December 15, 2023/Coronation Research
The DMO held its monthly auction of FGN Bonds on Monday (11 December ’23). It offered N360.0bn but raised N273.6bn through re-openings of the 14.55% FGN APR 2029, 14.70% FGN JUN 2033, 15.45% FGN JUN 2038 and 15.70% APR 2053 FGN bonds.
The bids were allotted at the marginal rates of 15.50%, 16.00%, 16.50%, and 17.15% respectively. Bid to cover ratio stood at 3.24x. On a m/m basis, demand improved by 99.1% to N886.4bn compared with N445.3bn recorded in November ’23 (marking the highest increase recorded since July ’23).
The robust demand observed at this bond auction was primarily driven by improved system liquidity on the back of FGN bond coupon payments and FAAC payouts during the period. Notably, there was substantial demand for longer-tenure bonds, such as the JUN 2038 and APR 2053 bonds. Domestic institutions remained the predominant participants at this bond auction.
The latest inflation report from the NBS shows October’s headline inflation increased by +61bps to 27.33% y/y. There was no MPC meeting held in November. We note that the MPC meeting is expected to hold at least four times per annum and the CBN has satisfied this target. It is worth highlighting that since May ‘22, the CBN has raised the policy interest rate by +725bp to 18.75%.
We expect continuous liquidity mop-up through frequent OMO auctions and CRR/LDR debits. The removal of the N2bn daily limit on funds placed at the Standing Deposit Facility (SDF) window allows the CBN manage system liquidity, while offering valuable feedback to assess the effectiveness of its current policy parameters.
For FY 2023, the FGN’s domestic borrowing target via FGN Bonds is N4.3trn. However, based on our estimates, c.N5.8trn has been raised from cumulative FGN bond issuances (exceeding the target by 34.9%). This is 82.5% of the total domestic borrowing target of N7.04trn. Other sources include, net NTB issuances (N1.6trn), and FGN SUKUK bonds (N350bn). Given the passage of a
supplementary budget of N2.1trn, our view remains that the FGN is likely to surpass its initial domestic borrowing target by the end-2023.
Moody’s Investors Service recently upgraded its outlook on Nigeria’s sovereign credit rating from “stable” to “positive” in response to the ongoing reform initiatives, notably the removal of fuel subsidies and the unification of multiple exchange rate windows. However, Moody’s acknowledged Nigeria’s vulnerable fiscal and external position, persistently high inflation, and uncertainties surrounding oil production.
Fitch Ratings maintained Nigeria’s long-term foreign-currency issuer default rating at ‘B-‘ with a stable outlook. Fitch cited accelerated reforms such as the removal of fuel subsidies, exchange rate unification, and naira devaluation as core justifications. Nonetheless, Fitch highlighted constraints on an upward rating revision, which include weak governance, low non-oil revenue, heavy reliance on crude oil exports, security challenges, and persistently high inflation.
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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