Budget Deficit: FG Raises N4.46trn Bonds in Eight Months as Rate Hits 15.85%

Kayode Tokede

As the federal government intensified borrowing from local investors to bridge the 2023 budget deficit, the government through the Debt Management Office (DMO) raised a total of N4.46 trillion from the bond market in eight months of 2023 as the interest rate on 30-year FGN bond increased to 15.85 per cent in August 2023 from 14.3 per cent in July 2023. 

According to TTHISDAY findings, the Debt Management Office (DMO) received N5.42 trillion total subscription as against N2.88 trillion offered during the period amid monetary policy tightening by the Central Bank of Nigeria (CBN) and global uncertainties.

Analysis of bond market activity during the period revealed that FGN bonds recorded 53 per cent oversubscription as interest rates continued on a steady trajectory.

The DMO has conducted four auctions in 2023, which were oversubscribed despite hike in inflation rate and investors’ diversification into the stock market.  

While the information on the buyers of corporate bonds are publicly disclosed, other publicly available reports indicate Pension Fund Administrators (PFA), asset managers, banks, and institutional/foreign investors are among the largest buyers of FGN Bonds.

The auction results released by DMO indicate strong investors’ demand for FGN bonds, as the total amount allotted exceeded the total amount offered. It also suggests investor confidence in the Nigerian economy and the ability of the government to meet its debt obligations.

A breakdown showed that in the first quarter (Q1) of 2023, total subscription to FGN bond stood at N2.61trillion while the DMO allotted N1.996 trillion out of the N1.080 trillion offered to investing public.

In the second quarter of 2023, investors were also offered N1.080 trillion FGN bond, it witnessed N2.503 trillion subscriptions. The DMO eventually allotted N2.23trillion.

However, July 2023 auction revealed that subscriptions stood at N945.14billion as against the N360billion offered. The DMO allotted N657.84billion.

At the just concluded FGN bond auction in August, the four instruments were 14.55 per cent April 2029 FGN bond; 14.70 per cent June 2033 FGN bond; 15.45 per cent June 2038 FGN bond; and 15.70 per cent June 2053 FGN bond. They were valued at N90 billion each, making a total offer of N360 billion.

In spite of current market conditions, the auction received a total subscription of N312.56 billion and amount allotted to successful bidders for the four instruments was N230.26 billion.

Investors’ appetite for the 15.70 June 2053 (30-year bond) remained strong, with a bid-to-cover ratio of 2.71 times.

Allotments were made at 13.85 per cent for the 14.55 per cent April 2029 instrument and 15.00 per cent for the 14.70 per cent June 2033 instrument.

Also, “15.20 per cent was for the 15.45 per cent June 2038 instrument and 15.85 per cent for the 15.70 per cent June 2053 instrument,” the DMO said.

The federal government had proposed to borrow over N11 trillion to finance the proposed 2023 budget deficit.

Findings by THISDAY revealed that FGN Bonds auctioned were re-openings with rates below the inflation rate.

The debt office in 2023 maintained four tenor bond auctions between January and June and each FGN bonds offers were oversubscribed.

Meanwhile, finance experts have attributed the strong demand for FGN bonds to attractive yields, which offer investors high returns on their investments.

They added that the oversubscription also revealed that investors have confidence in the government’s ability to meet its debt obligations.

The appetite for FGN bonds indicates that PFAs, and Nigerian investors prefer investment instruments with less volatility that assures them of their capital returns albeit with low yield on investment.

But, in recent years, Nigeria’s rising debt profile has been a topic of concern, as Vice President, Highcap Securities Limited, Mr. David Adnori warned that the country’s debt levels are unsustainable.

DMO stated in January that Nigeria’s public debt could rise to N77 trillion if the country’s “ways and means” are securitized.

“Ways and means” refer to the CBN’s lending to the federal government. The DMO said that the securitization of ways and means” is not unusual and is a common practice in many countries, but it is not a decision that can be made by the DMO alone.

Adnori expressed concerns that Nigeria’s rising debt levels could become unsustainable if not managed properly.

The government has argued that borrowing is necessary to finance critical infrastructure projects and stimulate economic growth.

The Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Dr Muda Yusuf,  who is also an economist said the FG had notified the general public of borrowing more in 2023.

According to him, “With all the volatility and foreign exchange issues, it makes sense to borrow at the domestic market rather than borrowing from the international market. It is all a reflection of our macro economy environment challenges and weak fiscal policy of the government. All this borrowing also is a reflection of the weak financial position of the government and it will continue like that.”

He noted that the oversubscription to FGN bond is a lucrative investment, stressing that the low risk involved attracted investors.

He added, “Anything sovereign has the lowest risk and nothing will go wrong with it except the country is collapsing completely. All over the world, sovereign bonds have the lowest risk and secondly it is an investment outlet for investors to invest their money.”

On his part, the Chief operating officer of InvestData Consulting Limited, Mr. Ambrose Omordion, said,  “We know that previous government borrowing was high. Excessive borrowing by the previous government at the expense of the private sector, which is the engine room of the economy brings to question the soundness of their economic strategy.

“The careless use of debt as a financing tool is fraught with calamitous dangers. Even more disheartening is when the debts are principally used to finance consumption or to unwisely finance few secondary infrastructures (Roads and Rail).

“These will neither enhance the productive momentum of Nigeria’s light industries nor make the economy self-reliant. The disorderly growth of the economy the last administration pursued can only mislead the country into an abyss if public borrowing is not curtailed to lower cost of funds so that production will be competitive.”