The Debt Management Office failed to raise 117 billion naira on sales of the federal government’s 225 billion naira bond program as underwriting levels weakened at its auction of FGN bonds in October.
The auction document on the DMO website showed that the agency offered N225 billion for subscription to investors, but raised N107.88 billion through the bond reopening at 14.55% FGN April 2029 , 12.50% FGN April 2032 and 16.25% 2037 FGN.
Unlike previous auctions with record oversubscriptions, the total subscription level recorded at the October auction was the lowest so far in 2022, as the DMO struggled to secure a total subscription of 119, N18 billion.
It suffered an undersubscription of around N117 billion, which can be seen as a loss to the federal government’s efforts to finance its budget deficit.
This development occurred against the backdrop of the recent tightening of the Central Bank of Nigeria’s discount window.
The CBN recently insisted that certain categories of its authorized resellers are not eligible to access the rebate window on specific transactions.
The central bank indicated this in a circular addressed to all dealers on access to the discount window, dated October 7, 2022 and signed by the director of the financial markets department of the apex bank, Dr Angela sere- Ejembi.
He specifically reminded participants whose bids were successful in open market operations auctions to refrain from accessing the rebate window on the date of the auction.
The apex bank has warned that now failure to comply with the directive will lead to the award being cancelled.
Similarly, the bank pointed out that winning bids at government securities auctions, including Nigerian Treasury bills, FGN bonds and Sukuk, are not allowed to access the CBN discount window at the settlement date.
The CBN explained that this decision was necessitated by the non-compliance with the provisions governing access to the remittance counter despite two previous circulars on the subject in 2012 and 2016.
It appears that the recent tightening of the discount window had an impact on FGN bonds during the primary market auction, forcing local banks to play it safe, as a possible violation of the discount window rules CBN discounting carries heavy financial penalties.
Reacting, an investment research analyst at Meristem Securities Limited, Mr. Damilare Ojo, said there were a number of reasons for the low bond underwriting, including the CBN’s tightening policy.
He said: “It’s very low, unlike what we’ve seen in terms of subscription. One of the reasons is the CBN’s tightening policy, which has reduced the liquidity of participating institutions, especially banks.
“Also, if you look at the system in general, the liquidity is very low. The market seems to be saying that for the government to get funds for its budget, it needs to up its game.
“Also, lately, there has been speculation that the DMO wants to secure the ways and means, which exceeds N20tn, competing with the 2023 budget, which is a huge amount. So it looks like people are holding back from this bond auction to see if they will be better opportunities.
Further, in reaction to this, a research analyst at Atlas Portfolios Limited, Mr. Olaide Baanu, said that the low take-up could be a result of higher rates in the secondary markets.
He said: “Since the CBN began rate hikes to curb inflation, rates in the secondary fixed income market have started to rise, representing reasonable returns for investors.
“However, the recent under-subscription of the DMO N225bn offering could be attributed to higher secondary market rates compared to the rates presented by the DMO. In addition, many investors are taking advantage of the exchange rate to invest in funds denominated in dollars.
He also noted that this deficit might not affect the federal government’s ability to finance its budget deficit, as the government can find money elsewhere, such as by borrowing from the CBN.