DMO, analysts differ on challenges as patronage crashes
By Babajide Komolafe
INVESTORS appetite for the newly introduced Federal Government of Nigeria, FGN, Savings Bond (FGN-SB or Savings Bond) has eroded by 88 percent as at November, 2017. But the Debt Management Office (DMO), the issuers of the bond, and market analysts are divided over the performance.
Financial Vanguard analysis of the allotment results of the Bond from inception in March 2017 to November show persistent decline in the value of investment and number of successful applications.
But while some analysts opine that the performance of the bond has been unimpressive relative to its market potential, the DMO argues that it has succeeded in attracting new investors into the capital market.
Introduced by the DMO, the Savings Bonds was designed to offer attractive returns and low risk investment avenue to low income earners. It was also aimed at deepening the national savings culture and provide opportunity to all citizens irrespective of income level to contribute to National Development.
Though, it started off in March with two-year tenor, the DMO, since April has been issuing two tenors of the bond, 2-year and 3-year, on a monthly basis, at average interest rate (coupon) of 13.01 percent and 14.01 percent respectively.
Cumulatively, total investment in the Savings Bond fell persistently from N2.1 billion in March to N256 million in November, indicating 88 percent decline.
Similarly, the number of successful applications fell by 84 percent to 421 in November from 2,575 in March.
Furthermore, while the 2-year Savings Bond attracted N3.791 billion investment from 5,735 applications between March and November, analysis showed that the value of investment per month dropped by 98 percent to N72 million in November from N2.1 billion recorded during the first offer in March, while number of applications also fell by 98.3 percent to 43 in November from 2,575 in March.
The 3-year Savings Bond suffered a similar fate, as value of investment fell by 78 percent to N184 million in November from N869 million in April when it was introduced.
The decline in investor patronage was in spite of increase in the interest rate (coupon) on the Bond. For example, the coupon on the 2-year FGN-SB was increased steadily from 13.01 percent in March to 13.82 percent in September, before it was reduced to 12.1 percent in October.
Similarly, the coupon on the 3-year FGN-SB was steadily increased from 13.79 percent in April to 14.82 percent in September before it was reduced to 13.1 percent in October.
Analysts’ comments: Ayo Akinwunmi, Head of Research and Strategy, FSDH Merchant Bank Limited, described the performance of the Savings Bond as unimpressive, noting that the bond has the potential to attract one million subscribers on a monthly basis.
Director, Portfolio Management, DMO, Mr. Oladele Afolabi, however, pointed at the achievement of the Bond in attracting new investors into the capital market. Responding to Financial Vanguard inquiry, he stated: “While subscription volumes have varied, a key achievement is that new investors are coming to the capital market every month and this is establishing a foundation that we will continue to build on to further encourage savings by Nigerians.”
Factors against the Savings Bond
The declining investment appetite for the Savings Bond, according to analysts, is caused by a number of factors including the rally in the stock market and unattractiveness of the Bond relative to other fixed income instruments.
Highlighting these factors, Dr. Joshua Omokehinde, General Manager, Southern Operations/Business Development Strategy, TIDDO Securities Limited, cited lack of awareness. “The enlightenment campaign has completely died down,” he stressed.
Ahead of the introduction of the Bond, the DMO had carried out massive promotional campaign, which may have been responsible for the initial investor-rally on the instrument. But one month after the introduction no new promotional messages have been promoted on the Bond till date.
On other factors undermining the Savings Bond, Omokehinde stated: “First, the bond is traded at a huge discount rate to the detriment of bondholders who could not hold to maturity. Secondly, the coupon is not competitive as it lagged behind other instruments like Treasury Bills, which attracts 18 percent, and FGN Bond, which attracts 15 percent. Third, the coupon is below inflation rate of 15.91 percent. Fourth, the coupon is lower than Monetary Policy Rate (MPR) at 14 percent. Fifth, the bond is not liquid unlike listed equities. “Finally, Investors are informed and not oblivious of the better rates from alternative instruments”.
Also, Michael Famoroti, an Economist at Vetiva Capital Management Limited, attributed the decline in the patronage of the Savings Bond to weaker marketing drive after the initial issues as well as the illiquidity of the bond.
