Exploring Opportunities in the Domestic Bond Market
Obinna Chima and Nume Horsfall highlight the opportunities in the domestic bond market for members of the organised private sector The significant improvement of level of business confidence expressed by both local and foreign investors in Nigeria reflects the opportunities in the country.
Some of the factors that have continued to contribute to the growing confidence in the Nigerian business environment include the on-going reforms in the power sector, infrastructure developments, impressive corporate results churned out by quoted companies, moderating inflation and exchange rate stability.
In view of this, the need for private sector operators, known widely as the key engine of economic growth to take advantage of the opportunities in the domestic bond market to contribute effectively to the country’s growth. The bond market provides both governments and the private sector operators the funds needed to get development and long-term infrastructure projects off the ground. Bond issues also help in raising the funds to get started on projects. In fact, bond issuance helps for new and expanding businesses.
Opportunities for Private Sector To the Debt Management Office (DMO), Nigerian corporates need to leverage the existing sovereign benchmark to raise long-term capital in the domestic bond market. The Director General, DMO, Dr. Abraham Nwankwo, noted by successfully addressing some of the challenges and constraints that affected Nigeria’s public debt management, the DMO anticipated windows of opportunities for the private sector to raise long-term capital for the development of the real sector and infrastructure.
Furthermore, he argued that the outcome of the $1 billion bond issued by the federal government recently, that was oversubscribed, showed that there was effective demand for debt instruments from the country.
“The challenge is for Nigeria’s private sector, either as individual private companies, or alternatively by pooling their resources together to directly access the international market, to raise long-term, lump sum monies to for various projects in the Nigerian economy. It can be in agriculture, solid minerals, transportation, roads, power projects, manufacturing amongst others. “There is nothing holding other private sector firms either as individuals or by pooling their balance sheet together from accessing the bond market,” he said.
The DMO boss declared that the debt office would continue to deepen the bond market by enhancing liquidity and introducing other instruments.
“Some of the products will come in the near-term and some in the medium-term. For example, the Global Depository Note we talked about, which is way of encouraging special classes of international investors who will not invest it directly in the deposit bond market except through a depository arrangement, is likely to come on stream before the year ends as approved by the National Assembly.
“The inflation-linked bond, we are working on it and I believe that in the near-term, that should come to fruition. Of course, the other flexibility arrangement we talked about, including the securities lending, will certainly come on stream before the end of the first half of 2014. So, many of these products are coming in the near-to-medium,” he added.
Nwankwo pointed out that the federal government would continue to work with the organised private sector to make sure that concerns such as tariff, duties, infrastructure and others are addressed.
However, the Managing Director/Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, stressed the need for deepen the Nigerian financial market with long-term funding.
“That is not going to happen from commercial bank. Commercial banks are to fund your working capital requirements and to help you provide short-term funding. So, we need long-term institutions. If you think that you are going to use your own cash-flow to fund your development, no sir! We must get away from the phobia and allergy of borrowing,” he explained.
But the Chief Executive Officer of Stanbic IBTC Stockbrokers Limited, Mr. Oladele Sotubo, said there was need to create more awareness on the bond market so as to attract more debt instrument issuers and investors to the market. “The approach is to make them see the benefits in this asset class as compared to other classes they are already used to. Nigeria’s bond market has a yearly turnover of about N10 trillion and this is growing as we expect to see more issuance from federal and state governments. The corporate bond space is gradually coming alive and we have also seen the emergence of Supra National bond with the listing of International Finance Corporation (IFC) bond.
“Expectations of reduction in the yield will drive investors to lock in on longer tenor bonds. Long-term bonds have higher duration which shows higher risk that will be compensated by higher expected return as longer term bonds are more volatile. Investors also look at assets that will match their liabilities,” he added. IFC’s Support In order to support Nigeria’s private sector, the International Finance Corporation (IFC), a member of the World Bank Group recently disclosed plans to float its first long-term, local-currency bond programme of about $1 billion in Nigeria. The plan, which would be executed in collaboration with the Securities and Exchange Commission (SEC), would allow the IFC issue series of local-currency bonds to deepen the domestic capital markets and support private sector development in Nigeria. The Vice President and Treasurer, IFC, Jingdong Hua, said Nigeria is a leader in the implementation of the IFC pan-African Domestic Medium Term Note Programme. The programme enables IFC to raise long-term, local currency funding for private sector development in the region.
Hua explained that through the $1 billion debt programme, the IFC would be making local currency finance available for local entrepreneurs who are always concerned about foreign exchange volatility when they borrow from foreign markets. “The private sector, from our experience, really wants to focus on building their business. If they can help it, they do not want to deal with foreign exchange volatility. Therefore, the increased capability of the IFC and other financial institutions, would help the private sector, so that they focus on their business rather than worry about foreign exchange volatility,” he said.
The IFC VP noted the corporation’s job of developing the private sector dove-tails into the Nigerian government’s strategy of stimulating the growth of the economy, pointing out the private sector created over 90 per cent of jobs. Commenting on the proposed debt programme, the Director General, SEC, Arunma Oteh, said SEC had spearheaded a number of reforms to accelerate the development of Nigeria’s domestic capital markets, describing the IFC programme as an important contribution to the commission’s efforts.
“It will enable regular domestic issuances by an international, triple-A rated issuer, expanding the opportunities for investors and increasing access to local-currency finance for Nigerian businesses,” Oteh added. In February 2013, the IFC issued the first local-currency bond by a non-resident issuer in Nigeria, raising N12 billion. IFC issues bonds as part of its regular programme of raising funds for private sector development, and to support the development of domestic capital markets.
An Executive Director at the Consolidated Discount House Limited (CDL), Mr. Akinola Odedina, said the proposed debt issuance by the IFC would deepen the domestic capital market and support the growth of the private sector. “To ensure heavy participation on this, the bond issuance should be timed for between January and March 2014 when banks may have closed their books and government ministries are trying to close their books on budget spending with possible liquidity in the economy. This will ensure a lesser rate for IFC,” he added.