INVESTORS’ apathy towards Nigeria’s sovereign bonds may undermine the Federal Government’s plan to finance its N10.78 trillion budget deficit.
The government plans to source about two-thirds of the estimated deficit in Budget 2023 through domestic bond issuance.
The government could only raise about 53 per cent of its last offering to the domestic debt market as fears of under-pricing and socio-political risks dampened investors’ enthusiasm.
The federal government, which sought to raise N225 billion through its regular primary market auction, was only able to raise N107.88 billion (about 53 per cent of the total offer).
The total subscription was N119.18 billion, which underlined that the low allotment was due to low investors’ appetite rather than rejection of bids by the issuer. The bid in the October issuance represented 51.63 per cent decline compared to the bid recorded last month.
The government had sought to raise N75 billion each on two offers, it only received total bid of N7.43 billion and N15.60 billion respectively, representing a shortfall of N126.97 billion from the offer size of N150 billion for the two offers. However, the third offer of N75 billion received total bid of N96.15 billion.
Most analysts said the under-subscription to the sovereign bonds was a red flag of investors’ apathy given the uncertainties around the national electioneering, the hawkish stance of the Central Bank of Nigeria and the foreign exchange (forex) liquidity crisis at the market.
Managing Director, Arthur Steven Asset Management, Mr. Tunde Amolegbe, said the apathy for sovereign bonds may persist in the meantime, citing the current mood of the market.
He said the medium to long-term sentiment in the sovereign debt market would be determined by the extent of policy stability and reduction in political risk.
“Well may be, on the short run (it may pose threat to deficit funding), but I think as policy stabilises and politics recedes, investors’ appetite is expected to pick up in the medium to long-term. However, we expect that the next bond auction might not be any better,” Amolegbe said.
He said the under-subscription was driven by four intertwined factors including the low systemic liquidity due to aggressive monetary policy by the Central Bank of Nigeria (CBN).
The Monetary Policy Committee (MPC) of the CBN had increased the Monetary Policy Rate (MPR) by 150 basis points from 14.00 per cent to 15.50 per cent, raising the benchmark interest rate to its highest level since adoption of MPR in December 2006.
The MPC also increased Cash Reserve Ratio (CRR) from 27.50 per cent to 32.50 per cent while retaining the asymmetric corridor at +100/-700 basis point around the MPR. It also retained liquidity ratio at 30.00 per cent.
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Amolegbe, the immediate past president of Chartered Institute of Stockbrokers (CIS), said with the high-interest environment, investors were expecting the interest rates and yields to continue to rise and as such were being careful to lock into government bonds now.
Analysts at Afrinvest West Africa said the “weak market appetite may not be unconnected to reduced system liquidity”.
The government proposed a budget size of N20.51 trillion on total revenue of N9.73 trillion in 2023, implying a N10.78 trillion deficit in the Appropriation Bill.
At the public presentation of the breakdown and highlights of the 2023 budget proposal, the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, said the overall budget deficit of N10.78 trillion for 2023 would largely be financed through domestic loans.
She outlined that the budget deficit will be financed mainly by borrowings including domestic sources, N7.04 trillion; foreign sources, N1.76 trillion; multilateral and bi-lateral loan drawdowns, N1.77 billion and expected N206.18 billion proceeds from privatization of national assets.
“There is a continuing need to exceed this threshold considering the existential security challenges facing the country,” Mrs. Ahmed said.
Stating that Nigeria has no plan to restructure its debt as government remains committed to meeting its domestic and external debt obligation, she said the government will continue to utilise appropriate debt management tools to streamline the cost and risk profile in the debt portfolio, including concessional loans.
The total public debt as a percentage of Gross Domestic Products (GDP) stood at 23.06 percent as at June 30, 2022, within 55 per cent threshold recommended by the International Monetary Fund (IMF) and World Bank (WB) as well as Nigeria’s self-imposed limit of 40 per cent set in the MTDS 2020-2023, even after including the outstanding balance on CBN Ways and Means Advances.