…FG’s domestic borrowings rise 18% to N5.6 trn

By Babajide Komolafe

Domestic investors are concentrating more on short-term lending to the Federal Government in anticipation of uncertainties and outcome of the 2023 general election.

Indications to this emerged from results of the domestic borrowing activities of the FG in the nine months period to September 2021, which showed increased preference for short term lending to the FG through its Nigeria Treasury Bills (NTBs) debt instrument.

Meanwhile, the FG, in apparent reflection of its efforts to finance the Budget 2021 deficit of N5.62 trillion, increased borrowing from local investors by 18 per cent in nine months to N5.6 trillion as at September 30, 2021 from N4.6 trillion in the corresponding period in 2020.

Dominance of Short-Term Lending

Unlike FGN bonds which are debt instruments with a maturity of more than one year, NTBs are debt instruments with a maturity of less than one year.

Indicating rising preference for short term lending to the FG, NTBs accounted for 63 per cent or N3.44 trillion of the domestic borrowing in the nine months ending September 2021 (9MTH-21).

On the other hand, FGN bonds, and FGN savings bonds accounted for 36 per cent or N2.02 trillion and 0.1 per cent or N7.4 billion respectively.

Also, FG’s borrowing through NTBs recorded a higher increase of 21 per cent in the 9MTHs-21 as against the 13 per cent increase recorded by FGN bonds during the same period.

According to investment analysts, the increased preference for short-term lending to  the FG, among other factors, indicates anxieties among investors over uncertainties relating to electioneering and the outcome of the 2023 general elections.

The analysts, however, differed on the possibility of the18 percent increase in FG’s domestic borrowing in 9MTh-21 crowding out the private sector from the debt market. While some opined that credit to the sector is equally growing at a healthy rate, others said that the upward trend in government borrowing will increase the cost of credit to private borrowers.

Higher Interest Rates

Financial Vanguard analysis showed that the increased FG borrowing in 9MTH-21 was significantly driven by higher interest rates on the debt instruments, which increased their attractiveness to investors.

For example, the average stop rate on NTBs rose by 3,600 basis points, bpts to 4.5 percent at the end of September from 0.9 percent at the end of December last year, while the average stop rate on FGN bonds rose by 5,500 bpts to 12.45 percent from 6.95 percent during the same period.

The higher interest rate of the instruments were part of measures to ensure that the FG can borrow enough to meet its domestic borrowing target of N3 billion this year.

Consequently, the investors’ demand exceeded the amount of NTBs and FGN bonds offered for sale by the FG during the nine months period under review.

For example, the NTB auctions conducted by the Central Bank of Nigeria, CBN, in 9MTH-21 recorded 100 percent over subscription, while the FGN bonds auction conducted by the Debt Management Office, DMO, during the same period also recorded 100 percent over subscription.

NTBs Auctions

Total NTBs (bills) sold by the CBN in 9MTH-21 rose, YoY, by 21 percent to N3.44 trillion from N2.84 trillion in 9MTH-20.

Analysis of the NTB auction results showed that the CBN increased the amount of bills offered by 25 percent, YoY, to N3.1 trillion in 9MTH-21 from N2.47 trillion in 9MTH-20, the amount of bills demanded by investors (total public subscription ) rose by 30 percent, YoY, to N6.52 trillion in 9MTH-21 from N5 trillion in MTH-20.

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However, the over subscription to the bills offered fell to 100 percent in 9MTH-21 from 110 percent in 9MTH-20.

FGN Bonds

Total FGN bonds sold in 9MTH-21 rose, YoY, by 13 percent to N2.02 trillion from N1.78 trillion in 9-MTH-20.

Analysis of the bond auction results showed that while the DMO increased the amount of bonds offered by 30 percent, YoY, to N1.35 trillion in 9MTH-21 from N1.04 trillion in 9MTH-20, the amount of bonds demanded by investors (total public subscription ) fell by 21 percent, YoY, to N2.77 trillion in 9MTH-21 from N3.52 trillion in 9MTH-20.

As a result, over subscription to the bond offerings fell to 105 percent in 9MTH-21 from 250 percent in 9MTH-20.

Savings Bonds

The savings bonds sold by the DMO in 9MTH-21 rose sharply by 137 percent to N7.36 billion from N3.1 billion in 9MTH-20.

