As DMO issues N100bn FGN bond

By Babajide Komolafe

CREDIT to the economy rose to an all time high above the N30 trillion mark in February 2019, driven by strong growth in credit to the private sector during the month.

The Central Bank of Nigeria, CBN, disclosed this in its Depository Corporation survey report for February released last week. The report showed that credit to the economy grew by N1.9 trillion or 6.35 percent to N30.5 trillion in February from N28.64 trillion in January.

The growth was driven by credit to the private sector which grew by N1.23 trillion or 2.2 percent to N24.16 trillion in February. The 2.2 percent growth represents a slight improvement when compared to the 1.96 percent growth recorded in 2018.

The report also revealed that credit to the government grew by N660 billion or 11.42 percent in February to N6.35 trillion in February from N5.69 trillion in January.

The report, however, showed that banks recorded 2.2 percent or N210 billion decline in current (demand) deposit which fell to N9.19 trillion in February from N9.4 trillion in January.

According to the report, “Broad Money supply recorded 3.22 percent month-on-month (m-o-m) increase to N34.79 trillion in February 2019, from N33.72 trillion in January 2019.

“This resulted from a 11.80 percent m-o-m rise in Net Domestic Assets (NDA) to N17.77 trillion accompanied by a decrease of 4.44 percent m-o-m in Net Foreign Assets (NFA) to N17.02 trillion.

“On domestic asset creation, the increase in NDA resulted from a m-o-m rise of 6.57 percent in Net Domestic Credit (NDC) to N30.52 trillion, but was offset by a 0.04 percent    m-o-m rise in Other Liabilities (net) to N12.74 trillion.

“Further breakdown of the NDC showed a 11.42 percent m-o-m increase in Credit to the Government to N6.35 trillion and an increase of 5.37 percent in Credit to the Private sector to N24.16 trillion.

“On the liabilities side, 3.22 percent m-o-m rise in Broad Money Supply was chiefly driven by 18.83 percent m-o-m increase in treasury bills held by money holding sector to N8.23 trillion but was offset by 0.98 percent m-o-m decrease in Narrow Money to N11.03 trillion (as Demand Deposits which fell by 2.22 percent to N9.19 trillion offset the effect of currency outside banks which rose by 5.70 percent to N1.84 trillion) and a 0.74 percent m-o-m moderation in Quasi Money (near maturing short term financial instruments) to N15.50 trillion.

“Reserve Money (Base Money) decreased m-o-m by 4.30 percent to N7.17 trillion as Bank reserves declined m-o-m by 8.47 percent to N4.58 trillion despite a 4.75 percent m-o-m rise in currency in circulation to N4.46 trillion.”

DMO to offer N100bn FGN bond

Meanwhile the Debt Management Office (DMO) will issue FGN bonds worth N100 billion with analysts projecting oversubscription and further reduction in the stop rate.

The bond offer comprises N40 billion worth of 12.75% FGN APR 2023 (5-Yr Re-opening), N40 billion worth of FGN APR 2029 (10-Yr New Issue) and N20 billion worth of FGN APR 2049 (30-Yr Re-opening).

Projecting, analysts at Lagos based investment firm, Cowry Asset Management Limited said, “We expect the bonds to be issued at lower stop rates amid demand pressure.”

Recall the FGN bond auction held by DMO in March recorded 67 percent oversubscription. While the DMO offered N100 billion worth of bonds, investors’ demand or total subscription stood at N240.6 billion. In response to the huge demand,  the DMO reduced the stop rates by 125 basis points (bps) from its previous auction levels down to 13.50 percent across all tenors offered.

Consequently, the five-year, seven-year and 10-year bonds were auctioned at lower stop rates of 13.50 percent, down from 14.52 percent, 13.50 percent down from 14.80 percent, and 13.50 percent down from14.94 percent respectively.

Cost of funds to rise

The FGN bond offer is, however, expected to trigger rise in cost funds in the interbank money market this week.

Last week cost of funds dropped sharply following inflow of N165.91 billion from matured treasury bills (TBs), which cancelled out the impact of outflow of N58.49 billion through primary market TBs sold by the Central Bank of Nigeria (CBN).

As a result average short term cost of funds dropped by 10.5 bpts,with interest rate on Collateralised (Open Buy Back, OBB) lending falling by 10.43 bpts to 9.86 percent last week from 20.29 percent the previous week. Similarly, interest rate on Overnight lending dropped by 10.57 bpts to 10.57 percent last week from 21.57 percent the previous week.

Analysts at Cowry Assets, however, project that this trend will be reversed this week.

“In the new week, T-bills worth N46.25 billion will mature via the secondary market. However, with the DMO expected to issue N100 billion worth of debts, we expect Nigeria Interbank Offered Rate (NIBOR) to trend upwards”, they said.