The Nigerian bond market hitherto an exclusive preserve of blue-chip companies have since become a fad among the different tiers of government who see it as a veritable source of income to drive development projects. In this report, Bukola Afolabi takes a look at the fortunes of the nation’s bond market vis-à-vis challenges of sustaining capital
Time was when the bond market was strictly an exclusive market. But not anymore. Today, it has become the beautiful bride sought after by everybody who is anybody, especially the different tiers of government. And the reason for this is not far to seek: the realization that the bond market is perhaps one of the easiest means of raising funds out there with little or no encumbrances at all.
The game changer
Following the reforms in the bonds market, the Federal Government in October 2003 issued three-year, five-year, seven year and 10- year bonds. While the three year bonds were 87.5 per cent oversubscribed and allotted, investors showed apathy towards the longer tenured bonds.
The low turnout for the other bonds resulted in subscription and allotment of less than 50 per cent of the issue. No bonds were issued in 2004. Following investors’ aversion for the long tenured bonds, the government offered only two and three-year bonds on seven separate dates in 2005, raising a modest N178 billion from investors at yields between 8.25 per cent and 17 per cent.
In 2006, the Federal Government was able to raise N282 billion from the three-year, five-year, seven year bonds. The amount raised was 58 per cent above amount raised in the prior year, while subscription was N613 million. From then onwards, the bond market has grown rapidly, with the Federal Government beginning a tradition of monthly issuance of bonds.
In 2006, for the first time since the re-opening of the market, special purpose bonds were issued to selected banks for the settlement of N75 billion pension arrears in 2006
According to Ms. Arunma Oteh, Director-General of Nigeria’s Securities & Exchange Commission (SEC), “interest in (Nigeria’s) bond market is not limited to local issuers as the reformed environment is attracting interest from multilateral financial institutions such as the IFC (International Finance Corporation) and the ADB (African Development Bank).”
Addressing participants on “recent reforms in the Nigerian bond market,” at a seminar organised by the Capital Market Correspondents Association of Nigeria (CAMCAN) in Badagry, Lagos, Oteh said: “the ADB has also filed for an MTN (Medium Term Note) programme of about $1.5 billion to be denominated in the local currency.”
She recalled “that the IFC issued its maiden ‘Naija Bond’ in February last year and has already approached us for a medium term note (MTN) programme to be naira-denominated worth about $1 billion.”Both programmes will be free from the eliminated limitation on the lifespan of a shelf programme,” she assured.
“You may also recall that we approved two new trading platforms, both over-the-counter (OTC), i.e. the National Securities Dealers Association (NASD) platform and the Financial Markets Dealers Association platform, the FMDQ. The former, which was launched recently has already started operations and is expected to revolutionise the entire bond market by boosting liquidity and simplifying bond trading.
“The Nigerian bond market is certainly on the verge of a revolution buoyed by an improved, competitive and conducive environment that attracts issuers and investors alike. The yield curve of the FGN bonds which has been extended to 20 years provides a good benchmark for issuers of all stripes to leverage the bond market to attract capital, both foreign and local. The market will continue to attract significant amounts of capital internationally since the FGN bond attracted inclusion into the emerging markets indices of Barclays and JP Morgan,” Oteh stressed.
Continuing, she said the result of these initiatives have been encouraging, as can be seen from the upswing in the domestic bond market, resulting in current total capitalisation of about N5.65 trillion.
What is more noteworthy, she continued, “is the increasing interest in the bond market by corporates and State Governments.”
State government bond
In its annual National Debt Sustainability Analysis (DSA) released by the DMO last year, the total domestic debt of the 36 states and the Federal Capital Territory (FCT) reached N1.471 trillion last year. This is an increase of 19.34 per cent compared with the N1.233 trillion domestic debt figures the previous year.
The figure indicates an abuse of the opportunity that the bond market provides reported recently that only sixteen states of the federation have raised bonds totalling N520 billion in the last six years without clear outlines on how the funds were used.
