October 18, 2022/Coronation Research
Coronation Economic Note
The DMO held its monthly auction of FGN bonds on Monday. It offered N225bn but raised N107.9bn, through re-openings of the 14.55% FGN APR 2029, 12.50% FGN APR 2032 and 16.25% 2037 FGN bonds. The participation level (demand) at this auction is the lowest YTD, as the DMO secured a total bid of N119.2bn (USD270.1m) at the auction.
The bids for the 10, 10 and 20-year benchmarks were allotted at the marginal rates of 14.5%, 15.0% (previously; 13.58%) and 16.0% (previously; 14.5%) respectively. The demand at this auction largely reflects tight system liquidity amid the CBN’s contractionary monetary policy stance, fewer coupon maturities compared to September, and relatively favorable rates in the money market.
At the last MPC meeting, the MPC/CBN increased the cash reserve ratio (CRR) by 500bps to a minimum of 32.5%. This is in addition to raising the monetary policy rate from 14% to 15.5% to tame rising inflation (currently 20.77% y/y for September). The use of discretionary CRR debits has tightened system liquidity and has led to further upticks in rates in the interbank market. We note that overnight and repo rates closed within a range of 11 – 17% in the interbank market. The relatively higher rates in the interbank market contributed to softer demand at the FGN bond auction.
In addition, the CBN’s circular dated 07 October ’22, prohibits participants with successful bids at FGN bond auctions from accessing the CBN’s discount window for short-term loans on the settlement day. Failure to comply would attract a penal charge of 5% on the allotment value. This directive reduces banks funding flexibility which directly impacts participation in FGN bond auctions.
According to the DMO’s bond issuance calendar, it had set out to raise a maximum of N2.5trn through FGN bonds to meet a domestic borrowing target of N3.53trn. However, year-to-date, it has raised N2.5trn and given that the Eurobond market remains expensive for emerging economies like Nigeria, we expect increased domestic borrowing. Recently, the DMO clarified commentary tilted towards FGN’s debt restructuring.
The DMO has assured domestic and international creditors that there are no plans to restructure the debt. However, other debt liability management options such as buybacks and bond exchanges are being explored, in addition to extending debt maturities to avoid bunching. Furthermore, re-profiling of debt-maturities by refinancing short-term debt using long -term debt instruments are also being considered.
Looking ahead, we await the final decision on the securitisation of the FGN’s ways and means advances from the CBN, which is estimated at c.N21trn as at end-August ‘22. We see mid-curve FGN bond yields in the secondary market around 13.7 – 14.8% and yields at the longer-end of the curve between 14.75% – 15.65% 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.
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