Federal Government Secures N7.2trn Bond Financing to Cover Funding Gap

Data obtained by Daily Sun yesterday showed that the domestic financial system has been placed at the center of an increasingly difficult effort to finance the country’s widening fiscal needs as the federal government has raised almost N7.2 trillion through bond auctions so far this year.

The data showed the sum, raised by the Debt Management Office (DMO), excludes borrowing through treasury bills, sukuk and other instruments. It nevertheless provides 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. With the current pace, the DMO has raised less than a quarter of that target through bond auctions, leaving it with a large financing requirement for the remainder of the year. The problem is not only whether investors have enough money to take up the supply, but whether the government can keep raising money without pushing up borrowing costs and diverting credit from businesses and households.

At its last 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.

In addition, total subscriptions amounted to N1.7 trillion, resulting in a bid-to-cover ratio of 2.1 times compared with 1.9 times recorded at the previous auction. Instead, the DMO seemed unwilling to take bids at yields it deemed rich.

The June 2038 bond had the highest demand, attracting bids of N821.3 billion against competitive sales of N631 billion. The DMO also sold N742.3 billion in non-competitive sales on the same instrument. The bond was cleared at a marginal yield of 17.79 per cent although bids went as high as 19 per cent.

This pattern was more acute in the January 2035 note. Investors offered N513.6 billion for the security, but the DMO allotted N64.1 billion. The bids ranged from 16% to 22.6%, and the final marginal rate came in at 17.15%. The result indicates that the agency is rationing borrowing to prevent the public debt stock from incorporating higher funding costs.

That restraint may become more difficult to maintain. Banks are likely to remain among the biggest buyers of sovereign debt, particularly because government securities offer a liquid, relatively low-risk outlet for funds, Quest Merchant Bank said in an emailed noted to Daily Sun.

The bank said the strong demand at the auction showed expectations were rising that yields may have peaked after inflation had moderated recently and the prospect of a sustained disinflationary trend.

It said therefore, investors are eager to capture higher yields, especially at the long end of the curve.

But industry experts said a more aggressive sovereign borrowing program could soak up liquidity that might otherwise have supported corporate lending, trade finance and consumer credit.

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The risk is especially acute for smaller companies, which already struggle with high lending rates and limited access to formal credit. If banks can earn close to 18 per cent from long-dated government debt – with lower credit risk and lower operational costs than private lending – the incentive to lend to riskier businesses is diminished.

Pension funds and asset managers may also keep favoring long-dated sovereign paper as they try to lock in elevated returns before inflation and rates fall. This could strengthen the DMO’s funding program, but it would increase the financial system’s exposure to the sovereign when costs of servicing public debt are high relative to government revenues.

“That said the agency still has significant distance to cover to reach its domestic funding target of about N29 trillion outlined in the budget.

“We expect robust investor demand, supported by easing inflation and expectations of a gradual decline in yields,” Quest Merchant Bank said.

The FG is therefore facing a narrow corridor of policy. It must fund 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.

Thus, the DMO’s ability to maintain that balance will determine not only the credibility of the budget but also the availability and cost of financing for Nigerian businesses.