a low- hanging fruit, “he added.


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