By Babajide Komolafe, Economy Editor

Influx into the secondary market has basically dried up, with inflows dropping from around $18 billion naira at their peak to less than $1 billion naira.

Nnamdi Nwizu is the Co-Managing Partner/Founder, Comercio Partners Limited, an investment banking company. As  a member of the company’s executive management team,  Nwizu leads the Trading division where he is responsible for overseeing fixed income investments for individual and institutional investment management accounts. In this interview, he  provides insights into the major factors influencing the fixed income markets and implications for investors.

In addition to the happenings at the global level, what are the major domestic trends, happenings, influencing investment expectations and decisions in the fixed income market?

Several local factors have influenced investment expectations in the fixed income market, but I will focus on three: Cash Reserve Ratio debits, FX scarcity, and taxation on fixed income instruments.

The Central Bank of Nigeria (CBN) debiting banks for CRR requirements has become the CBN’s primary monetary policy tool. This allows the CBN debit banks for excess liquidity and pay no interest (0%) on the cash deposited with the CBN. 

The CBN issues these debits every forthnight, causing banks to rush to invest excess liquidity in government securities or loan money to clients ahead of the CRR debit days, which also coincide with FX retail auctions. CRR debits in the banking industry are currently estimated to be around N13.6 trillion naira.

FX scarcity, which has essentially limited the ease with which foreign investors can exit, continues to have an impact on investments by foreign portfolio investors. Influx into the secondary market have basically dried up, with flows dropping from around USD18 billion naira at their peak to less than USD1 billion naira.

As a result, the fixed income market is dominated primarily by domestic players, with pension funds naturally leading the way. Finally, the third point I mentioned is the expiration of tax waivers on Treasury bills, Corporate bonds, and State Government bonds.

In 2012, the government granted a 10-year waiver on tax payment for Treasury bills, corporate and state government bonds, and a perpetual tax waiver for federal government (FGN) bonds. With the expiration of the tax waivers for all instruments except FGN bonds will be subject to all taxes, from corporate to withholding tax.

Banks and corporate investors, who are the most affected, have increased their demand for short dated bonds as a result. Fortunately for the Pension Fund Administrators, the funds they manage are tax-exempt by law, so the expiration of the tax waiver has no effect on them.

“Nevertheless, in mid to long term, given expected external pressures from increasing global interest rate we expect the Apex Bank to choose between, “Pro Growth Strategy and Defending the Naira?” (Comercio Partners’ Traders Voice,  January 14, 2022)

What are the implications of a continuation of the Pro Growth strategy for fixed income investors?

A pro-growth strategy implies that the government will continue to favor liquidity injection and low interest rates over a hawkish stance of raising rates to attract foreign portfolio investors to the fixed income market.

High interest rates means higher propensity to save and also makes it more expensive for corporates and retail investors to access funds needed for growth. The CBN by choosing a Pro Growth strategy, means that rates should remain relatively low and liquidity injection by the CBN, which should lead to increased demand for government securities by investors, and they look for outlets for their excess liquidity.

“It is coming to an end before or by the end of this year. We will tell them don’t come to the Central Bank for foreign exchange again and go and generate their export proceeds. (CBN Governor, Godwin Emefiele on February 11th, 2022)

What is your projection on how the above policy announcement  will impact the foreign exchange market and the fixed income market?

I believe we saw a rebuttal in the papers from a CBN official on the exact meaning of this. However, if it occurs as predicted, the currency will face additional pressure, and the CBN may be forced to raise interest rates in order to attract foreign investment flows.

It also implies that more local investors may seek to exit local fixed income securities in favor of foreign currency denominated assets, resulting in an increase in yields in the local fixed income market.

The Commercial Papers market appears to be booming. The number and value of CPs programmes registered on FMDQ rose 41 per cent and 18 per cent to 58 and N3.57trn as at March 2nd, 2022 from 41 and N3.02trn at the end of 2020. This trend is expected to continue.

How involved is Comercio Partners in this market and what is your advice to investors in terms of risks, and how to mitigate them?

The growth we have seen in the Commercial Paper space is as a result of the low interest rate environment and the dearth in OMO bills issuance. OMO bills issuance volumes have dropped from about N1trn monthly to about N120bn monthly. Both factors have led to a switch by investors to Commercial Papers.

The high demand for them has naturally led to an increase in the number of issuers entering the market, as they now see it as a simpler and less expensive way to raise funds. Concerning risk, investors must understand that they are investing in unsecured papers.

This means that there is no collateral for most Commercial Papers and if they go bad, then they must start court proceedings against the company, to find a way to seize assets and get funds back. Best mitigation is due diligence.

Ensure you do your due diligence on the firm issuing the Commercial Paper as they are responsible for the repayment of your funds. Check how healthy they are, look at their balance sheet, profitability, Management and Board. All of these are key with regards to the ability and willingness to repay funds taken.

“Consistent with our most overriding goals, we hold a set of values that provide us with a consistent framework to help us to make the best decisions for our investors in an ever evolving global and local financial environment.”

Can you elaborate on this set of values and their implications for the investment community?

Investment management is a highly specialized business that necessitates specialized skill sets, extensive experience, and a thorough understanding of the dynamic global markets in order to be successful.

The financial security that we strive to help our clients attain does not happen overnight. It’s a long-term task, and we’re taking a long-term approach to it. 

As a result, each decision is guided by our passions which are Knowledge, Excellence, Integrity, a relentless pursuit of Innovation and providing customized investment services.

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