…Borrowing still below N29trn domestic provision
By Chinwendu Obienyi
The federal government has raised nearly N7.2 trillion through bond auctions so far this year, placing the domestic financial system at the centre of an increasingly difficult effort to finance the country’s widening fiscal needs, data obtained by Daily Sun revealed yesterday.
According to the data, the sum, raised by the Debt Management Office (DMO), excludes borrowing through treasury bills, sukuk and other instruments. It nevertheless offers an early indication of the scale of government recourse to banks, pension funds, asset managers and other local institutions as the country seeks to fund a N31.5 trillion budget deficit.
The budget envisages about N29 trillion in domestic borrowing. At the present pace, the DMO has covered less than one-quarter of that target through bond auctions, leaving it with a substantial financing requirement for the rest of the year. The challenge is not simply whether investors have enough cash to absorb the supply, but whether the government can continue raising funds without pushing borrowing costs higher and diverting credit from businesses and households.
At its recent bond auction, the debt office sold N805.2 billion in competitive allotments across the January 2035, April 2037 and June 2038 maturities, below the N1.1 trillion offered. But total sales rose to almost N1.6 trillion after N752.3 billion in non-competitive allotments.
Furthermore, total subscriptions reached N1.7 trillion, producing a bid-to-cover ratio of 2.1 times, up from 1.9 times at the preceding auction. Instead, the DMO appeared unwilling to accept bids at yields it considered too expensive.
The strongest demand was for the June 2038 bond, which attracted N821.3 billion in bids against competitive sales of N631 billion. The DMO also allotted N742.3 billion in non-competitive sales on the same instrument. The bond cleared at a marginal yield of 17.79 per cent, despite bids stretching as high as 19 per cent.
This pattern was sharper in the January 2035 note. Investors bid N513.6 billion for the security, but the DMO allotted only N64.1 billion. Bids ranged from 16 per cent to 22.6 per cent, while the final marginal rate settled at 17.15 per cent. The outcome suggests that the agency is rationing borrowing to avoid embedding higher funding costs in the public debt stock.
That restraint could become harder to sustain. Quest Merchant Bank, in an emailed noted to Daily Sun, said, banks are likely to remain among the largest buyers of sovereign debt, particularly because government securities offer a liquid, relatively low-risk outlet for funds.
According to the bank, the strong demand at the auction reflects growing expectations that yields may have peaked, following the recent moderation in inflation and the prospect of a sustained disinflationary trend.
It said that consequently, investors are keen to lock in elevated yields, particularly at the long end of the curve.
But industry experts stated that a more aggressive sovereign borrowing programme could absorb liquidity that might otherwise have supported corporate lending, trade finance and consumer credit.
The risk is particularly acute for smaller companies, which already face high lending rates and limited access to formal credit. If banks can earn close to 18 per cent from long-dated government debt, with lower credit risk and fewer operational costs than private lending, the incentive to extend loans to riskier businesses weakens.
Pension funds and asset managers may also continue to favour long-dated sovereign paper as they seek to lock in elevated returns before inflation and interest rates decline. This could support the DMO’s funding programme, but it would deepen the financial system’s exposure to the sovereign at a time when public debt-service costs remain high relative to government revenues.
“That said the agency still has significant distance to cover to reach its domestic funding target of around N29 trillion outlined in the budget.
We expect investor demand to remain robust, supported by easing inflation and expectations of a gradual decline in yields”, Quest Merchant Bank said.
The FG is therefore confronting a narrow policy corridor. It must fund a large deficit, preserve investor confidence and manage a rising debt-service burden, while avoiding a borrowing strategy that leaves the private sector short of credit.
Hence, the DMO’s ability to maintain that balance will shape not only the budget’s credibility but also the availability and cost of financing for Nigerian businesses.
The post FG raises N7.2trn via bonds to address funding shortfall appeared first on The Sun Nigeria.
<small>Source: The Sun Nigeria — read the original story there.</small>
