Foreign investors stayed away from the Central Bank’s latest OMO Auction which held on the 19th of March 2020. According to the data seen by Nairametrics Research, there were zero bids for each of the OMO bills slated for sale by the CBN.
The Central Bank had about N140 billion on offer via the restricted Open Market Operations divided into N10 billion for 89-day and 180-day bills respectively and another N130 billion for a 362-day bill. The 362-day bill was offered at a range of bid of between 17% to 18.25%.
OMO Bills Flux – The CBN has over the last two years relied on selling OMO Bills to foreign and local portfolio investors at very high rates using it as a pseudo sterilizer of the naira and attracting the much needed foreign currency brought into the country by foreign portfolio investors. Since then OMO Bills have ballooned to an N18 trillion market until the CBN said it has had enough late 2019.
Data from the National Bureau of Statistics also shows inflow into money market instruments grew from $3.2 billion and $8.4 billion in 2017 and 2019 respectively to a whopping $13.4 billion in 2019.
The bank banned everyone except foreign investors and banks from accessing the OMO market all in a bid to push drive funds away from risk-free CBN securities to more risky assets that it believed had a more positive effect on the economy. The move left asset managers with trillions of naira hanging in the dry pushing them to the treasury bills market as they searched for alternative risk-free investments.
Since the ban, foreign portfolio inflow into money markets fell from $3.5 billion in the second quarter of 2019 to $2.5 billion and $1.4 billion in the third and fourth quarter of 2019. It was $5.8 billion in the first quarter of 2019.
The latest data from the Central Bank of Nigeria revealed that Nigeria’s 364-day treasury bills have fallen to 4.6%. While the 90-day treasury bills current stop rate sold for 2.3%, the 182- day treasury bills sold for 3.4%.
The National Bureau of Statistics’ latest consumer price index revealed Nigeria’s inflation rate was 12.2%, the highest in years. At 12.2% inflation rate Nigeria’s inflation-adjusted real return for the 90-day treasury bills is about -11.9%.
Global Markets free-fall: However, it appears the global market sell-offs have left foreign investors with no choice but to exit emerging markets drying up any future security sale. Nigeria’s Eurobond yields are now selling for as high as 13.4% for the bond maturing 2025 due to widespread drop in bond prices. Bond prices have an inverse relationship with yield. If a bond prices go down the yield goes up and vice versa.
Effect on Forex: With the CBN recording a no show, it is likely that it will further hurt its ability or option to rely on OMO sales to foreign investors to maintain a robust foreign exchange reserve.
Nigerian Treasury Bill falls to 3.05% per annum
The DMO sold N2 billion on the 91-day paper and N8.385 billion on the 182-day.
The latest data from the Treasury bill auctions concluded today revealed that Nigeria’s 364-day tenor dropped to 3.05%. On the other hand, Stop rates printed lower for the 91-day tenor at 1.09% and 182-day tenor, which went for 1.5%.
At the Treasury bill auction, the Debt Management Office sold N2 billion on the 91-day paper, N8.385 billion on the 182-day, and N148.361 billion on the 364-day bills.
Ladi Bello, a treasury dealer at Nigeria’s Tier 1 bank in a phone chat interview with Nairametrics, spoke on the just-concluded auction.
“At the Primary Market Auction conducted by the DMO yesterday, N159bn was rolled-over across the standard maturities on offer with demand skewed towards the new 1-Yr paper.
“Stop rates on the short and mid-tenured maturities closed marginally lower than the preceding auction at 1.09% (↓1bps) and 1.50% (↓5bps) respectively, while the 1-Year paper remained unchanged at 3.05%,” Bello said.
Quick facts: The massive disparity between the subscriptions and the offers recorded suggests investors are willing to earn a negative real return, compared to the higher risk in other assets such as stocks and real estate.
Temitope Busari CFA, a leading investment professional in a note to Nairametrics also spoke on the low-interest rates the Federal Government of Nigeria was borrowing with. She said;
“Yesterday’s Treasury bills stop rates were not far off from expectation and yields will likely continue southwards in the near to medium term.
“Additionally, we might see increased pressure on the short-end of the curve due to the dearth of instruments in the market versus excess liquidity.
