The recently offered local dollar bond has gained significant attention and optimism in the last couple of days. The issue which is expected to be oversubscribed is a win-win for the issuer and investor as the Federal Government will benefit from low-cost borrowings and investors will enjoy decent returns in hard currency. The bonds are priced at 9.75% (a 25-basis points premium over the 8.375% coupon on the March 2029 Nigerian Eurobond).
The recent rise in Nigeria’s GDP by 3.19% is a positive sign indicative that the economy is gradually moving in the right direction. The growth suggests that the country is experiencing some level of economic expansion, which should in theory benefit the population and lead to improvements in living standards. However, despite this optimistic indicator, the average Nigerian is yet to feel its impact as the cost of goods and services continues to rise.
With two OMO auctions conducted simultaneously last week, liquidity remained long throughout the week. Opening at over N730 billion on Monday, the week closed with liquidity above N624 billion. At the NAFEM window, the Naira traded as high as N1,615.00 on Wednesday, as low as N1,499.00 on Thursday, and closed the week at N1,598.56.
On Monday, the Central Bank of Nigeria (CBN) released a circular to authorised dealers regarding the operational functioning of the Standing Deposit Facility (SDF), thereby signaling a significant policy shift. The circular announced that the SDF for Commercial and Merchant Banks would be adjusted to 25.75% for deposits up to N3 billion, with a lower rate of 19.00% applied to excess deposits above this threshold. Analysts remain speculative about the move, particularly given its timing, as it occurred on the same day as an Open Market Operation (OMO) auction. The timing and substance of this circular have sparked considerable discussion in financial circles.
The decision to set such distinct rates for the SDF is indicative of the CBN’s intent to carefully manage liquidity in the banking sector. By offering a higher rate for deposits up to N3 billion, the CBN is likely attempting to encourage banks to keep their excess liquidity within manageable levels, thereby preventing an over-accumulation of funds that could distort money market rates. The lower rate for deposits above N3 billion suggests a desire to disincentivise banks from holding onto excessive liquidity, encouraging them instead to lend to the real economy or to invest in other financial instruments. The policy shift remains surprising to some analysts, particularly when viewed in the context of the OMO auction held on the same day.
Unlike the last two auctions which recorded no sale across all the tenors, in the week under review, the CBN conducted two back-to-back OMO auctions. The CBN issued over N869 billion at the close of the first OMO auction where the lowest tenor closed at 18.4890%, the mid-tenor at 19.2880%, and the highest tenor at 21.8900%. The second auction of the week only recorded sales for the highest tenor, at a closing rate of 21.8700%, indicating a slight decline of 2 basis points from the previous close.
TENOR | AUCTION DATE | OFFER (₦’B) | BIDS (₦’B) | RANGE OF BIDS (%) | STOP RATES (%) | PREVIOUS STOP RATES (%) | TOTAL SALE (₦’B) |
92-DAY | 26-08-2024 | 75.00 | 5.00 | 18.4890-18.4890 | 18.4890 | NIL | 5.00 |
176-DAY | 26-08-2024 | 75.00 | 12.00 | 19.2880-20.5500 | 19.2880 | NIL | 10.00 |
358-DAY | 26-08-2024 | 350.00 | 874.46 | 20.7200-23.4300 | 21.8900 | NIL | 854.46 |
TENOR | AUCTION DATE | OFFER (₦’B) | BIDS (₦’B) | RANGE OF BIDS (%) | STOP RATES (%) | PREVIOUS STOP RATES (%) | TOTAL SALE (₦’B) |
91-DAY | 27-08-2024 | 75.00 | NIL | NIL | NIL | NIL | NIL |
175-DAY | 27-08-2024 | 75.00 | 2.00 | 19.9000-19.9000 | NIL | NIL | NIL |
364-DAY | 27-08-2024 | 350.00 | 763.00 | 21.3800-23.4500 | 21.8700 | NIL | 758.00 |
The recent OMO auctions marked a departure from previous trends, as the last OMO auction in June only offered sales for the 364-day benchmark, with bid rates reaching as high as 2689%. This pattern of focusing on the highest tenor and the recent steady decline in auction rates suggests that the CBN may be attempting to moderate the upward pressure on interest rates. By adjusting the SDF rates and conducting these OMO auctions, the CBN appears to carefully balance the need to manage liquidity with the goal of stabilising interest rates in the money market. In weeks to come, a big test for this strategy will be how much the CBN leaves as liquidity in the market.
