. As CBN’s restrictive fx policy may hinder index inclusion
Director General of the Debt Management Office (DMO) has announced that the Federal Government would issue a USD2.5billion Eurobond in Q1 2018 as part of the USD5.5billion fund raising programme approved by the National Assembly last year.
The proceeds of the issuance are to be used to refinance short term local debt, specifically T-bills.
The DMO also stated that Nigeria may open discussions with JP Morgan in Q2 2018 regarding the inclusion of Nigerian bonds in the investment bank’s Government Bond Index – Emerging Markets.
However, investment one research reacting to the development, noted that the development to include the federal government bonds in the emerging market index highlight that the potential discussions come almost three years after Nigeria was excluded from the index due to the CBN’s restrictive FX policy, which hindered the ability of investors to repatriate funds and consequently replicate Nigeria’s weight in the index.
It pointed that prior to the exclusion, Nigeria’s weighting was 1.8 per cent of the index, which was tracked USD210bn worth of assets under management, as reported by Reuters.
The implication of the new development, Investment One research noted, debt refinancing, expected to moderate yields in the fixed income space, should be a positive for the administration’s goal to alter the nation’s debt profile to 60:40 domestic to foreign split, from c.75:25 currently.
However, “we highlight that the on-going delay in the passing of the budget remains a risk to economic activities while heightened political risk in H2 2018, as electioneering intensifies, could lead to a drawdown in the equities market.
Furthermore, we highlight that a further slide in yields in the fixed income space may be moderated by the US Fed’s hawkish stance, with three rate hikes forecast for 2018” the report said.
According to Investment One research, “The USD2.5billion refinancing, in addition to the USD0.5billion worth of T-bills refinanced in Q4 2017, should save the government N92billion in debt servicing per annum, according to the minister of finance while also elongating the nation’s debt maturity profile
The fresh foreign debt and emerging market index listing , the report noted should be a supportive of lowering the administration’s debt service to revenue ratio from c.45% currently thereby improving the government’s spending capacity and potentially increasing allocations to capex over the medium to longer term.
The potential decline in yields in the fixed income space due to the refinancing reinforces the likelihood that we may be moving towards a more accommodative monetary policy (lower interest rate and yield environment) in 2018. With this said, we highlight that the slide in yields may be more prominent on short dated maturities with the yield on the one year T-bill currently c.15.70%.
Also, the re-inclusion in the JP Morgan Index could lead to a further moderation in yields in the fixed income space as funds tracking the index would have to rebalance their portfolio and buy Nigerian bonds in order to minimize tracking error.
Stories by Bonny Amadi