Financial Intersection: Debt Repayments & Naira Gains

As April ushers in the beginning of Q2 2024, it also marks the commencement of the first FGN bonds auction for the quarter. The FGN bond auction for the month of April featured a new issue of a 5-year bond, in addition to re-issues of the 7-year and 10-year bonds. The opening rate for the 29s (new 5-year bond) was 19.3000%, compared to 18.5000% and 19.0000% for the 31s and 34s, respectively, at their first issue. At the auction, the stop rate declined by 25bps (1.25%) for the 31s to close at 19.75% and 45bps (2.2%) for the 34s, which closed at 20%.

It is worth recalling that the auction held in Q1, on March 18th, 2024, featured the 27s, 31s, and 34s bond maturities, where the 27s were exchanged for a new 29s maturity. However, in the same period, Bloomberg reported a surprise auction conducted by the DMO, introducing new issues for the 26s, 27s, and 28s. The reissuance figures indicated a significant uptick; ₦47.886 billion was allotted for the 31s in March 2024, while ₦85.050 billion was sold in April 2024. Similarly, the re-issuance of the 34s saw an increase from ₦275.850 billion in the last quarter to ₦461.848 billion in Q2 2024, signalling an apparent rise for both tenors.

Undoubtedly, Nigeria is confronted with substantial demands for servicing its external debt, which cuts across payments for Eurobonds and several international financial commitments. It is believed that the impact of meeting these repayment obligations would cause a strain on the country’s reserves.

Although data on Nigeria’s external debt servicing in Q1 2024 is unavailable, it is reported that Nigeria allocated approximately half of its dollar payments to service external debts between January and October 2023. This allocation shows the weight of foreign debt on the nation’s economy.

The CBN Governor, Mr Olayemi Cardoso, has stated that the decline in foreign exchange reserves primarily stems from meeting debt repayments and fulfilling standard financial obligations. He clarified that there are no intentions by the apex bank to utilise the country’s external reserves to defend the naira, as such an approach would be counterproductive. The CBN’s stance aligns with the implementation of a ‘willing buyer, willing seller policy,’ indicating a commitment to market-driven exchange rate mechanisms.

At the just concluded Global Trade Review West Africa, experts have shed light on why the recent strengthening of the naira in the FX market has not translated into lower prices of goods and services nationwide. The President of the Association of Corporate Treasurers of Nigeria (ACTN), Yinka Ogunnubi, emphasised that despite the gains, the exchange rate volatility has sparked concerns among producers about the sustainability of the naira. Specifically, Mr Ogunnubi illustrated the effect on long-term planning, which the rapid appreciation of the naira encourages. Mr Ogunnubi further highlighted that many companies are expected to incur significant FX losses in Q1 2024 due to the volatility in the FX market. Additionally, he urged the CBN to take steps to ensure the sustainability of the naira in the FX market, thereby instilling confidence among investors and producers for effective long-term planning and ultimately leading to price reductions.

Contributing to the discussion, Mopejuola Faloye, Group Treasury Manager at Oando, emphasised the significance of the actions and regulations that the CBN will implement during the forthcoming six months while working to stabilise the naira, actions which will be crucial for investors and businesses alike.