High bond yields thrill grassroots investors
Deposit mobilisation via the Federal Government of Nigeria Savings Bond (FGNSB) has been on for three months. Next offer will open on June 5 and close on June 9. The exercise backs the Central Bank of Nigeria’s (CBN’s) financial inclusion project of getting more Nigerians to embrace financial services. Stakeholders dismiss speculations that the high yields accruable to FGNSB investors will discourage commercial banks’ depositors, especially from the grassroots. Offers’s promoter – the Debt Management Office (DMO) – sees the FGNSB as an opportunity for grassroots investors to build sustainable wealth, writes COLLINS NWEZE.
For investors – both local and foreign – return on investment remains an attraction any day. Hence, when the Federal Government of Nigeria (FGN) Savings Bond for this month’s offer attracted 13.189 per cent coupon, it was seen as unbeatable. It has remained so, especially for commercial banks which hardly offer anything above single digit interest on deposits.
The bonds allow the quarterly remittance of interest income directly into bond holder’s account. The interest paid on the customers’ deposit accounts is monthly and below six per cent per annum.
Savings bonds in Nigeria, as elsewhere, are debt securities issued by the government to help fund development projects. They are debt instruments offered by sovereigns to mobilise resources from the general public, especially individuals and small savers. It offers guarantees that help to stimulate and deepen the savings culture among households, assists in the diversification of funding sources for the government and establishes benchmarks for other issuers. It also encourages financial inclusion across the social and economic strata.
Despite the month-to-month subscriptions to the bonds, stakeholders in the financial sector insist that it does not in anyway, threaten banks’ deposit base. They believe that both the bonds and deposit drives are needed to ensure that more people within the population have access to financial services.
The Group Chief Finance Officer, United Bank for Africa (UBA) Plc, Ugo Nwaghodoh, said the FGN Savings Bond does not pose any threat for commercial banks’ deposit base.
He said the N2.067 billion raised in the maiden offer does not in any way threaten the deposit drive of commercial banks.
“I do not think the FGN Savings Bond will threaten commercial banks’ drive for deposits. The sky is wide enough for all birds to fly,” he said at a briefing on bank’s results in Lagos.
The Chief Executive Officer, Nextnomics Advisory, Dr. Temitope Oshikoya, said the government needs to borrow through local bond issuance to fund the budget. He said the Debt Management Office (DMO) will be involved in the process, adding that the practice where banks end up buying up the bonds instead of lending their deposits to customers is not the best for the economy.
“It will be good to have more people invest in the local bond market. Banks are expected to lend to the private sector, instead of investing so much in the local bonds”, he said.
Oshikoya explained that FGN Bonds serve as risk-free investment with tax-free income. The bonds provide relatively high and stable returns and the principal element (collected at maturity) can be used as collateral for securing credit facilities from banks.
Besides, bondholders that want cash can trade the bonds on the floor of the Nigeria Stock Exchange (NSE) for immediate cash before maturity, even as it qualifies as liquid assets for banks from two years to maturity.
He said that if the debts are well spent, it helps to boost liquidity in the economy and investment in key sectors like agriculture and mining, among others.
A financial expert, Charles Odinaka, said the FGN Savings Bond complements the Central Bank of Nigeria (CBN’s) financial inclusion project.
According to him, the CBN’s financial inclusion vision was aimed at enabling the Nigerian population to know, understand and develop the ability to evaluate financial products/services so as to lower the number of financially-excluded persons within the population, from 46.3 per cent to 20 per cent by the year 2020.
The financial inclusion also broadens the knowledge service providers on the needs of their customers, products and associated risks. The financial inclusion in Nigeria and would continue to work towards this aspiration by extending FGN Savings Bonds to under-banked businesses, communities and individuals across the country.
Odinaka said: “Specifically, the FGN Savings Bonds give investors ease of access to investment opportunities. The investors in the bonds will ultimately become drivers of the economy and eventually contribute their quota to the economic growth of the nation. I foresee a situation where all members, youths, students, traders, name it, operating in the economic space or playing field, do not have difficulty in investing their money because of the benefits that come with the bonds.”
