Monday, August 06, 2012 11:00 PM / DLM Research

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Analysis

During the review week, secondary market activities for FGN bonds were influenced by the release of the CBN’s guidelines for accessing the lending window and repo transactions. Going forward, authorised dealers in the domestic money market are not allowed to access the WDAS window throughout the term of a repo agreement with the CBN. This is in addition to the existing guideline that disallows accessing the WDAS and the standard lending facility (SLF) on the same day. The new guideline is expected to further strengthen the current monetary policy stance; especially with respect to the cash reserve ratio (CRR) and net forex open position.

In the course of the week, we observed adjustments in the market in reaction to the outcome of the last MPC meeting. Earlier on in the week, the OTC market witnessed high demand from portfolio managers and institutional investors for the ‘on-the-run’ bonds, and the consequent decline in yields. The trend however reversed later in the week following the onset of tight liquidity levels, which led to profit-taking. We equally believe this is not unconnected with banks’ repositioning to comply with the new 12% CRR requirement recently stipulated by the MPC.  

In view of its drive to reduce domestic borrowing, Nigeria may issue a second eurobond of c.US$600 million. At present, Nigeria seeks to reduce domestic borrowing to c.N500 billion in the medium term, from c.N744 billion in 2012. In addition, the eurobond is expected to significantly reduce the country’s high debt service payments in view of the prevailing high interest rates in Nigeria, never mind the crowding out of the private sector in the domestic bond market. Nigeria’s first eurobond ($500mn), which was issued in January 2011, recorded a high subscription level of c.250%. As at Friday, August 3, the eurobond was trading at 110.89 with a yield of 5.15%. (fig. 3&6)

We however argue against this new direction. Why? In our view, there is a strong possibility that Nigeria may revert to the high levels of international debt that saw the country paying out significant portions of the annual national budget in debt servicing, prior to the debt forgiveness programme executed by the Obasanjo administration between 2004 and 2006. In our analysis, Nigeria’s external debt service payments were c.2.6% of domestic output between 2004 and 2006; this figure has dropped to c.0.2% since 2007 as a result of the significant reduction in external debt.  

Rather, we argue for a concerted approach to Nigeria’s economic management by both fiscal and monetary authorities. On the fiscal side, we would like to see a wider tax net with a view to raising more revenues and significantly diluting the contribution from the oil sector to total revenues to government. This is in addition to the current widespread knowledge of the need to diversify the domestic economy from being a mono-product economy. We would equally like to see an aggressive drive for Nigeria to have a budget surplus in the medium term as a result of the current fiscal consolidation effort. These should then be complemented with single-digit interest rate levels on the monetary side with the preoccupation being to stimulate domestic production, output and real growth with a positive impact on individuals, households and firms.
 

In the week ahead, we expect a treasury bill auction of c.N142.06 billion while treasury bills worth the same amount will mature during the week. Also expected is the maturity of OMO bills worth c.N81.54 billion. In our opinion and in view of the events of the week, the market is expected to remain flat in the week ahead.

LAST WEEK: The Nigerian Bond Watch @ 300712 – DLM

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