Analysts comments

According to investment analysts, the increased FG borrowing from local investors, which is expected to continue next year, in view of the higher deficit of N6.25 in the proposed Budget 2022, is good for investors, especially when juxtaposed with the higher interest rate offered on NTBs and FGN bonds.

Speaking to Financial Vanguard, Olaolu Boboye, analyst with CardinalStone Partners Limited,said: “The increased government borrowing may lead to higher yields which are likely to be positive for domestic investors. In our view, the increase in yields could ease the inflation burden on investment return.”

Tunde Abidoye, analyst with FBNQuest Capital, however, noted that the higher interest rates (yield) might be harmful to bond investors. He said: “Typically, higher yields are good for investors. But again, it depends on where you are positioned. If you are a holder of bonds, then rising yields will reduce the value of your holdings.”

On his part, Ibukunoluwa Omoyeni, Economist with Vetiva Capital Management Limited, averred that the increase in interest rates on FG’s debt securities has not been commensurate with the increase in borrowing and the inflation rate.

He said: “If increased government borrowing implies that there will be an uptrend in yields, this can only be positive for investors and would lead to improved demand. However, we must keep in mind that, despite high borrowing levels and inflation, rates have been artificially kept low throughout the year. This begs the question, even if local borrowing increases, is there any guarantee that yields won’t be held at or around current levels? That said, given the possibility for higher returns, the expected increase in borrowing is positive for local investors.”

Impact on credit to private sector

Abidoye of FBNQuest Capital and Boboye of CardinalStone Partners opined that there is little reason to worry that the increased borrowing by FG will constrain credit to the private sector. They stressed that notwithstanding other factors undermining credit availability to the private sector, the sector has benefited hugely from real sector interventions of the apex bank.

Boboye said, “ We have little concern that the private sector will be crowded out due to increased FG borrowing. Our view is premised on the following: “Although banks have maintained a perennial presence in government securities, they have also continued to expand their loan books.

“For context, CBN data reveals an annual average growth of 23 percent in banks’ credit to the private sector in the last three years, which may have been supported by CBN policies such as those relating to Loan-to-Deposit Ratio,LDR, and Cash Reserve Ratio, CRR.

“Nonetheless, World Bank data reveals that private sector credit in Nigeria accounts for only 12.1 percent of GDP, much lower than peer economies like South Africa (129.0%), Kenya (32.7%) and Egypt (27.3%). While the lower credit to GDP ratio suggests scope for more expansive credit creation in the economy, it may also reflect banks’ lending apathy due to asset quality concerns.

“The private sector also continues to benefit from CBN’s intervention programmes such as the Real Sector Support Financing (RSSF), Anchor Borrowers Program (ABP), Creative Industry Financing Initiative (CIFI) and the recent 100 for 100 policy on production and productivity, among others. As of December 2020, the CBN had disbursed over N4.3 trillion to the private sector through different intervention programmes”.

Also highlighting factors impacting credit to the private sector, Abidoye said: “ While credit to the government has been growing strongly, much stronger than credit to the private sector, I believe the issue with limited credit extension can be linked to two major factors.

“Firstly, on the one hand, the CBN tried to get banks to lend to the real economy by raising the minimum loan-to-deposit ratio for commercial banks to 65 percent. “However, on the other hand, it is using discretionary CRR debits on banks to sterilize a sizable proportion of their deposits. These debits have a negative impact on commercial banks’ liquidity positions and their ability to significantly grow credit. “Again, we understand that this is a complex issue because the CBN uses its sterilization actions as part of its demand management strategy to manage exchange rate pressures.

“Secondly, interest rates are still high enough to discourage certain classes of borrowers from approaching the banks. Again, the banks can’t be faulted for the high interest rate environment as they largely reflect structural issues within the economy.”

Omoyeni of Vetiva Capital, however, offered a different opinion noting that the increased FG borrowing and higher interest rate on NTBs and FGB bonds could translate to higher interest rates and hence constrain credit to the private sector borrowers.

He said: “We expect the high level of government borrowing to cause an increase in the market interest rates and this will reduce the funds available to the private sector due to the high cost of assessing loans. It will also become more expensive for corporations to issue debt as they will have to offer rates that are more attractive than what are obtainable on government securities.”

Vanguard News Nigeria