Amid Hike in Rates, PFAs Exposure in FGN Securities Up 17% to N29.66trn

Kayode Tokede

The hike in Monetary Policy Rate (MPR) by Central Bank of Nigeria (CBN) in an effort to tackle double-digit inflation is driving Pension Fund Administrators (PFAs) to gilt edge securities as their exposure to federal government papers increased by nearly 17 per cent to N29.66 trillion in the first quarter (Q1) of 2023 from N25.36 trillion reported in the first quarter of (Q1) 2022.

The federal government securities include FGN Bonds, Treasury Bills, Agency Bonds, Sukuk, and Green Bonds.

Data obtained from National Pension Commission revealed that PFAs exposure in FGN securities reached N9.48 trillion in January 2023, a 14 per cent high when compared to N8.35 trillion in January 2022.

It inched up higher in February as it increased to N9.98 trillion, a 17.3 per cent growth from N8.51 trillion reported in February 2023.

PFA exposure in FGN securities closed March at N10.2 trillion, a 20 per cent increase from N8.5 trillion in March 2022.

Since June 2022, the CBN, has raised MPR five times to 18 per cent at its last Monetary Policy Committee (MPC) meeting in a bid to curtail the steady rise in the inflation rate to 22.04   per cent in March 2023.

The MPR is the benchmark for determining the interest rate charged by banks and also influences the yields on fixed-income securities.

The hike in MPR prompted a general rise in interest rates with yields on one-month deposits rising to 7.12 per cent in Q1 2023 from 3.33per cent in Q1 2022.

Similarly, the interest rate on the federal government’s Treasury bills rose to 3.81 per cent in Q1 2023 from 1.75 per cent in Q1 of last year.

Analysts believe PFAs are taking position in FGN securities in a move to beat inflation and invest in securities that are risk-free.  

According to the Vice President, Highcap Securities, Mr. David Adnori, the rush in PFAs’ investments in FGN securities over the last three months is triggered by high interest rate regime following the increase of the MPR by the CBN to tackle rising inflation.

He said, “I had foreseen PFAs investment in FGN securities in the Q1 2023 to continue to grow but investments in stock market will be based on the yield environment, the performance of the stock market during the year and the corporate performance of listed companies for 2022 financial year.”

On his own part, Managing Director/CEO of APT Securities and Funds Limited, Mr. Garba Kurfi, expressed that, “The Investment in FGN Bonds by PFAs is necessary because of its availability and risk-free when compared with the other securities. Most aged people prefer their money to be invested in less risky assets. There are no available instruments to invest like bonds with high interest rates.

“There is a need for more financial products that can give alternatives and provide high returns like Bonds in the financial markets in order to attract pension funds investments.”

Meanwhile, further findings by THISDAY revealed that PFAs exposure in stock market closed Q1 2023 at N3.1 trillion, an increase of 7.4 per cent from N2.88 trillion in Q1 2022.

The stock market in Q1 2023 added N2.44 trillion in market capitalisation to close on March 31, 2023 at N29.544 trillion from N27.915 trillion at which it opened for trading activities on January 3, 2023 but dropped by N857billion in March from N30.401trillion to N29.544trillion it closed for trading.

The overall market performance measure NGX All-Share Index, which tracks the general market movement of all listed equities on the Exchange, rose by 5.11 per cent to close at 54,232.34 basis points in Q1 2023 from 51,595.66 basis points it closed on December 30, 2022.

Adonri acknowledged the PFAs’ role in lifting the stock market in Q1 2023, stressing that some high-network investors’ opted to invest in the stock market.

He added, “The only thing that drives stock market performance so far in Q1 2023 has been the keen interest of PFAs investment in some fundamental stocks. Otherwise, the political tension, the Naira redesign policy of CBN, hike in the inflation rate, among others discouraged investment in the stock market. The Nigeria macroeconomy was in total disarray in the period under review.”

PFAs continued to benefit from the federal government borrowing to bridge 2022 budget financing.

Analysts at Vetiva research in a report titled, “Nigeria H2 2022 outlook: A strange labyrinth,” said the government expected to increase borrowings, and the global economy tightening over the Russia-Ukraine war is to drive FGN bonds rates higher.

They predicted an increase in government borrowings in the same period as the FGN gears up for the 2023 Presidential Elections.

“This should lead to an improvement in liquidity in the fixed income space, following an easing of monthly maturities, eased from N893.2 billion in Q1 2022 to c.N354.3 billion in Q2 2022.

“The latest bond offer calendar for Q2 2022 shows that the government is expected to increase its borrowings by 50per cent, and barring an improvement in oil revenue, we expect the government to borrow aggressively in H2 2022 as it seeks to meet its financing needs. The expansion of the budget deficit by N965 billion should further boost liquidity in the bonds space, as the country is expected to tap the domestic market to fill the gap.

“Given that the government expects to tap the domestic market to meet its funding needs as well as raise capital for its infrastructure projects ahead of the 2023 elections, we expect this to result in an uptick in yields. Furthermore, the tightening of monetary conditions around the world will add further pressure on policymakers to raise rates, in a bid to retain foreign investors in the bonds market.”