Budget Deficit: FG Borrows N2.94trn from Debt Market in 11 Months

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Kayode Tokede

The federal government between January and November of 2022 borrowed a sum of N2.94trillion through FGN Bond Market to finance the 2022 budget deficit, bond auction results released by the Debt Management Office (DMO) has revealed.

This is represents an increase of 8.13 per cent over the N2.72trillion borrowed to finance budget deficit between January and November of 2021.

The FGN bonds are debt securities of the Federal Government of Nigeria (FGN) issued by the DMO and it has the obligation to pay the bondholder the principal and agreed interest as and when due.

The bond market offers less volatility that assures Pension Funds Administrators (PFAs), and investors of their capital returns albeit with low yield on investment as the marginal rates on -Year Bond FGN Bonds that close the November 2022 auction was at 16.2 per cent, below 21.09 per cent inflation rate as of October 2022.

The federal government had highlighted that the 2022 budget has debt deficit of N6.26trillion, forcing the government to issue new borrowings of N5.012 trillion (of which domestic – N2.506 trillion and foreign – N2.506 trillion); drawdowns on Project-tied Multilateral/Bilateral loans – N1.156 trillion; and Privatisation Proceeds of N90.73 billion.

President Muhammadu Buhari last month said fiscal operations of the federal government resulted in an estimated budget deficit of N4.63 trillion.

According to him, “This represents 63 per cent of the estimated deficit for the full year. This is largely attributable to revenue shortfalls and higher debt service obligations resulting from rising debt levels and interest rates.

“The deficit was mainly financed through domestic borrowing amounting to N4.12 trillion. Hence, total public debt stock increased from N39.6 trillion Naira as at the end of December 2021 to N42.8 trillion Naira as at the end of June, 2022.”

The Year-till-Date (YtD), FGN bond results revealed that DMO offered to raise N2.18trillion in 11 months of 2022 and eventually witnessed a oversubscription of N4.12trillion, out of which N2.94trillion was the total allotted amount.

The latest FGN bond auction result for the month of November 2022 revealed that the DMO offered N225billion for subscription to investors but raised N344.01billion through re-openings of the 14.55 per cent FGN APR 2029, 12.50 per cent FGN APR 2032 and 16.25 per cent 2037 FGN bonds. The DMO finally allotted N269.15billion to investors in November. 

The agency had offered N225 billion for subscription to investors in October but raised N107.88 billion through re-openings of the 14.55 per cent FGN APR 2029, 12.50 per cent FGN APR 2032 and 16.25 per cent 2037 FGN bonds.

Reacting to the oversubscription in November, the Head Financial Institutions’ Ratings Agusto & Co, Mr. Ayokunle Olubunmi said that FGN bonds interest rate is higher compared to investing in the Treasury bills market.

He explained that, “the FGN bonds have no default risk, meaning that it is certain your interest and principal will be paid as and when due. The interest income earned from the securities are tax exempt compared to the treasury bills that expired in January 2022.”

Analyst at PAC Holdings, Mr. Wole Adeyeye also said, “Most investors do away with the stock market and invest in bond market because they have the assurance that the market is the safest of all investments in domestic debt market since it is backed by the Federal Government, and as such it is classified as a risk-free debt instrument.”

He added that, “the deficit in the budget has given room for the government to borrow. The government needs money to finance key projects this year.

“The money spent on debt servicing is eating deep into the government’s revenue, which makes borrowing an unsustainable form of financing.”

Analysts at Cordros Research during the week maintained that the FGN bonds secondary market turned bullish this week, as the average yield dipped by six basis points w/w to 14.5per cent.

According to Cordros Research, “We attribute this performance to investors cherry-picking attractive bonds in higher-yield environments particularly at the short and mid segments of the naira curve.

“We expect the outcome of the FGN auction to shape the sentiments in the Treasury bond secondary market next week. At the auction, the DMO will offer instruments worth N225.00 billion through re-openings of the 14.55% FGN APR 2029, 12.50% FGN APR 2032, and 16.2499% FGN APR 2037 bonds.

“Notwithstanding, in the medium term, we maintain our view of an uptick in bond yields, as both the FGN’s borrowing plan for 2022FY and the expected fiscal deficit point towards an elevated supply.”