This is against the backdrop of massive unemployment and infrastructural deficit across the country, which the debts could have addressed.
Specifically, the 16 state governments were found to have raised the bonds without their citizens’ understanding of what the funds are meant for.
Filings by the state governments at the NSE showed that Kogi state’s N5 billion bond is the smallest so far while Lagos emerged the biggest debtor with a total of N187 billion issued so far.
Analysis of numbers obtained showed that Osun state with internal generated revenue and federal allocation of less than N2 billion has so far raised N30 billion including the just concluded N11.4 billion sukuk.
Others include: Kwara N17 billion, Niger N15 billion, Kaduna N8.5 billion, Gombe N20 billion and Edo N25 billion.
Benue, Ebonyi state Ondo state, Ekiti state, Bayelsa state, Imo state and Delta state have also raised N13 billion, N16.5 billion, N27 billion, N25 billion N50 billion, N18.5 billion and N50 billion respectively.
Investigation by The Nation also revealed that Oyo, Ekiti, Zamfara, Rivers and Adamawa states respectively have concluded arrangements to head to the stock market to have a taste of the binge findings also revealed that the states activities at the bond market have crowded out corporates, particularly the manufacturing sector thus inhibiting their ability to create value and employment.
Although safety of the funds is paramount, experts believe that pension funds administrators (PFAs) should do more than rely mainly on state and federal government bonds to invest pension contributions.
The PFAs held bonds totalling N1.9 trillion at the end of March, equivalent to 45 per cent of their assets under management and 42 per cent of the outstanding stock of debt instruments.
The project of the state government
The number of listed state governments bonds currently being auctioned at the Nigerian Stock Exchange (NSE) has risen to 35, with a total market value of N565 billion. The above amount was raised between 1978 and 2013 from the capital market to finance various developmental projects.
The Nigerian bond market has provided N565 billion to 18 states to finance various infrastructure projects in the last 35 years, 75 per cent of the funds were raised in the last five years. In the last two years, four state governments had raised funds through the bond market to finance various developmental projects.
Leading the pack in terms of volume and value is Lagos State, which got approval to raise N167.80 billion from the capital market but has so far raised N80 billion in 2012 to finance construction of Adiyan Waterworks (Phase II), infrastructure developments, health facilities and redevelopment of Eric Moore Schools.
On December 31, 2013, Ekiti State Government concluded its N25 billion bond issuance programme with the successful raising of the balance of N5 billion from the exchange. Ekiti State had in 2012 embarked on the bond issuance programme raising N20 billion as the first tranche with a coupon of 14.5 per cent to fast-track its infrastructural development and economic transformation.
Having begun the execution of the various projects, Ekiti State returned to the market to raise the remaining N5 billion with a coupon of 14.5 per cent to complete the projects. Earlier in 2012, Ondo State Government under the 50 Billion Debt Issuance Programme issued N27 billion bond to finance developmental projects.
It was followed by Gombe State in the same year which raised the sum of N20 billion to finance the building of township and regional roads, schools, purchase of earth moving equipment, mega park, School of Nursing and refinancing of existing loan while Osun State got approval to raise N60 billion from the capital market.
But has so far raised N30 billion in 2012 and N17.4 billion in 2013 under its Tranche 1 and 11 to finance road infrastructures, commercial infrastructure, urban renewal, Ede waterworks and refinancing of loan while the second Tranche will be used to finance education.
Recently, Director General of Securities and Exchange Commission (SEC), Ms Arunma Otteh said while the state governments have benefitted significantly from the market, the federal government had also been an active participant in both the domestic and international bond markets.
More disciplined funding
Also, Director-General of the Debt Management Office (DMO), Dr. Abraham Nwankwo noted that his agency is busier now and has helped by its enabling law ensured Federal Government is now more accountable for its spending. In the days before the advent of the office, he explained further, government funded its deficit budgetary expenses through ways and means, in which case more currency is printed to fund the shortfall in the annual budget. This was particularly the case, he recalled, during the military era and in the years immediately preceding the DMO’s birth.