He further noted that the coupon on the Savings Bond are less attractive than prevailing fixed income securities, and have been cut on a month-on-month basis in recent times, which coincided with a strong rally in the equity market.
In an analysis of the factors responsible for the declining performance of the Savings Bond, Akinwunmi and other analysts at FSDH Merchant Bank had stated: “One of the factors we can attribute to this development is the rally that dominated the equity market in Nigeria since the introduction of the Bond in March 2017. Other factors are: the low awareness of the benefits and characteristics of the Bond; the low liquidity of the Bond at the secondary market and the high yield on the Nigerian Treasury Bill (NTB).”
Managing Director/Chief Executive, Cowry Asset Management Plc, Mr. Johnson Chukwu, however, cited the economic situation of the low income earners, who are the target of the Savings Bond, as the major factor undermining investment in the Bond.
He said: “What happened when the bond was introduced in March was that these class of investors moved their savings from banks into the Savings Bond. This accounted for the huge response to the first offer. However, their economic condition is yet to improve for them to generate new savings and thus invest more in the Savings Bond.”
The DMO allows secondary market activities for the Savings Bond so that that investors can sell the bond in case they need money before maturity. Financial Vanguard, however, reveal that while the bond is indeed listed on the Nigeria Stock Exchange, trading is however extremely low.
This, according to Famoroti of Vetiva Capital, is due to the desire of many investors to hold the product to maturity. He also blamed this on limited information on how to trade the product either as traders or investors as well as the structure of the instrument (not structured as a regular bond) which makes the pricing slightly opaque.
Confirming this, Chukwu of Cowry Asset noted that the typical investor in the Savings Bond in not really interested in speculation or capital gains. “They see investment in the Savings Bond as life savings and hence not conscious of any capital gain”, he told Financial Vanguard.
While market analysts agree that there is huge potential for the Savings Bond, they averred that realising this potential requires more efforts on the part of the DMO and other fiscal and monetary authorities, especially in the area of awareness and investor education.
According to Famoroti of Vetiva Capital, “A retail savings product has a lot of potential in Nigeria given our huge population size, limited awareness of viable savings products, and the fact that the median income is still relatively low.
“But a retail savings product would likely find success if it is able to easily penetrate the retail space – perhaps by leveraging on already established financial routes or untapped technological channels. And of course, investor education and a thriving secondary market are prerequisites for the success of any debt instrument”, he said.
“There is a need for all the stakeholders in the Bond to reignite investors’ interest in it”, stressed analysts at FSDH Merchant Bank.
Listing the strategies required to achieve this, they said: “The DMO and the stockbrokers can organize investors’ road-shows in various cities and schools across the country. This will be an avenue to directly engage retail investors on the need for them to hold the bonds in their investment portfolio. They can start with a pilot scheme in Lagos, Abuja, Port Harcourt and Kano.
“The DMO can work with some identified large corporate organizations that have large number of employees to encourage their employees to invest in the bonds on a monthly basis. The DMO can also work with government agencies to encourage civil servants to invest in the bond.”
In addition to above, Dr. Omokehinde of TIDDO Securities cited the need to reconsider the use of the Biometric Verification Number (BVN) as a requirement for investment in the Savings Bond.
Afolabi of DMO, however, said that the agency has not slowed down on awareness campaign for the Bond as claimed by the analysts.
He stated: “The FGN-SB is a new instrument in the market that is developing gradually. The DMO has continued to promote the FGNSB to increase awareness of the instrument and its benefits among the populace. Grassroots engagements are on-going as well as interactions with professional and market associations. These will continue, along with adverts and social media engagements. The effort to improve the level of financial literacy of Nigerians will also continue and we count on the media as partners in this effort.”
Johnson of Cowry Asset on his part, believes that the future prospect of the Savings Bond is tied to improvement in the nation’s macroeconomic conditions, especially as it concerns low income earners.
He stated: “We may see a reversal in the declining trend in the Savings Bond in 2018 as the economy improves and jobs are created leading to more incomes for low income earners. As households have more income to meet their needs, they will be able to set aside some for savings, and hopefully, this will lead to more investment in the Savings Bond.”