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Home Business News

New bond offerings show cost of local debt is getting lower

Chacha Wabara by Chacha Wabara
October 26, 2017
in Business News
Debt Management office

Bonds

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The Debt Management Office (DMO) yesterday sold five and 10-year debt at a flat rate of 15 percent at an auction in a move that signaled the beginning of reduction of local debt costs by the Federal Government. The offering, which raised N121.13 billion as against the N100 billion initially planned saw N21.13 billion of the 10-year debt allotted on a non-competitive basis.

With this move, the DMO is clearly reducing the costs of local borrowing by the FG which rose to as high as 18% recently. However, 8 months of consecutive reductions in the inflation rate to its current 15.98% has meant that the DMO does not need to offer local debt at such high prices. Furthermore, analysts expect that the inflation rate will continue to fall which in turn will mean that local debt will be purchased at cheaper rates.

For a country that plans to locally borrow half of its N2.36 trillion budget deficit, the reduction in inflation leading to the reduced costs of borrowing is a welcome relief. The country’s finance policy makers have come under serious criticism recently over their decision to use Eurobonds to borrow another $5.5 billion out of which $3 billion was expected to be used to repay local borrowings.

RelatedPosts

Debt Management Office lists triple-tranche bonds on Nigerian Exchange

DMO raises N124 billion in July FGN bond auction as investors oversubscribe long-term instrument

If the costs of local borrowing continues to drop, the FG may find it easier to reach its target without incurring excessive interest rates that could jeopardize future expenditure.

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