Furthermore, the growing interest in Dollar bonds presents promising opportunities for investors and the economy as it offers an opportunity to hedge against currency risk and provides access to international capital markets. However, careful management is also required to mitigate potential risks associated with foreign currency exposure and debt sustainability. For Nigerians, this trend could lead to a more robust financial market, increased investment opportunities, and potentially stronger economic growth.
Market participants are closely monitoring the outcome of the Domestic FGN US Dollar Bond, as it represents a significant development in Nigeria’s financial landscape. The Federal Government announced the issuance of this bond weeks before its opening date on August 19, 2024, with a closing date set for August 30, 2024. Settlement is scheduled for September 6, 2024, adding to the anticipation among investors. This bond, with a total offer of US$500 million, carries a 5-year tenor and a coupon rate of 9.75% per annum, which will be paid semi-annually, maturing in 2029. The introduction of this bond is a strategic move by the Nigerian government to attract foreign and domestic investors by offering a relatively high yield in a stable currency. A 9.75% coupon rate in US dollars is particularly appealing in the current global economic environment especially as the US Federal Reserve is expected to start cutting interest rates in the US.
The success of the Domestic FGN US Dollar bond issuance could also have broader implications for Nigeria’s financial market. Where the bond is well-received and oversubscribed, it could signal strong investor confidence in Nigeria’s economic prospects
and fiscal management. This could pave the way for future issuances, potentially creating a more robust market for government-issued bonds denominated in foreign currencies. Such a development would enhance Nigeria’s integration into global financial markets and provide the government with a more diversified funding base. The question, however, is whether the DMO will be taking this approach instead of issuances in the international market.
For the average Nigerian, the impact of the Domestic FGN US Dollar Bond may be less direct, but significant irrespective. Successful issuance and settlement could lead to increased foreign exchange reserves and assist with stabilizing the Naira, which could, in turn, reduce inflationary pressures and improve the cost of living.
According to a report from the National Bureau of Statistics (NBS), Nigeria’s Gross Domestic Product (GDP) recorded a notable year-on-year growth of 3.19% during the second quarter of 2024. This performance marks a significant improvement from the 2.51% growth rate achieved in the same quarter in 2023, in addition to the 2.98% growth rate recorded in the first quarter of 2024. The increase in GDP is a positive signal for the Nigerian economy, reflecting a recovery momentum that could have wide-ranging implications for both market participants and the general population.
Statistically, the key driver of this GDP growth in Q2 2024 was the Services sector, which expanded by 3.79% and contributed a substantial 58.76% to the total GDP. This sector, encompassing activities such as telecommunications, finance, trade, and real estate, has become increasingly dominant in Nigeria’s economic landscape. While this is believed to be a step in the right direction, its impact on the average Nigerian has been limited due to increased living costs and structural inefficiencies.
The International Monetary Fund (IMF) has weighed in, offering a broader perspective of Nigeria’s economic potential. According to the IMF, Nigeria’s economy could grow at an even more impressive rate of 5% or higher where the country successfully removes 25% of the bottlenecks that currently hinder governance and business operations. These bottlenecks include inefficiencies in government processes, regulatory barriers, and other structural issues that make it difficult for businesses to thrive and for economic growth to be fully realized.
The Federal Government seems to be making strategic moves to reduce its cost of borrowing by switching focus from local currency to foreign currency debt. Although this has brought about a gradual reduction in fixed income yields, the exchange rate remains somewhat elevated. As the markets anticipate the MPC decision later this month, we are of the opinion that a policy reversal at this juncture may be premature in view of broad considerations. The GDP growth in Q2 2024 reflects a positive trajectory for Nigeria’s economy and a potentially lucrative environment for the fixed-income market as this growth presents opportunities for strategic investments in emerging sectors. With the economy showing growth, there would be increased revenue from taxes and other sources. This could reduce the need for aggressive borrowing, potentially leading to a more stable supply of government bonds.
We expect bearish markets across as the world anticipates a cease-fire deal between Israel and Hamas. Oil prices (which are already near 6-month lows) should inch lower once a deal is agreed to.