“Technically, it’s more beneficial for the Government to borrow at the current levels to enhance our chances of recovery post-pandemic recession. Anecdotally speaking, the current interest rate regime is deemed punitive for savers, considering inflation is currently at 13.22%.”
Basically, the CBN sells T-bills on a bi-weekly basis to investors and it is one of the safest investments available. Interests are paid upfront, with the principal paid in full upon maturity.
Understanding Treasury Bills: Basically, when the government goes to the financial market to raise money, it can do it by issuing two types of debt instruments – treasury bills and government bonds.
Treasury bills are issued when the government needs money for a short period, while bonds are issued when it needs debt for more than, say five years. The issuance of treasury bills is also used as a mechanism to control the circulation of funds in the economy.
Treasury bills have a face value of a certain amount, which is what they are actually worth. However, they are sold for less. For example, a bill may be worth N10,000, but you would buy it for N9,600. Every bill has a specified maturity date, which is when you receive the money back.
The government then pays you the full price of the bill (in this case N10,000), giving you the opportunity to earn N400 from your investment. The amount that you earn is considered as the interest, or your payment for lending your money to the government.
The difference between the value of the bill and the amount you pay for it is called the discount rate and is set as a percentage.
Nigeria’s total public debt stock increased by N2.381 trillion in 3 months
The Debt Management Office revealed that Nigeria’s debt stock increased by N2.381 trillion.
Nigeria’s Total Public Debt Stock stood at N31.009 trillion as of June 30, 2020. The disclosure was contained in a press release by the Debt Management Office (DMO), on September 9, 2020.
The data shows that the Total Public Debt Stock which comprises the Debt Stock of the Federal Government, the 36 State Governments, and the Federal Capital Territory, increased by N2.381 trillion within 3 months when compared with the N28.628 trillion recorded on March 31, 2020.
The N2.381 trillion increase was accounted for by the $3.36 billion Budget Support Loan from the International Monetary Fund (IMF), New Domestic Borrowing to finance the Revised 2020 Appropriation Act including the issuance of the N162.557 billion Sukuk bond, and Promissory Notes issued to settle Claims of Exporters.
Backstory: It will be recalled that the 2020 Appropriation Act had to be revised due to the adverse impact of COVID-19 on the Government’s revenues, and the increased expenditure needs on health and economic stimulus amongst others.
What to expect
According to the Debt Management Office, the Public Debt Stock is expected to grow, as the balance of the New Domestic Borrowing is raised, and expected disbursement is made by the World Bank, African Development Bank, and the Islamic Development Bank, which were arranged to finance the 2020 Budget.
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Additional Promissory Notes are also expected to be issued before the year ends. This and New Borrowings by State Governments are expected to increase the Public Debt Stock.
Fidelity Bank to raise N50 billion in bonds in Q4 to refinance existing debts
The new issue will be made to redeem the existing N30 billion bond which was issued at 16.48%.
One of Nigeria’s second-tier commercial banks, Fidelity Bank Plc, has concluded plans to issue up to N50 billion ($131.3 million) in local bonds by the fourth quarter of 2020, in order to refinance existing debts as the yields drop.
The disclosure was made by the Chief Operations and Information Officer, Gbolahan Joshua, during an analyst call on Tuesday, September 8, 2020.
The crash of crude oil price globally, which was triggered by the novel coronavirus pandemic, has led to a decline in bond yields on the local debt market. This has made foreign investors to dump their local assets, leaving excess liquidity in the money market. This has also put a lot of pressure on the foreign exchange market as they look for dollars to repatriate their funds.
The Fidelity Bank top executive disclosed that the new issue will be made to redeem the existing N30 billion bond which was issued at 16.48%.
The global economic situation has seen yields in the debt market drop from as high as 18% about 3 years ago to less than 5% for the one-year treasury bill.
Fidelity Bank had revealed that it expected to see a 15% drop in profit this year when compared to 2019 result due to the coronavirus pandemic. Its profit after tax increased by 21.9% to N12 billion for the half-year 2020.
The second-tier bank also disclosed that its income declined in the second quarter due to a downward review of lending rates on loans as a result of the economic downturn.