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FG’s debt management strategy sparks concern over naira

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FG’s debt management strategy sparks concern over naira

There was a noticeable exit of some foreign funds from Nigeria’s currency market last week after treasury bills repayment by the Debt Management Office (DMO) and the Central Bank of Nigeria (CBN) pushed down yields. The development has triggered fears of naira weakness, writes TONY CHUKWUNYEM

In line with the Federal Government’s strategy of reducing its debt and debt-servicing costs, the Debt Management Office (DMO) and the Central Bank of Nigeria (CBN) last week repaid significant volumes of treasury bills instead of the usual practice of rolling them over.

The DMO set the ball rolling when it announced last Tuesday that it would repay a total of N198.03 billion worth of treasury bills maturing in December with part proceeds of Eurobonds it raised last month.

Details provided by the office showed that it would redeem N131.415 billion and N66.617 billion of Nigerian Treasury Bills (NTBs), which would mature on December 14 and December 21, 2017 respectively.

In a statement, the DMO explained that: “The NTBs will be redeemed primarily using proceeds of the $500 million raised through a Eurobond issuance by Nigeria in November 2017. The redemption over time will help reduce the refinancing risk associated with short-term borrowings through treasury bills.”

CBN repays N340bn worth of treasury bills

Similarly, on December 14, the CBN repaid a total of N340 billion worth of treasury bills comprising the  N131.4 billion worth of treasury bills issued by the DMO and  open market bills issued by the Apex Bank.

Traders said the   payoff increased banking system credit to almost N500 billion, lowering overnight rates to one per cent from five per cent the previous week.

The DMO had announced in October that as part of efforts to reduce the country’s debts and debt servicing costs, it would raise Eurobonds or syndicated loans for $3 billion to redeem part of a local treasury bill holding worth N2.7 trillion.

60:40 borrowing template

It will be recalled that the DMO had on June 20, 2016, unveiled a four-year borrowing plan, Debt Management Strategy (2016-2019), that it said was appropriate for managing the country’s debt.  Unlike under the previous 2004/2006 debt management strategy, where it was felt that the best way to manage Nigeria’s debt profile was to reduce the level of external borrowing and increase the rate of domestic borrowing (ratio of 84 per cent domestic borrowing to 16per cent external borrowing), the new strategy had a ratio of 60:40 borrowing template.

The DMO explained that the strategy was intended to keep money in the hands of private investors in order to spearhead a private sector driven economy.

Other objectives of this strategy, according to the DMO, are to free up space in the domestic market for other borrowers and achieve a more sustainable debt portfolio mix of 60 per cent domestic and 40 per cent external.

In addition, the redemption overtime will help reduce the refinancing risk associated with short-term borrowings through NTBs with tenors of 91, 182 and 365 days.

It further explained that this strategy of enabling the private sector to access funds and possibly at a lower cost than was hitherto possible is consistent with the government’s policy of a private-sector led growth.

Shedding further light on this strategy when she recently  represented the Finance Minister, Mrs Kemi Adeosun,  at a session organised by the Senate Committee on Local and Foreign Debts in Abuja, the Director-General , DMO,  Ms Patience Oniha,  disclosed that out of Nigeria’s  current debt  stock of N19trillion, 77 per cent was from the domestic market through the various products issued, including treasury bills, the Federal Government of Nigeria Bonds, the Federal Government Savings Bonds and the FGN Sukuk.

Oniha explained: “The implication of having that large amount in domestic debt is high debt service because the costs of – meaning interest rates – are high.

“If the government is so visible and prominent in the local market, it means that we have taken some of the money that should go to the private sector.

“Banks should be able to have large amounts of money to extend to the real sector. If we are not too prominent in the domestic market, there should be more room for banks and other financial institutions to lend to the private sector and, thereby, contributing to economic growth.”

Impact on currency markets

However, as government intensifies its debt management strategy, there are indications that the move may negatively impact the naira’s exchange rate.

For instance, traders said that following DMO’s  announcement last Tuesday, yields on treasury bills dropped by more than half to around seven per cent across board, adding that in response to the sell-off in bills, some foreign investors were booking profits and bidding to repatriate their funds thereby creating a liquidity squeeze on the currency market.

According to traders,  the development has caused low activity on the investor forex market as foreign players are not bringing in new funds but bidding to buy dollars, while banks are not willing to sell at lower than  N360  per dollar.

Indeed, 24 hours after the DMO announcement, Nigeria’s foreign exchange market saw transactions worth $1.34 million at its interbank window at a rate of N314.50 per dollar, as commercial banks traded the local currency at below the CBN rate.

The CBN has used a rate of around N306 to supply dollars to banks since it introduced a multiple exchange rate system in February. In April, the apex bank allowed foreign investors to trade the naira at a market-determined rate, which has weakened to around N360 per dollar.

Although the local currency’s exchange rate was still stable against the dollar at around N363 and N365 per dollar at retail exchange bureaus and the parallel market respectively at the weekend, analysts believe that it is likely to weaken in the coming days on the back of the treasury bills’ repayments.

For instance, commenting on how the naira is likely to fare against other currencies this week,   Reuters stated at the weekend that:  “The naira is under pressure. Nigeria repaid N340 billion worth of treasury bills on Thursday instead of rolling them over, in a move that lowered yields and prompted foreign buyers to exit.  Traders say the sell-off has led to a bottleneck in the forex market with thin inflows as foreigners bid to buy dollars.”

IMF’s disclosure

Interestingly, last Wednesday, the International Monetary Fund (IMF) disclosed that even though foreign investors were still keen on Nigeria, they were yet to get over their concerns about currency controls, which the country has in place last year.

An IMF senior financial sector expert, Miriam Tamene, said there was interest in Nigeria’s securities market, adding however, that investors were being careful because fears of getting trapped still exist.

Tamene’s comments came after her team visited the Securities and Exchange Commission (SEC) as part of consultations on developments on the economy. The report of the consultation will be presented to the IMF board in February.

“Investors are interested in Nigeria, but with difficulties they had in getting their money out recently, that confidence is not there yet. It has improved though, but they are still watching,” Tamene said in a statement released by the SEC.

Analysts point out that the CBN has kept liquidity tight since July 2016 to support the naira by attracting foreign inflows into the country’s bond market to boost dollar liquidity in the wake of the currency crisis occasioned by the slump in oil prices. They, however, predict that foreign investors will further reduce their investments in the country if, as widely expected, the CBN reduces interest rates next year.

Last line

However, as a financial consultant, Mr. Okey Agu, argued:   “It is true that foreign inflows are needed to increase dollar liquidity in the system and ensure naira stability. But government’s debt management strategy is aimed at reducing our debts and debt servicing costs.

“The government cannot continue increasing the country’s debt profile because it wants to attract foreign investors.  Besides, if oil prices continue to improve, the CBN will be able to defend the naira  without introducing policies that will hurt the economy in the long term.”

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