Subscription down 62 %

By Peter Egwuatu

The Federal Government’s plan of wooing retail investors in the capit market through FGN Savings Bond seems not to be materialising as both value and volume of subscription to the investment window plunged 50 per cent and 62.4 per cent respectively in the year ended December 2018.

Data from the Debt Management Office, DMO, showed that the value of FGN Savings Bond declined by 50 per cent to N3.6 billion from N7.2 billion recorded in the preceding year, 2017, a situation attributable to dwindling purchasing power and more attractive return on investment in competing asset classes.

Also, the number of subscribers for the Savings Bond crashed by 62.4 per cent to 3,702 at the end of  December 2018, from 9,846 in the year 2017.

FG allots N438m to 469 savings bond subscribers in June – DMO(Opens in a new browser tab)

Capital market operators and stakeholders have attributed the negative turn of fortune barely one year after launch of the instrument to low purchasing power, uncompetitive yields, amongst other market circumstances.

Financial Vanguard’s analysis reveals that allotment results of the Bond from inception in March 2017 to December 2018 show decline in the value of investment and number of successful applications.

The FGN Savings Bond 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 2017, with two-year tenor, the Debt Management Office, DMO, since April of that year, 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 per cent and 14.01 per cent respectively. However, the rate as at the end of December 2018 had fallen to 12.402 per cent and 13.402 per cent respectively.

Performance analysis

Further highlighting the disappointing performance, while the 2-year Savings Bond attracted N0.661 billion proceeds at the end of December 2018, the 2017 subscription value stood at N3.841billion, representing a decline of 82.8 per cent or N3.180 billion. Similarly, the number of subscription for the two tenors dropped to 1,414 at the end of 2018, representing a decline by 4,483 or 76.02 per cent from 5,897 recorded in 2017.

Analysis of the 3-year tenor Savings Bond in subscription value in 2018 stood at N2.892 billion, representing a drop by 39.3 percent or N1.319 billion from 3.358 billion in 2017. Similarly, the number of subscription for the 3-year tenor bond at the end of December 2018 stood at 3949, representing a drop of 72.6 per cent or 1661 from 2288 recorded in 2017.

At the end of December 2018, both value and number of subscription for 3-year tenor were over that of 2-year tenor. But in 2017, the reverse was the case as both subscription value and number of subscribers for the 2-year tenor bonds were higher than that of 3-year tenor bond.

Investment analysts give insight

Commenting, Managing Director/Chief Executive, Cowry Asset Management Plc, Mr. Johnson Chukwu, 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 2017 was that this 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 bond is listed on the Nigeria Stock Exchange but trading is, however, extremely low. This is due to the desire of many investors to hold the product to maturity.”

Chukwu 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 which was not like a regular bond, a situation which also makes the pricing opaque.

Commenting also, the Head of Research & Investment, FSL Securities Limited, Victor Chiazor, said: “The FGN Savings Bond came up as an alternative investment at a time the government needed funds, and the capital market needed a boost in business activities as the stock market was significantly bearish. At the time the rates were much higher and investors were attracted to these high rates.

‘‘However, in 2018 we have seen rates drop from as high as 14 per cent offered in 2017 to as low as 11 per cent in 2018. This decline has forced investors to search for other higher yielding investments or return.”

Commenting as well, 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.

The Managing Director/CEO, APT Securities & Funds Limited, Mallam, Garba Kurfi, said: “The Savings Bonds lack machineries for advertising the product to bring understanding to common man, and the brokers commission is not adequate compared with equity.

‘‘The interest margin is not adequate to attract institutional investors and foreign investors, coupled with the restrictive he maximum limit of N50million per person or institutions.’’

The Executive Vice Chairman High Cap Securities Limited, David Adonri, said: ‘‘FGN Savings Bond is still attractive but purchasing power is low. Having exited the recession, the tendency for financial assets to start migrating to equity is high. ‘‘Also, the money market operators have devised means of bunching retail investors to invest in treasury bills contrary to regulations.”

Managing Director/CEO, Sofunix Investment & Communications, Mr. Sola Oni, said: “The shortfall recorded in the Federal Government’s bond auction is an indication of investors’ apathy. We must appreciate that the philosophy of the FGN Savings Bond transcends the economics of capital mobilization. The bond offering is targeted at low income earners as a way of encouraging savings culture.

‘‘At the commencement of the programme, there was intensive publicity and this enhanced patronage. However, issues such as uncompetitive yields, compared to other asset classes in fixed income securities became an obstacle. For instance, the yield on Treasury Bill became more profitable.

“However, weighed against inflation rate and Monetary Policy Rate (MPR), competition from the equity market, illiquidity of the bond on the secondary market, perception of many low income earners that such an investment is buy and hold and paucity of fund for sustained investment, the FBN Savings Bond no longer appears attractive to existing and potential investors.”

Policy uncertainty is part of the problem – Shareholders

Reacting as well, the spokesperson for Independent Shareholders Association of Nigeria, ISAN, Mr. Moses Igbrude, said: “Investment is all about confidence and level of safety. All good investors invest when they consider the level of risk involved and the confidence that their investments will not be in jeopardy.

‘‘Low purchasing power of shareholders is one reason among others that makes investment in FGN Savings Bond to decline in the year ended December 2018 when compared to 2017 and the uncertainty as regards the direction of the economy following the non-appointment of cabinet members by President Muhammadu Buhari  have all led investments to nosedive; so investors are now very cautious of where they put their funds and it is also an indication that most investors are moving their money to a more stable and safe environment.”