November 17, 2023/Coronation Research
The DMO held its monthly auction of FGN bonds on Monday (13 November ’23). It offered N360bn but raised N434.5bn 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 bids for the 10, 10, 15, and 30-year benchmarks were allotted at the marginal rates of 16.00%, 17.00%, 17.50% and 18.00% respectively. Bid to cover ratio stood at 1.0x. On a m/m basis, demand improved by 16.2% (marking the highest increase recorded since August ’23).
Demand was primarily driven by improved investors’ sentiments towards long–tenured bonds. We note that the demand for the 30–year bond remained bullish partly due to expectations of inflation moderating the long–term.
Meanwhile, negative real interest rate (currently –8.58%) continues to widen as headline inflation maintains its upward trajectory. It is worth noting that headline inflation increased by +61bps to 27.33% in October ’23 compared with 26.72% recorded in September ’23.
For FY 2023, the FGN had set out to raise N7.04trn specifically from domestic sources. Meanwhile, based on our recent estimates, c.N10trn has already been raised from cumulative FGN bond issuances (N5.0trn), NTBs (N4.8trn), and FGN SUKUK bonds (N350bn) in 2023. Therefore, exceeding its domestic borrowing target by 42%.
Based on the Medium–Term Expenditure Framework and Fiscal Strategy paper (MTEF), the fiscal deficit for 2024 is estimated at N9.1trn which is 4.5% of 2022 nominal GDP. This is above the 3% threshold set by the Responsibility Act 2007. The deficit is expected to be financed by new borrowings of N7.8trn (N6.0trn from domestic sources, and N1.8trn from external sources). It seems like domestic borrowing will continue to be a major source of deficit financing, as the ICM remains relatively expensive for emerging economies.
Over the next month, we see mid–curve FGN Bond yields in the secondary market around 14.9% – 16.0% and yields at the longer end of the curve ranging between 16.0% – 18.0%.
There are growing concerns around Nigeria’s rising debt profile vs debt repayment capacity. It is worth highlighting that the effectiveness of the country’s borrowing strategy is contingent on transparent utilization of borrowed funds, efficient project execution, and a keen focus on investments that generate economic returns.
To enhance effectiveness, there is a need for robust fiscal discipline, rigorous debt management practices, and a concerted effort to diversify revenue sources. Prioritizing investments that stimulate economic growth and foster long–term sustainability, coupled with active measures to improve public financial management, would contribute to a more effective borrowing strategy.
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