The federal government has so far this year raised almost N7.2 trillion through bond auctions, thus placing the domestic financial system at the center of an increasingly difficult effort to finance the country’s widening fiscal needs, data obtained by Daily Sun revealed yesterday.
The data indicated the total raised by the Debt Management Office (DMO) excluded borrowing through treasury bills, sukuk and other instruments. It nevertheless gives 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 provides for domestic borrowing of about N29 trillion, it said. So far, the DMO has raised less than a quarter of that target through bond auctions and has a large financing requirement for the rest of the year at the current pace. The problem is not just whether investors have enough money to absorb the supply, but whether the government can keep raising money without pushing up borrowing costs 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 on offer. But total sales increased to almost N1.6 trillion after N752.3 billion in non-competitive allotments.
Total subscriptions stood at N1.7 trillion, translating into a bid-to-cover ratio of 2.1 times versus 1.9 times at the previous auction. Rather, the DMO seemed reluctant to accept bids at yields that it thought were too expensive.
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The bond with the highest demand was the June 2038 bond, which recorded bids of N821.3 billion against competitive sales of N631 billion. The DMO also sold N742.3 billion of the same instrument through non-competitive sales. The bond was sold at a marginal yield of 17.79 per cent although bids were as high as 19 per cent.
This pattern was more pronounced in the January 2035 note. Investors bid N513.6 billion for the security, but the DMO allotted N64.1 billion. The bids were from 16% to 22.6% and the final marginal rate was 17.15% The outcome suggests that the agency is limiting borrowing to avoid higher funding costs being reflected in the public debt stock.
Such restraint may become more difficult to sustain. Banks are likely to stay among the biggest buyers of sovereign debt, especially since government securities provide a liquid, relatively low-risk outlet for funds, Quest Merchant Bank said in an emailed note to Daily Sun.
The bank said the strong demand at the auction was a sign of increasing expectations that yields may have peaked after recent moderation in inflation and the prospect of a sustained disinflationary trend.
Therefore, as it said, investors are keen to capture higher yields, particularly at the long end of the curve.
But industry experts said a more aggressive sovereign borrowing program could soak up liquidity that could have otherwise gone to corporate lending, trade finance and consumer credit.
The risk is even more acute for smaller companies which already face high lending rates and limited access to formal credit. If banks can earn near 18 per cent on long-dated government debt – with lower credit risk and lower operational costs than private lending – the incentive to lend to riskier businesses is reduced.
Pension funds and asset managers may also continue to favor long-dated sovereign paper as they try to lock in elevated returns before inflation and rates fall. This could bolster the DMO’s funding program, but it would increase the financial system’s exposure to the sovereign when public debt-service costs are high relative to government revenues.
“That said the agency still has a long way to go to meet its domestic funding target of about N29 trillion as outlined in the budget.
“We expect strong investor demand, supported by easing inflation and expectations of a gradual decline in yields,” Quest Merchant Bank said.
The FG therefore finds itself in a narrow corridor of policy. It must finance a large deficit, maintain investor confidence and cope with a growing debt-service burden, without a borrowing strategy that starves the private sector of credit.
Hence, the ability of the DMO to keep that balance will determine not just the credibility of the budget but also availability and cost of financing for Nigerian businesses.