In his contribution, the Managing Director, CRC Credit Bureau Limited, Tunde Popoola said the government is in dire need of funds to stimulate and get the economy out of recession, stating that domestic debts do not react to exchange rates, especially when the loans are repaid in the local currency.
Popoola said: “The bond is capable of boosting savings culture among Nigerians. And it has been brought down to between N5, 000 and N50 million which is affordable to many Nigerians.
“The funds raised can be deployed into infrastructure funding. We are going to be interested in the next phase of the offer to determine its modalities of implementation. We need to see detailed guidelines for its implementation.”
For the government, the savings bond will shore up access to funds available for investment in the economy, thereby facilitating gross capital formation and economic growth. It equally enables the individual to enjoy those benefits which accrue to big investors in the capital market.
The DMO recently took the FGN Savings Bond campaign to Ibadan, Kano and Onitsha, among other cities. The one-day advocacy and sensitisation workshop in Ibadan was attended by trade union leaders, associations in the Southwest, during which the benefits of investing in the bonds were emphasized.
The DMO urged willing participants to subscribe through stockbroking firms trading with the NSE, its accredited and licensed distribution agents.
DMO’s Director-General Abraham Nwankwo said the bond would empower every Nigerian economically, describing it as a window principally designed for retail investors with a view to providing opportunity for investors to contribute to national development because it improves the savings culture in the country.
Nwankwo, who noted that the DMO has a board chaired by the Vice President, explained that Nigerians can invest a minimum of N5, 000 and maximum of N50 million in FGNSB.
He explained that any above the N50 million peg should be invested in the old bond, known as Federal Government of Nigeria Bond (FGNB).
Nwankwo said: “We are here in Ibadan to enlighten the general public about the Federal Government of Nigeria Savings Bond. The government of President Muhammadu Buhari has an economic philosophy of making sure that the economic process is inclusive.
“As Nigeria recovers from economic recession and grows, nobody should be left behind. Every Nigerian, no matter the income level, will have an opportunity to participate in the process of re-activating the economy, and also benefit from the progress that is being made.
“It is in that regard that the Debt Management Office has been mandated by the Vice President and the Acting President, Prof Yemi Osinbajo, to ensure that the DMO also works along this mandate.
“The Federal Government has been issuing bonds since 2002 and the purpose is to ensure that government raises additional money to augment revenue to be able to fund various capital projects in the budget.
“The budget is always approved by the National Assembly, which means the National Assembly on behalf of the people of Nigeria takes a decision and approves that money should be borrowed.”
He explained that funds are also borrowed from external sources. “However, based on new philosophy of government, that whatever we are doing should be inclusive, so that when we achieve growth, it will be growth with development because everybody is involved, we have decided to design a new instrument – FGN Savings Bond, which can be accessible to the low income group, such as teachers, artisans, drivers, tomato sellers, market women, plumbers, trade unions and to all types of associations.
“On a personal level, you will benefit because you will be earning assured and competitive interest rate every quarter. The FGN Savings Bond is offered every month. The DMO has been given the mandate.
“The Minister of Finance, Mrs. Kemi Adeosun, has given us all the support to make sure that we are able to reach Nigerians everywhere. We have been to Kano and Onitsha. We are also in Ibadan. We will continue with other cities. We will go to the local governments and villages.”
In Kano, Nwankwo also said the bond would enable low income earners to contribute their quota to the development of the nation’s economy.
He said the bond was part of the federal government’s initiatives of inclusiveness in governance, noting that with the new bond, both rich and low income earners would contribute to the nation’s economy.
“With only N5, 000, one can benefit from the new bond. This is an opportunity for all and sundry to participate. It is designed to touch lives at the grassroots”, he said.
In his remarks, the Director, Portfolio Management Department of the DMO, Dr Oladele Afolabi, said the FGN Savings Bond was issued monthly in tenors of two and three years.
