FG’s Borrowing Spree Signals Rally in Low Interest Environment

Mrs. Zainab Ahmed.
The Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed.

…As Stock Market Gets Set For Bearish Trend

BEVERLY HILLS, May 02, (THEWILL) – The yawning appetite of the Federal Government for borrowing will most likely ignite a rally in the low interest environment in the year. This will also set the pace for a corresponding downturn in the stock market, which has seen unusually bullish trends amid the COVID-19 pandemic.

Speaking at the public presentation of the details of the national budget in Abuja last January, the Minister of Finance, Budget and National Planning, Zainab Ahmed, disclosed that the Federal Government would borrow about N709.69 billion from domestic and foreign sources, including multilateral and bilateral finance organisations, to finance the 2021 federal budget deficit of  N5.2 trillion.

Since 2016, the government has been battling with acute revenue shortage arising from volatility in oil prices in the international market. It has not achieved its revenue budgets, while recurrent expenditure is fully executed. Government has therefore embarked on a borrowing spree to finance its expanding recurrent budget. The unmitigated culture of profligacy and, most recently, the COVID-19 pandemic, seem to compound this challenge.

In recent times, bargain hunters deserted the equity market for the fixed income market to invest in government securities Treasury Bills and Bonds which offered handsome yields.

About three years ago, treasury bills were sold at double-digit rates and this attracted many investors who showed interest in it, including banks and other institutional investors.

According to reports, some smart investors at the time approached banks to obtain loans to invest in T-bills. Consequently, the Central Bank of Nigeria restrategised and gradually began to slice the rates.  It also blocked the use of loans for treasury bills investment.

Treasury bills are short term debt instruments used by the CBN to borrow money from the public on behalf of the federal government. The apex bank also uses treasury bills to control money supply in the economy.

In a strange move “to revamp the economy through real sector growth”, the government inauspiciously ‘decreed’ deliberate low-yield returns for the T-bills and bond instruments to discourage the influx of investors to the safe fixed income market haven.  This ignited sustained the CBN’s dovish position, which spurred a rally in the equities market that, in turn, provided a safe haven for investors fleeing low T-bill and bond yields.

The development triggered a sharp downturn in the fixed income market with a rate crash that made T-bills and bonds a deserted window, thus creating an unprecedented low interest environment as the government focused more on external loans and pension funds for borrowing.

For instance, more than N435 billion worth of unsuccessful transactions were recorded in the Nigerian T-bills auction conducted by the CBN on November 11, 2020 on behalf of the Federal Government. The trend of limited attractive instruments had forced investors to bid as low as 1 per cent each for the 92-day and 182-day bills and 1.9 per cent for the longer 364-day maturities.

Rates on T-bills plunged further as CBN settled its stop-rates at 0.04 percent, 0.15 percent and 0.3 percent for the 91-day, and the 182-day and 364-day maturities as against 0.34 percent, 0.5 percent and 0.9 percent in the previous stop rates auction.

In September 2020, the CBN reduced interest rates on savings deposits from 3.9 per cent to 1.25 percent.

In a letter to all banks, referenced BSD/DIR/GEN/LAB/13/052, dated September 1, 2020 and signed by CBN’s Director of Banking Supervision, Bello Hassan, the apex bank said it had “noted with satisfaction the recent declining trend in market rates in the banking sector, following the implementation of policies aimed, among others, at stimulating credit flow to the real sector”.

The CBN had announced late 2020 that a total of ₦850.41 billion worth of  T-bills were set to mature in the first quarter of 2021 and will be re-issued between December 2020 and the first quarter of 2021.  It said the sum of ₦76.82 billion would be available for the 91-day period, ₦176.86 billion for the 182-day period while ₦596.73 billion would be for the 364-day period.

The T-bills would be issued in tranches with the first tranche rolled out on March 11, 2021, while the last tranche is scheduled for May 27, 2021. During the period, the apex bank will issue TBs worth N92.05 billion on 91 days tenor, N79.64 billion on 182 days and N398.7  billion on 364 days.

A breakdown of the programme revealed that in March, the apex bank plans to sell N135.96 billion worth of T-bills, comprising N5.9 billion worth of 91 days bills, N22.39 billion worth of 182 days bills, and N107.67 billion worth of 364 days bills.

In April, CBN plans to sell N253.68 billion worth of T-bills comprising N37.29 billion worth of 91 days bills, N28.1 billion worth of 182 bills and N188.29 billion worth of 364 days bills.

In May, CBN plans to sell N170.71 billion worth of T-bills comprising N48.84 billion worth of 91 days bills, N29.15 billion worth of 182 bills and N92.72 billion worth of 364 days bills

Compared to last year, the CBN has effected an upward adjustment in the T-bill and bond yields, apparently to attract investors back to the fixed income market and to patronise government securities as the federal government. This reflected in the Q1 and Q2 2021 issuances which showed a rise in the rates as against the trend in Q4 2020.

While 91-days tenor recorded a maximum yield of 0.4 percent in Q4 2020, it hit up to 2 percent in Q1 2021. Similarly, 182-day tenor attracted a yield up to 3.5 percent in Q2 2021 compared to a maximum of 1 percent in Q4 2020.  The trend followed in 364 maturity tenors which reached 9.75 percent in 2021 against 1.21 percent maximum in Q4 2020.

The  government in January 2021 announced its plan to take over about N895.5 billion in quoted companies and deposit money banks, as “special borrowing” to fund crisis-related expenditures,  a move that drew the irk of concerned Nigeria’s stakeholders. The amount represents unclaimed dividends (standing at N158 billion) and dormant bank balances (N737.5 billion) in the affected financial services sub-sectors.

Some experts project a slump in the stock market as government, through the CBN and the Debt Management Office, embark on aggressive borrowing that appears unending.

“It’s bound to happen. With the disturbing trend in inflationary and forex pressures, the CBN will be compelled to change policy stance in favour of tightening.

When this happens and yields rise, portfolio managers shift preference to fixed income securities to the detriment of the stock market,” said Uche Uwaleke, professor of Finance and Capital Market at the Nasarawa State University, in a note to THEWILL.

The doyen of the Nigerian Stock Exchange, Sam Ndata, confirmed the anticipated reversal in the low interest environment following reversal of the trend.  He said, “It  is a pattern that every reversal of a low interest rates environment that is an upward review of T-ll and bond rates will eventually affect the stock market bearishly.”