Nigerian government borrowing from bonds market declines 73.6% to N600 billion

The Nigerian financial market has recorded a major shift as the Federal Government and companies pull back from bonds segment of the market while equities market record a major rebound.

The value of government securities listed on the Nigerian Exchange Limited, NGX, in the first quarter of the year, Q1’22, declined by 73.6 per cent to N599.7 billion from N2.27 trillion recorded in the corresponding period of 2021, Q1’21.

Also the value of corporate bonds listings declined by 32.4 per cent to N28.3 billion from N41.9 billion in Q2’21.

Consequently, the total value of newly listed securities (Government securities, equities and corporate bonds) on the Exchange in the period under review fell by 33.3 per cent to N1.8 trillion from N2.7 trillion in Q1’21.

Meanwhile, equities listed on the NGX in Q1’22 recorded astronomical growth, rising 1,901.8 per cent to N1.1trillion from N54.9 billion in Q1’21.

The monumental surge in equities listings amidst the huge decline in government securities also indicates a fiscal policy crowding-in, reversing a five-year trend of crowding-out in the public-private sector interplay in the Nigerian capital market.

The crowding-out effect comes when huge fund raisings by governments in the capital market through bonds issues ultimately squeezes private sector fund raisings in the same market. The opposite referred to as crowding-in has now been recorded.

However, some analysts and operators are suspecting that the Federal Government’s policy of weighing its borrowings in favour of the international rather than domestic sources may have triggered companies to return to bonds market which was hitherto dominated by the government.

They added that increased corporate bonds and equities listings in the market will spore increased liquidity and trading activities in the capital market.

Commenting, Executive Vice Chairman, HighCap Securities Limited, David Adonri, said: “The 2021 – 2025 NDP (National Development Plan) stipulates that Federal Government shall reduce its borrowing from the investing public in Nigeria and borrow more from foreign sources to finance expenditures. The purpose of this policy is to crowd-in more domestic funds for the private sector to finance corporate investments in the economy.

“This is the reason for higher new corporate listings and higher FGN Eurobond (foreign funds) in Q1 2022 when compared to Q1 2021. The effect of this strategy is deepening of the capital market from both domestic and foreign assets creation.”

He stressed that the essence of the capital market is capital formation, noting that capital formation through the market enables businesses and government to access adequate funds with which to create wealth and generate productive employment.

“The more the capital formed through the issuance of equities and bonds, the higher is economic development and the deeper is the capital market.

“However, I think that if the quantum of FG Eurobonds listed in Q1 2022 is added to listed bonds, total value of new listings may be higher than in Q1 2021”.

He stated further: “Equities market has gained about 23 per cent this year already. It has been propelled by impressive corporate fundamentals and migration of more financial assets to equities.

“Last year, the primary market for debt was very attractive for new issues due to the low interest rate environment of the economy. As a result, huge financial assets migrated in 2021 to debt primary market and equities secondary market. “However, with rising yield on bonds and recent hike of interest rate, the exuberance of equities is likely to be curtailed in the immediate future.”

While projecting market activity in the second half of the year, H2’22, Adonri said: “The economic crisis rocking the global economy now, heightened political risk attendant to 2023 general election and excessive political spending by government and rogue politicians, are capable of eroding investor’s confidence in the capital market. Therefore, H2 2022 may not be very pleasant for equities. Increase of interest rate may cause financial assets to migrate away from equities to debt.

Managing Director/CEO, APT Securities & Funds Limited, Garba Kurfi, while noted the positive impact of the listing of Dangote Cement, BUA Foods Plc and FGN Euro bond in Q1’22 on the performance of the market.

He therefore, stated: “This was possible because of lower interest rate which encourages many corporate to take advantage of lower rates.”

He added, “The capital market is bouncing back particularly equity because of the rise in inflation. For the first time in 14 years the ASI (All Shares Index) rose above 54,000 basis points since 2008.

“The Federal Government needs to list corporate institutions on the Exchange, such as NNPC as done in Saudi Arabia which listed AREMCO, we need to list NLNG, GENCOS, DISCOS among others.”

In his own reaction, Tajudeen Olayinka, an analyst, investment banker and stockbroker, said: “It is in the interest of the economy to have more private sector businesses list their securities on Securities Exchanges in Nigeria, either to be admitted on an OTC Exchange or listed on a regular Exchange, as against government securities dominating the scene.

“More listing by private sector is an indication of businesses having more access to long term capital. It is good to have it this way, because private sector capital formation tends to drive economy more towards attaining full employment and output at a lower level of inflation.

“But the level of private sector capital raising in Nigeria is still not encouraging, especially if one reflects on the level of capital raising in our market before the global meltdown of 2008/2009.

“No one should celebrate the figures for 2021 and 2022. They are both not encouraging. Government not listing Eurobond in 2021, as against US$4 billion it was able to list in 2022, was an indication that accessing international capital market in the midst of global pandemic could not have been attractive to foreign issuers, including Nigerian government” Olayinka added.

On the rebound of the equity market, he said: “Yes, equity market is gradually bouncing back, but still not at the level it should be. It is also good that we now have more local investors participate in the market, with index pushing up to the level we had it in 2007.

“When we begin to have strong demand for shares in the secondary market, we will begin to see more investors participate in the primary issue market, and that is what is required to accelerate growth in capital formation.

“We also need to have a right mix of local and foreign investors’ participation in our market, to be able to create a conducive and more stable private sector capital raising environment in Nigeria.”

Looking at the future, Olayinka said: “There is need for government to create a more friendly capital raising environment to encourage more companies get listed on the Exchange. A situation where Federal Government now borrow from unclaimed dividends, to fund uncontrollable budget deficit is not in the long term interest of the market.

“Federal Government should go back to the provisions of Companies and Allied Matters Act (CAMA) 2020 as they affect the treatment of unclaimed dividends to encourage more companies get listed on the Exchange.

“It took a long time for Nigeria to attain the global standard we have in CAMA 2020, and must not allow current administration to get it frittered away.”

Commenting, analyst/Head of Research and Investment at FSL Securities Limited, Mr Victor Chiazor, said: “The additional listings in the equities market during the first quarter of 2022 was a good development, as it brought about more investment options and further deepened the equities market.

“More so, increased debt and equities listings in the market bring about increased liquidity and trading activities in the market.

“The drop in corporate bond listing in Q1’22 to NGN25.3 billion down from N41.9 billion in Q1’21 was largely as a result of a higher interest rate in Q1’22 which made debt capital more expensive for companies when compared to Q1’21 when the yield environment was much lower while the equities market in Q1’22 benefited from the listing of a highly capitalized stock.”

Looking at the future, Chiazor said: “To improve corporate bond listing, the government must encourage a low interest rate regime which will encourage more companies to access the debt capital market as the interest expense element will not be toxic to the companies earnings while more incentives such as tax waivers and market friendly fiscal and monetary policies are expected to increase listing on the Nigerian Exchange.

“As we approach the general elections, we expect investors to become more cautious due to uncertainties around who becomes the next president but volatility is expected to increase once interim dividends are announced by most of the listed companies.”