Debts to soar higher as FG seeks sources to fund budget

THE DEBT MANAGEMENT Office (DMO) recently released the Q4 2018 bond issuance calendar, and has indicated a N67 billion - N112 billion increase in planned borrowing to N270 billion - N360 billion, compared to N203.34 billion sold in the previous quarter.

On this, analysts say more borrowing is expected as government looks to score political points by implementing the budget.

On the average, the amount planned of N315 billion is 17 percent higher than the offering in Q3 2018 and 5 percent higher than that of Q4 2017. It is also the highest quarterly offering since the N300 billion offered in Q4 2017.

Consequently, total net bond issuance, year-to-date, stands at N485.59 billion, with N307.41 billion left to complete the N793 billion budgeted domestic borrowing for 2018.

Opeyemi Oni, a market analyst at Cordros Capital, who spoke on the on issues across markets, stated that “we see scope for higher federal government borrowing over the rest of the year as the administration remains steadfast in implementing the 2018 budget to score political points ahead of the general election.”

She said, “So far, net-borrowing in the domestic bond market stands at N485.59 billion. Additionally, the President has requested approval to proceed with the $2.86 billion Eurobond issuance, although this may prove tricky amidst increasing political tensions within the National Assembly. The government also plans to offer 10 stateowned companies for sale to selected investors and the public in Q4 in order to raise N289 billion.”

Oni continued, “all the aforementioned still isn’t enough to plug the deficit, and thus, we expect to see increased borrowing, especially from the domestic leg of 360 billion. However, with CBN’s claim on FGN now in excess of NGN837 billion as at March 2018, we do not expect all the borrowings to be sourced through the capital market.

“Year-to-date, stop rates have climbed 193 basis points on average at auctions, with rate on the 5-year and 10-year bonds expanding by 181 basis points and 204 basis points to 15.00 percent and 15.25 percent respectively. Investor interest has strengthened recently, following the EM selloffs in May, with the September auction recording a N68.51 billion oversubscription, the highest since the April auction and the third most oversubscribed of the year.”

Speaking on the outlook of the bond market, Oni said, “I expect a yield uptick in the bond market, albeit below 2017 highs of 17.12 percent. Anchoring on the increased hawkish delineation of the monetary policy committee through the rest of the year, combined with expected weaker participation by foreign investors as the Federal Reserve System continues its tightening stance, the impact of which will sustain foreign investors’ apprehension towards naira denominated assets.

The MPC, elected to leave policy parameters unchanged in its last meeting, with 3 of its members voting for rate hike, and 3 others suggesting a hike in the CRR rates, it shows that the CBN is not backing down in its fight against inflation, given the recent increase. Although CBN has net repaid N2.06 trillion worth of OMO bills between June and September, the CBN has net issued N787 billion year-todate and has also mopped up excess liquidity via FX sales to shield the naira.

On the effects of MPC’s continued stance, Oni said that this would take its turn on OMO issuance, as we would see increased foreign sell-offs of naira asset.

She said, “the CBN’s tolerance for liquidity in recent months must have been necessitated by weak demand and investors’ hunt for higher yield with CBN clearly aversive towards raising stop rates to support fiscal authority’s quest to cut down on borrowing cost even as reserves continue to take the brunt.”

“Evidently, CBN sold a total of $5.7 billion across its different windows to keep FX market lubricated and equally mop up the liquidity build up. That said, we expect CBN hawkish rendition to reflect in OMO issuances through the rest of the year as increased foreign sell-offs of naira assets drives pentup demand for FX, with CBN stepping up paper issuances to arrest speculative tendencies on the naira,” Oni said.

According to the Central Bank of Nigeria’s August Economic Report, the federal government’s fiscal deficit printed N1.13 trillion, 58 percent of the total budgeted deficit of N1.95 trillion for 2018.

This is due to the budget’s late passage, with total expenditure implementation only at 39 percent. Specifically, capital expenditure, at 22 percent implementation, significantly lags recurrent expenditure at 49 percent implementation. Federal government’s retained revenue, at 2.45 trillion year-todate, is also only at 34 percent of the full year budgeted total.