In January 2017 the DMO raised N215bn from the first monthly auction of FGN bonds of the year, and issued paper in the first quarter at a fast gallop. Last week’s equivalent auction raised its target of N110bn (N360m). Although once again it is running its auction programme without an approved FGN budget in place, it is in a more comfortable place than 12 months ago. The marginal rates last week were slightly higher than the previous month: 13.38% and 13.49% for the five and ten-year benchmarks (Jul ‘21s and Mar ‘27s), compared with 13.19% and 13.21%.
Since the auction, we have had the market-positive news that the FGN may raise another US$2.5bn from the sale of Eurobonds this quarter and that the DMO would like a conversation with JP Morgan about the return of a selection of its FGN bonds to the bank’s indices for government issues in local currencies in emerging markets.
The decline in yields on FGN paper in the past four months amounts to +/- 350bps for the bonds and we doubt that this is reflected in the 2018 budget proposals, which have total debt service at N2.03trn excluding the sinking fund. We have estimated the average cost of FGN borrowing in naira last year at 15.5%, based upon debt service for the first nine months.
In addition to the momentum in its favour, the DMO appears to have a lower funding target for this calendar year. It raised N1.25trn net from the domestic market in 2017 whereas the FGN deficit in the 2018 proposals is said to be N2.0trn and the strategy is to shift the balance towards external borrowing.
The DMO’s new calendar for Q1 2018 tells us that investors are to be offered two new issues, Feb ‘28s next month and Mar ‘25s at the auction in March. Its calendars are released after consultations with the investor base.