August 19, 2024/FBNQuest Research

he federal government (FG) will auction its first series of the much-anticipated dollar-denominated domestic bond today, August 19, 2024. The issuance, the first of its kind, marks a significant milestone in the nation’s domestic debt market. The bond security, available to local and foreign investors and qualified institutional investors, has a five-year tenor maturity, with semi-annual coupon payment and bullet principal repayment at maturity. Although the dollar-denominated bond program totals US$2bn, the FG aims to raise an initial tranche of US$500m at this debut auction.

• The coupon of the bond instrument is expected to be benchmarked against comparable FGN Eurobond instruments, such as the FGN ’29 USD paper.  
• The minimum investible amount is US$10,000, with additional increments of US$1,000 thereafter.
• According to the minister of finance, Wale Edun, the proceeds from this bond issuance will be channelled into critical sectors of the economy as approved by the president.
• Nigeria’s credit ratings outlook is mixed, which gauges the country’s creditworthiness and is a crucial consideration for prospective investors.
• For context, Fitch Ratings, in its latest outlook, revised the country’s credit rating outlook to positive from stable and retained Nigeria’s long-term foreign-currency issuer default rating at B-
• Meanwhile, Moody’s rating agency retained Nigeria’s positive credit outlook and left the nation’s long-term foreign currency unchanged at Caa1.
• In the same vein, Standard and Poor’s (S&P) ratings affirmed its stable outlook and maintained its ‘B-/B’ ratings on its long- and short-term foreign and local currency.
• The stringent credit conditions in the international capital market provide a reasonable explanation for the FG opting to source FX inflows from the domestic market.
• Most importantly, these FX inflows would potentially bolster the country’s external reserve and inject the much-needed FX liquidity to support the Naira exchange rate.
• However, additional borrowings, especially when considering currency risks, will exacerbate the country’s rising debt profile and raise concerns about debt sustainability.
• Based on recent DMO data, the nation’s total public debt stock rose to about 53% of 2023 GDP in Q1 2024, higher than the 23% recorded in Q1 2023 and the agency’s 40% self-imposed public debt limit.
• More worrisome is the rising debt servicing costs and the significant strain of debt obligations on the government’s finances, particularly considering that the oil sector, which is the primary source of FX accretion to Nigeria’s gross official reserves, has consistently underperformed in recent years.
• Another potential downside risk highlighted by the IMF is the impact of domestic dollar purchases of the bond, which could reduce FX liquidity in the domestic market and exert downward pressure on the naira exchange rate.  
• Regardless, we expect to see a strong appetite for the bond instrument at the auction, reflecting positive investors’ sentiment towards the government reforms and initiatives.