Fear Of Debt Service To Revenue Forces DMO To Adjust Bonds Coupon

Some Nigerian experts have explained the rationale behind cutting interest rate on the FGN Savings Bond by the country’s debt manager.

The Debt Management Office on Monday reviewed the interest rates on its July FGN Savings Bond by 13 basis points.

Two years FGN Savings Bond due July 13, 2024 fell to 8.075 per cent from 8.205 per cent held in June, while the three years bond maturing July 13, 2025 slid to 9.075 per cent from 9.205 per cent.

Bond issuance has become a viable source of funding for the Nigerian government as a means to meet its budget obligations.

In the first half of 2022, savings bonds sustained attractive rates growing from 7.542 per cent per annum issued on January 19 to 9.205 per cent in June for the two-year bond.

The three-year bond maturing 2025 which was issued January 19 surged from 8.542 per cent per annum to 9.205 per cent per annum in June.

But the interest rates dropped in July, a move experts believe may not affect the attractiveness to investors.

Nigeria’s fiscal crisis worsened in the first quarter of 2022 as the country’s debt service to revenue ratio has risen to 80 per debt, according to a Central Bank of Nigeria document.

It rose by 400 basis points when compared to the 76 per cent which it was at the end of 2021.

Nigeria’s debt profile hit $100bn or an equivalent of N41.6tn in March 2022, according to the DMO. Euro bond and Diaspora Bond accounts for $15.91bn.

Nigeria’s Professor of Capital Market Studies, Uche Uwaleke, said the cuts could be due to “Improvement in the government’s fiscal position from higher crude oil prices and increased collections by the FIRS. So, there’s little motivation to increase the coupon on the bond which is usually done to attract investors.

“Debt service to Revenue Ratio is becoming unsustainable. So, the government may be applying caution.”

Muda Yusuf the Chief Executive Officer of the Centre for the Promotion of Private Enterprises said the decline in the rates is a strategy by the DMO to raise cheaper funds considering global trend of yields.

He said, “That is a very marginal drop. In any case, if you are raising money, the lower the rate, the better for you and if the market is such that you can get people to subscribe and possibly over subscribe even at that lower rate, it is good for the person issuing the bond.

“I think they are taking advantage of the general state of yields in the market. Yields are very low if you go to the fixed income markets. It is lower than that in many banks too, luckily before you can get 5 per cent.

“Treasury bills and some other bonds are not upto this amount. So, when you compare it with this from other asset classes it is still attractive and it is likely to attract very heavy subscriptions if not over subscribed. It is still a good deal for any investor in the market.”

Yusuf argued that the bond is secured, adding that the rates when compared to other returns are very competitive.

Kalu Ajah, a financial market expert said the decision is targeted at “reducing the cost of borrowing by the Federal Government of Nigeria (FGN).”