DMO makes headway sorting Nigeria’s N5.6trn budget deficit

The Debt Management Office (DMO) in its quest to meet the onerous target of raising N2.34 trillion towards the projected deficit of N5.6 trillion contained in Nigeria’s federal government’s 2021 budget, has been taking bold steps to deliver on plan. The debt office has now raised N1.42 trillion at its bond auctions, including non-competitive sales to public agencies in just over a six months period.

However, when the smaller amounts it generates from the sale of other debt instruments, such as Sukuk and green bonds, are added to the amount realized, it is clearly on track to meet the target for the year, say analysts who have been tracking the DMO’s activities this year.

As was anticipated and witnessed, the 2027, 2035, and 2050 instruments were oversubscribed by 178 percent due to strong investor demand with bid-to-cover ratios for 10-year, 15-year, and 30-year bonds settling at 1.32x, 2.55x, and 4.48x, respectively. The debt office allotted bonds worth N325.80 billion through competitive bids across the 10-year tenor at N50.81 billion, the 15-year tenor at N103.90 billion, and the 30-year tenor at N171.09 billion at the marginal rates of 12.74 percent, which declined by 36 basis points; 13.5 percent, also falling by 50 basis points; and 13.7 percent falling by 50 basis points, respectively. Additionally, the DMO allotted bonds worth N4.50 billion through non-competitive bids across the 10-year tenor at N3.50 billion and 15-year tenor at N1 billion. In total, the DMO raised N330.30 billion, 120 percent more than the amount offered, and it took advantage of the huge bids from investors at the June auction.

The federal government  had lined up a huge borrowing programme ahead for the year 2021, not least because of the additional hit to revenue collection as a result of the Covid-19 virus. It is understood from sources that the government in its approved 2021 budget, projected a deficit of N5.60 trillion, to be covered by new borrowing of N4.68 trillion. This consists of a 50/50 split between its domestic and external borrowings through the DMO, multilateral and bilateral loans of N710 billion and privatization receipts of N200 billion. The deficit had initially been put at N5.20 trillion in its initial proposed budget, but was jerked up after a review by the National Assembly.

On the other hand, the domestic funding target of N2.34 trillion, if established, is highly challenging to the government. Meanwhile, as was seen in 2020, the debt office was given a revised target of N1.60 trillion but it grossed N1.66 trillion from FGN bonds over the 12 months, which suggests that the reported domestic funding target for this year is highly challenging. Although the DMO collects minor sums from the issuance of other debt instruments, such as the N163 billion it got from the sale of Sukuk in the first half of 2020, the success of its target hinges upon the FGN bond auctions.

According to economic analysts at FBNQuest Capital Research, “the final auction in June has to be viewed as another exemplary effort by the DMO. It has an onerous domestic funding target of N2.34 trillion towards the projected deficit of N5.60 trillion in the FGN’s 2021 budget. By way of context, we recall that it collected a total of N1.66 trillion (gross) from FGN bond sales in 2020.”

Similarly, United Capital analysts opined that “the recent auction lends further credence to our position that the upward yield reversal in the fixed income market has plateaued. This is consistent with the results of the NTB auction last week and the most recent MPC meeting.”

A further analysis of the positions held by economic analysts on the recent auction by the DMO in pursuit of its 2021 target suggests that its unprecedented funding target, which was a 40 percent addition to the increase on the previous year’s record has surely been the main driver of the retracement in rates from the low point in October and November last year. Not much stress is needed to achieve the feat.

“Further, the continuing securitization of the previous administration’s domestic arrears could bring tradable issuance of another N1.5 trillion. Looking further ahead, there has been talk of the same treatment of the FGN Ways and Means advances from the central bank, estimated at up to N10 trillion. The new debt instruments, held by the apex bank, might subsequently become tradable in the market. Domestic investors do have some choice in the naira-denominated fixed-income space. Corporate bond sales have picked up as issuance by Nigerian corporates increased by 52 percent in 2020 to N1.02 trillion, divided between commercial paper, which is 75 percent of the total, and bonds. A prominent rating agency sees similar corporate issuance this year,” FBNQuest analysts opined.

“Some foreign portfolio investors (FPIs) outside the payments pipeline may be tempted back into the market by a little more retracement. More likely in our view, the domestic institutions will again make the running and the FPIs will generally stick with less complicated trades with similar (or better) returns elsewhere.  All said, the domestic institutions are still the core buyers of the bonds, which accounted for 60 percent of the assets under management of the PFAs at end-April,” they further stated.

In the perfect world, the DMO and its counterparts will likely plan their issuances with fewer global and domestic uncertainties; the direction of the Covid-19 virus and the crude oil price rally could probably top the list of grey areas. Conclusively, it is believed that the DMO will at another issuance in the future, tempt investors with some new benchmarks and surely create some savings for the federal government as the coupons on its existing FGN bonds.

However, analysts have pointed out that in the next auction by the DMO scheduled for July, some buying interest in the secondary bond market is expected to be witnessed as residual demand is met.