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Nigeria Offers Record ₦2.5 Trillion Bonds Amidst Rate Hike Expectations and Fiscal Concerns

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Bonds

CEM REPORT, MARKET | The Nigerian government is making a bold move in the local debt market, offering a record N2.5 trillion worth of seven and 10-year bonds today, February 19th, 2024. This staggering sum marks a sevenfold increase from January’s offering and the highest amount ever sought in a single month. Analysts interpret this move as a reflection of the government’s urgent need to raise funds, potentially driven by concerns about future interest rate hikes.

Investor Expectations for Higher Bonds Yields

Investors participating in the auction are likely to demand higher interest rates due to several factors. Firstly, inflation in Nigeria continues to surge, reaching a concerning 29.9% in January. This puts pressure on the Central Bank of Nigeria (CBN) to raise its benchmark interest rate, currently at 18.5%, at its upcoming meeting on February 26th-27th. Analysts predict a significant hike, possibly 300 basis points, further pushing up rates.

Secondly, the last Treasury Bill auction saw high yields driven by investor demand, with a one-year paper commanding a 23.43% return. This demonstrates investors’ preference for higher returns in an environment of rising inflation and anticipated rate increases.

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Concerns Around Debt Sustainability

While the need for funding is evident, experts raise concerns about the sustainability of Nigeria’s growing debt burden. Kelvin Emmanuel, an economist, highlights the already high proportion of government revenue used to service existing debt, raising questions about the efficiency of this funding strategy.

“There are disadvantages in raising more debt when your budget deficit is so high and a significant portion of your capital expenditure goes towards servicing debt,” Emmanuel cautions. However, he acknowledges that relying on printed money from the CBN might be an even riskier alternative.

Balancing Act for the CBN

Global central banks are expected to loosen monetary policy later this year as inflation cools. However, Nigeria’s unique situation of rising inflation puts the CBN in a difficult position. Raising rates to combat inflation could attract investments and stabilize the currency but might simultaneously dampen economic growth and exacerbate debt servicing costs.

Market Outlook and Uncertainty

Market participants are anticipating the upcoming MPC meeting with a mix of hope and anxiety. Sesan Adeyeye, a portfolio manager, believes investors will push for higher yields due to the recent Treasury Bill auction and inflationary pressures. However, system liquidity might play a role as the CBN recently eased some restrictions, potentially tempering the overall interest rate increase.

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The current benchmark interest rate stands at 18.5 per cent with analysts expecting a 300 basis points hike by the CBN when the Monetary Policy Committee meets on February 26 and 27.

Concerns

Nigeria’s record bond auction underscores the complex financial landscape the country faces. While seeking increased funding is crucial, concerns about debt sustainability and the impact of potential rate hikes remain significant. The CBN’s upcoming decision will be closely watched, as it will shape the economic outlook and investor sentiment in the coming months.

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