CBN Governor, Sanusi Lamido Sanusi

Eromosele Abiodun

Following increased interest in the FGN bond market underpinned by strong demand at auction, the Debt Management Office (DMO) raised an average of N71 billion each month at auction from October 2011 through to September 2012, totalling N852 billion and received bids averaging N142 billion for the same period  totalling N1.7 trillion.

THISDAY findings revealed that the announcement in August by JP Morgan that three FGN bonds would be included in its government bond index with effect from the start of October has further prompted a rally in the market.

THISDAY checks also revealed that yields narrowed by up to 300 bps as offshore investors, many new to Nigeria, entered the market. However, experts estimate that index investors would have to commit about $1.5 billion merely to give Nigeria a market weight.

The market has also witnessed some profit-taking but analysts have predicted that there would be further legs to the rally, not least because of improved inflation prospects.

Meanwhile, a report by FBN Capital showed that banks’ bids have not evaporated since the increase of 400bps in their CRR in July. They added that the tentative signs of pension funds returning to the equity market may whittle their influence in the market.

“However, there are there is no regulatory cap on their holdings of FGN paper, and there are not many other fixed-income instruments to hold in their portfolios,” they noted. They also revealed that the recent growth in the Nigerian economy was achieved despite a lack of financial deepening.

“Private-sector credit extension in South Africa in 2011 was close to twice that in Nigeria, as a percentage of Gross Domestic Product (GDP). In addition to the modest deepening, we can see from the lending data that the deposit money banks (DMBs) focus their loans on minerals (which we assume to include oil), transport, manufacturing and trade.

“Much of the vibrant growth in the non-oil economy, therefore, can be traced to sectors with limited access to credit from the DMBs such as agriculture and small-scale construction.

“This prompts several observations: that the impact of monetary policy is blunted as a result; that the gathering of data on the informal sectors of the economy is challenging, suggesting a wide margin of error; and that, given the reluctance of the DMBs to lend to agriculture, we can understand why the CBN entered this field with its N200 billion Commercial Agriculture Credit Scheme in 2009,” they stated.