Speaking on “the transformation of the Nigerian bond market,” Nwankwo , who was represented by Joseph Ugwuala, head, Policy, Strategy and Risk Management at the office, said between 2003 and this year, Abuja has funded N4.612 trillion or 57.74 per cent of total deficit of N7.986 trillion arising from fiscal operations through bonds issuance at the domestic market.
Giving a breakdown of the figure, showing that in 2003, fiscal deficit stood at N202.72 billion, representing 2.04 per cent of the nation’s Gross Domestic Products; dropping in 2004 to N172.6 billion or 1.51 per cent of GDP. By 2005, national deficit level fell again to N161.86 billion or 1.11 per cent of GDP; before beginning soaring to N341.86 billion or 2.35 per cent of GDP, and representing a 111.79 per cent jump. The deficit level jumped again to N580.19 billion or 3.64 per cent; and then N537.95 billion or 0.84 per cent in 2008. In 2009, deficit was N836.6 billion, 3.02 per cent of GDP. The figure more than doubled once more as government’s revenue obviously stagnated as needs mounted, Federal Government’s fiscal operations resulted in a 2010 deficit of N1.993 trillion or 6.11 per cent of GDP, the highest within the 10-year period. It dropped to N1.136 trillion or 2.96 per cent in the following year; and N1.135 trillion or 2.85 per cent in 2012. Last year’s deficit is forecast to reduce below the trillion Naira mark at N887.06 billion or 1.85 per cent of GDP.
He noted that in 2003 at the onset of the bond market, N72.75 billion of the deficit or 36 per cent was funded by domestic borrowing, dropping to N27 billion or 16 per cent the following year; and N25 billion or 15 per cent by 2005, In 2006, the figure rose to N1087.2 billion or 31 per cent; rising further to N200 billion or 34 per cent in 2007; a dropping to N155.47 billion or 29 per cent in 2008. In 2009, the quantum of the deficit funded through the domestic bond market ballooned to N542.11 billion or 63 per cent, a level from which it has never dropped. In 2010, domestic funding of deficit catapulted further to N1.36 trillion or 68 per cent; falling to N852 billion or 75 per cent the following year; last year, N744.44 billion or 65 per cent of the federal deficit was funding domestically; while N544.06 billion or 61.33 per cent of this year’s deficit is to be sourced from the domestic bond market.
According to Nwankwo, “the current practice of financing part of the country’s fiscal deficits by borrowing from the market has not only led to the development of the domestic debt market, it has brought other salutary benefits for monetary policy operations and the economy.”
These, he continued, include “removal of conflict of interest – clear separation of debt management functions from monetary policy operations – thereby allowing each agency, especially the CBN, to concentrate on its core mandate; subjecting government’s borrowing to market discipline; use of long-term as against short-term funds to finance long-term projects – a clear case of optimal asset-matching; significant reduction in refinancing risks through tenor elongation.”
One other benefit, he added, was the “establishment of a Sovereign Yield Curve and benchmark for private sector borrowing.”
The domestic bond market, according to the DMO boss, has not been just for financing government’s fiscal deficits, as it served as a platform for issuance of the Asset Management Corporation of Nigeria (AMCON) bonds to buy toxic debts off the balance sheets of Nigeria banks. Proceeds of the domestic bond issuance, he noted, were also used to fund special government stimulus spending initiatives like the N200 billion commercial agriculture programme, whereby the funds raised by the DMO were made available to the CBN for lending to agriculture enterprises through the commercial banks between 2008 and 2010. Also, proceeds from the issue was used to fund the cotton, textile and garments revitalisation programme, part funding to the tune of N100 billion with FGN bond proceeds. Others include “the purchase of locomotives for the revitalisation of rail transportation; and, the provision of seed money for the development of infrastructure in new districts in the Federal Capital Territory.”
