Towards the DMO's Funding Target for the Year

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Friday, November 20, 2020 / 09:21 AM / by FBNQuest Research / Header Image Credit: Business Day

 

The DMO held its latest monthly auction of FGN bonds on Wednesday. It offered NGN80bn, raised NGN80bn (USD210m) and attracted a total bid of NGN185bn. After the drama of the previous month's auction, there were small moves on the marginal rates: 3bps higher for the reopened 15-year benchmark at 5.00% and 21bps lower for the 25-year paper at 5.79%. The bid was the lowest since March and was dominated by PFAs. Some other would-be participants (including retail) may have been put off by the debits to the market expected today for a retail fx sale and a cash reserve ratio (CRR) adjustment.

 

When we add sales on a non-competitive basis to public bodies, we find that the DMO has collected NGN1.85trn from bond sales to date this calendar year. This figure is gross and is not adjusted for any repayments on maturity.

 

The DMO was given a funding target of NGN1.60trn in the 2020 budget, which is to be raised solely from domestic sources. In our view it is well placed after eleven months, recalling that it collects smaller sums from the sale of other debt instruments such as sukuk and green bonds. It raised NGN163bn from a sale of sukuk in H1 2020.

 

The federal finance ministry does not share the interest rate assumptions underpinning its budgets. That said, the collapse of domestic rates this year will surely create some savings from the NGN2.68trn allocation for total debt service excluding sinking fund contributions in this year's budget (NGN1.87trn domestic and NGN805bn external). The 15-year benchmark was only issued this March with a 12.50% coupon and the rate has this week crashed to 5.00%.

 

The slight uptick in one of the marginal rates this week sharpens the debate as to how far this crashing of returns will run. The PFAs are the largest holders of FGN bonds. Data from their regulator show a sharp decline in their holdings of NTBs. However, their holdings of the FGN bonds amounted to a sizeable NGN6.39trn at end-August and we struggle to see anything other than a gradual reallocation of assets. We also struggle to identify an alternative home for funds on such a scale.

 

There is a limit to the corporate bonds in naira in circulation despite some high-profile recent issues, and also to tradeable real estate. The best we can offer is the equities market, where buying by PFAs and other domestic institutions has driven the strong rally of about 21% on the NSEASI over the past month.  


Sales and demand at FGN bond auctions (N bn)

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Source: Nigerian Communications Commission (NCC); FBNQuest Capital Research


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