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Wednesday, February 1, 2023

CBN’s Hawkish Policy Stance to Undermine Bond Sales

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There are growing expectations that the Central Bank of Nigeria (CBN) will cling onto its hawkish stance amid rising inflation, which will drive up borrowing costs, and undermine bond deals in 2023.

Starting from the second half of last year, corporate bond issuers were more conservative in issuing new debt instruments due to the high-interest yield environment.

Thirteen new corporate bonds listed on the FMDQ exchange were issued in 2022 (vs. fifteen in 2021), according to data compiled by Meristem Securities.

Analysts at the research firm said seven of the thirteen bonds were issued before the first-rate hike in May, while the remaining issuances took place between June and September (before the third-rate hike).

“Therefore, we believe that the higher yield environment in H2:2022 discouraged corporate bond issuers,” said analysts at Meristem.

Yields on fixed income securities have been rising gradually since the first quarter of 2022 as Russia’s invasion of Ukraine that aggravated a pent up demand after the relaxation of the lockdown measures combined with macroeconomic challenges forced the central bank to embark on an abrupt hike in interest rates.

More importantly, also fueling the rotation from equity into bonds is the federal government system’s liquidity and the expiration of the income tax exemption on corporate bonds and government securities that took effect in January 2022.

Analysts expect the fixed income market to be on a bullish note and  slowdown in bond sales this year because there remains persistent inflationary pressures stoked by foreign exchange scarcity, insecurity in the food producing states, and higher utility bills and political risk are still on the horizon.

The central bank lifted its monetary policy rate by 100 bps to 16.5 percent at its November 2022 meeting, following a 150bps hike in September, matching market expectations. That represented the fourth straight rate increase last year.

The Nigeria 10 year government bond has a 13.509 percent yield; and that compares with yields of 4.10 as at November 2020, according to data from Government Bonds.

For the first time in 11 months, the National Bureau of Statistics (NBS), yesterday, reported that inflation has eased to 21.34 per cent in December from an all-time high of 21.47 per cent in November, 2022.

While companies were fleeing the debt market last year, there had been an entry of commercial paper issuances mainly for refinancing and working capital needs.

The total market turnover of the instruments improved from zero value in 2021 full year (FY) to N200 million between January and October 2022, signifying increased activities, according to data from Meristem Securities.

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