In Onitsha, Nwankwo, said the Federal Government of Nigeria Savings Bond (FGNSB) is designed purposefully to favour the poor and give them a stake in government.
The DMO director-general was addressing leaders of market unions and leaders of middle income earner organisations in an advocacy/sensitisation workshop on the FGN Savings Bond in Onitsha.
He said that over the years, the bonds issued by the government were elitist and sold as wholesale bonds to privileged individuals, corporate companies and organisation.
He noted: “All these super rich individuals bought it as wholesale bond, but the difference we have in the FGNSB is that we are making these bond available to the ordinary Nigerians,” he said.
Currencies Analyst, Ecobank Nigeria, Olakunle Ezun, said there is need for Nigerians to invest in local bonds.
“It is not advisable for government to print money to meet developmental needs. And it is advisable that the citizens invest in FGN bonds, which are safe, profitable and deepens the local bond market,” he said.
To him, although the funds from the domestic bond market are more expensive than the international bond market, investing in the local bond market is in the best interest of the economy.
The government bonds, he added, help the government funds its deficits in a non-inflationary manner while providing benchmark yield-curve for pricing other securities/bonds.
It also engenders rational management of government’s fiscal and monetary operations.
The DMO explained that a bond is a loan and the investor or holder of the bond is the lender. It said: “When you purchase a bond, you are lending money to a government, local government council, state government, federal agency or a corporation, known as the issuer. The government uses it to fund budget deficit, for instance, or to build roads, electric power stations, finance factories, among others.
“When you purchase a bond, in return the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it ‘matures’.”
The debt office said when investors buy government bonds they are lending funds to the federal government for a specified period of time.
It said that government bond is considered as the safest of all the investments because it is backed by the ‘full faith and credit’ of the government.
The Managing Director of Afrinvest West Africa Limited, Ike Chioke, said the outlook for bonds market remains bullish based on the firm’s medium-term outlook.
Chioke said in an emailed statement: “Our medium-term outlook remains bullish as we expect yields to moderate on falling inflation expectation and improving current account and fiscal balance. Relatedly, the NSE listed the Series 1 of the FGN Savings Bond, maturing March 2019. The Bond was priced at 13.01 per cent at issuance and has an outstanding value of N2.067 billion. The DMO is expected to release the issuance rate this week.”
Chioke explained that in the Eurobond market, Nigeria successfully raised $500 million mid last week to conclude its $1.5 billion Global Medium Term Note due February 2032.
He said: “The bond was issued at a yield of 7.5 per cent, 38 basis points lower than the issuance yield of the $1 billion tranche issued in February.
“The two instruments, which have the same maturity date, have subsequently been consolidated into a single $1.5 billion bond with the market yield trending further downwards to 7.4 per cent as of writing.” The DMO chief believes that as Nigeria reforms, restructures and strategises towards pulling back the economy unto a path of inclusive and sustainable growth, it is useful to pay detailed attention to the sectors and subsectors.
“This is because while summary pictures succeed in showing the prevailing conditions, the secrets to the various pieces of the solution lie in the details. That is, appropriate disaggregation is good for effective diagnostics, analytics and strategics, as well as for understanding investor calculus.”
In respect of Nigeria’s public debt, he said it was important conceptually and practically, to recognise that the domestic and external components are conditioned and governed by dynamics that are considerably different. “Indeed, it is pertinent to note that in spite of the drastic drop in the country’s foreign exchange earnings, following the oil-price shock since mid-2014, the external debt liability hardly constitutes a source of vulnerability,” he said.
Nwankwo said that Nigeria’s 10-year Eurobond (2013 to 2023), which traded at an average yield of about 6.945 per cent for 2015 and at 8.680 per cent for January 2016, has been trading at a daily yield of between 6.147 per cent and 6.571 per cent so far throughout the month of September 2016.
So far, investment in bonds remains attractive to grassroots investors. Not even the banks can reverse the rising trends.