Analysts shine light on benefits, risks of Nigeria’s $500m local dollar bond offer

As treasury, DMO officials welcome investors

Red flag raised over bond’s 5-year tenure

Worry over deployment of bond’s proceeds
Opportunity to earn risk-free return on investments
Nigerians can now invest idle dom account $$

L-R: Banji Fehintola, executive director, Africa Finance Corporation; Peter Ashade, group chief executive officer, United Capital; Niyi Omojola, managing director, Constant Capital Markets and Securities Limited; Olawale Edun, minister of finance and coordinating minister of the economy; Patience Oniha, director-general, Debt Management Office; and Chuka Eseka, group managing director, Vetiva Capital Management Limited, at the Domestic FGN US Dollar Bond Roadshow in Lagos, recently.

ONOME AMUGE IN LAGOS, NIGERIA

Nigeria’s push to attract foreign currency into its economy through domestic and international investors gets off to a new start today Monday 19 August, 2024 as it opens its $500 million dollar denominated domestic bond issuance in what is termed by the country’s officials as a clarion call on investors to join the nation’s charge towards economic greatness. This new financial orchestra, for the injection of investors’ foreign currency funds into the much challenged Nigerian economy, is being conducted by the Debt Management Office (DMO). The DMO noted that this issuance is a grand gambit in the government’s plan to funnel capital into critical sectors, particularly infrastructure, considered the cornerstone of the country’s long-term development. The $500 million tax-exempt bond, according to Nigeria’s treasury officials, is designed to appeal to a wide range of investors, both domestic and international. As such, investors can participate with a minimum investment of $10,000, and subsequent investments can be made in increments of $1,000. The idea behind this structure, Business a.m. understands, is to encourage a diverse pool of investors to bring in a variety of capital from both inside and outside of Nigeria. Wale Edun, Nigeria’s finance minister and coordinating minister of the economy, during a roadshow in Lagos where the plan was disclosed to prospective investors, weaved together a narrative of the government’s master plan for economic revival and the vital role of the initiative in the country’s journey towards economic stability. Edun explained that the bond, the first of its kind in the country’s financial system, is not only a source of capital but also a harbinger of benefits for the nation, promising the safety of a financial fortress, the diversification of a well-crafted portfolio, and the predictability of a steady cash flow. He added that the bond is also a catalyst for the development of Nigeria’s domestic capital market and a means of enhancing asset liquidity, ensuring that the nation’s financial potential is unlocked and unleashed. “This bond issuance is more than just a financial instrument; it is a strategic move to channel funds into sectors that will catalyse economic growth. “This historic issuance will provide essential foreign exchange liquidity and boost reserves, which will help stabilise the exchange rate, manage inflation, and eventually lower interest rates,” he noted. The bond, slated to be issued on August 19, 2024, with the expectation of increasing the nation’s foreign currency reserves, was chosen over an initial plan to issue a Eurobond on the international market. This decision, the minister explained, is in line with the government’s strategy to bridge the budget deficit, stabilise the local currency, and support economic growth. Expanding its reach, the Nigerian domestic dollar bond finds a home not only on the Nigerian Exchange Group (NGX), but also on the floor of the FMDQ Securities Exchange, extending a warm embrace to Nigerian investors across borders and those holding dollars within their foreign currency accounts. With a settlement date expected ten days after the auction date, the Nigerian government wields a wand laced with anticipation as investors eagerly await the pricing to be revealed, their interest piqued by the potential for attractive returns and the prospect of participating in the nation's financial tapestry. As the Nigerian domestic dollar bond offers a beacon of hope to the nation’s economy, its light does not shine without a shadow, a shadow cast by the cautious words of Uche Uwaleke, a professor of capital market and finance, and director, Institute of Capital Market Studies, Nasarawa State University, who questions the ambitious five-year tenure of the bond issuance, raising a red flag to the potential challenges that may lurk in the shadows of this economic opportunity. “A two-year, short-term tenor, would have been better and less costly since this is a debut issuance designed to test the domestic market’s appetite for USD-denominated domestic bonds. It is instructive to note that when Ghana issued her first domestic dollar bonds in 2016, it had a 2-year tenor and was largely successful,” he argued in an article titled “How will the domestic dollar bond impact the Nigerian economy?”, which he shared with Business a.m. over the weekend. In the delicate dance between economic opportunity and financial stability, Uwaleke’s concerns strike a delicate chord, reverberating with the echoes of the International Monetary Fund’s warning in its Article IV Consultation report on the country. Like a cautious maestro, the analyst cautions against the potential pitfalls of onshore dollar liquidity, which could disrupt market harmony, tip the scales of naira securities, and send the naira into a discordant spiral, risking further strain on the nation's currency. “It is equally important to prevent a situation where the parallel market is made a source of funds invested in these bonds which speaks to whether there are adequate safeguards in relation to the Know Your Customer (KYC) principles in view of the nature of the transaction. “For Nigerians in [the] Diaspora in particular, a key consideration would be the effectiveness of the Clearing and Settlement infrastructure associated with the domestic dollar bonds issuance,” Uwaleke added. Despite these concerns, Uwaleke strikes a hopeful chord, his confidence reverberating in the potential of the domestic dollar bond which, according to him, holds a lot of promise to investors and the economy in general in a number of ways. According to Uwaleke, the bond issuance provides an opportunity to earn risk-free return on investments given that dollar deposits with banks attract little or no interest. Uwaleke, who also doubles as the president, Capital Market Academics of Nigeria (CMAN), explained that the interest payable on the bond is exempt from income tax. This provides an opportunity for both retail and institutional investors to diversify their portfolios. According to the capital market expert, the bond provides a more cost-effective way for the government to meet its financial requirements, particularly in times when interest rates are high due to hawkish monetary policies, which make it more expensive for the government to service domestic debt. Uwaleke highlighted other benefits of the bond, including the possibility of strengthening the naira as dollars raised through the bond will be available for use in the foreign exchange market. He also believes that if the debut bond is successful, the government will be encouraged to issue more domestic dollar bonds, which will reduce the amount of naira bonds issued, ensuring that more capital is available for private sector investment. Uwaleke noted that the bond will bring increased liquidity to the capital market due to the introduction of a new asset class. He also believes that like the debut Eurobond in 2011, this domestic dollar bond will lead to the introduction of similar bonds by companies and sub-national governments, which will deepen the capital market. “All said, the benefits of the domestic dollar bonds outweigh the costs. It is expected that the net proceeds will be ring-fenced and invested in critical sectors of the economy such as agriculture, education and health,” he concluded. Victor Chiazor, head of research and an investment expert at FSL Securities, expressed confidence in the subscription level of the domestic dollar bond, stating that the high-interest rate being offered by the government is expected to make it a popular investment choice for many. Chiazor, while noting the expected popularity of the bond, cautioned against the potential negative effect it may have on the economy. Specifically, he expressed concern that the bond may encourage domestic players to convert their naira holdings into dollars, which could weaken the value of the naira. “For us, we hope this does not become a frequent pattern within the Nigerian economy as it has the tendency to further increase the level of dollarisation of the economy,” he said. David Adonri, managing director of HighCap Securities, also provided his thoughts on the domestic dollar bond. According to him, the bond will allow domiciliary account holders to earn income on their previously non-interest-bearing deposits. In addition, he believes that the bond will reduce capital flight because the interest payments will remain in the local economy rather than being transferred abroad. “Generally, it is an attractive investment outlet for domestic investors who have been yearning for investment in dollar-denominated assets locally. It will deepen the country’s capital market,” Adonri said. While supportive of the bond, Adonri identified the need for the government to be prudent with the funds raised through the bond. Specifically, he stressed the importance of the government using the capital raised in a responsible and effective manner, ensuring that it is put towards meaningful and beneficial projects or initiatives. Olatunde Amolegbe, the managing director of Arthur Steven Asset Management, noted the unique situation in Nigeria where a large number of citizens hold significant amounts of dollars in domiciliary accounts, which are not invested or used to stimulate economic activity. Amolegbe believes that the domestic dollar bond offers a solution to this problem, providing a way for these idle funds to earn interest while also allowing the bondholders to benefit from holding a stable reserve currency, such as the US dollar. The financial expert also expressed optimism that the domestic dollar bond will provide the government with much-needed dollar liquidity, which can be used to support the foreign exchange market and potentially lead to a stronger naira. In his view, the bond, in essence, offers a win-win situation for the government and investors, as it allows the government to access foreign currency without increasing its debt burden, while also providing investors with an opportunity to earn interest on their idle funds. Femi Ademola, managing director, AIICO Capital, commented that the issuance of the domestic foreign currency-denominated bond is a fulfilment of the government's promise to attract funding from Nigerians living abroad. According to Ademola, the bond provides a safe investment opportunity for those holding foreign currency, as it allows them to invest in dollars, alleviating their concerns about potential naira devaluation. “The success of this issuance will be a confidence boost for the country and the current administration. It would also allow the government to channel the remittances into more profitable ventures for investors,” he stated. Ademola also pointed out that the domestic foreign currency-denominated bond, like Eurobonds, will have a positive impact on the financial market. He stated that, just like Eurobonds, the domestic bond will be tradable in the market, which will deepen the financial market and provide greater liquidity.