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Bonds: Viable Instrument For Financing Development



The federal government has continued to make concerted efforts to raise funds from local and international debt market with a view to bridging the infrastructure deficit in Nigeria. OLUSHOLA BELLO, writes.

As the quest for development by emerging markets like Nigeria deepens, the importance of infrastructure in various sectors of the economy cannot be over emphasised. However, a major deterrent for infrastructural growth is the shortage of funds for the successful execution of same. For example, in Nigeria, it is reported that an estimated sum of $2.9 trillion is required to meet its infrastructural deficit by 2043.

The present government has been making concerted efforts in raising funds from local and international debt market with a view to bridging the infrastructure deficit in Nigeria. While the government looks to raising funds to finance critical infrastructure projects such as power, roads and rail, and projects aimed at diversifying the economy away from oil and gas. The judicious use of the funds generated will no doubt bring positive turn-around to the economy.

Experts have agreed that considering the huge infrastructural deficit currently being experienced in the country and the enormous financial resources required to fill the gap in the face of dwindling government revenue and the inability of our annual budget to bridge the infrastructure deficit, it has become necessary to resort to prudent external and domestic borrowing to bridge the gap.

Spending on critical capital projects as one planned by President Muhammadu Buhari administration is one of the surest and fastest ways of reflating an economy in depression. Not only would businesses that have closed shop open for business again, but Nigerians who had lost their jobs due to recession would get them back. This would have immediate multiplier effects on all sectors of the economy.

Rising Profile of Bond Market

A bond is a contract between a lender and a borrower, whereby the borrower agrees to pay the lender interest and repay principal at stipulated periods. It is issued by the government or a corporate institution as a way of raising funds for particular projects.

The Nigerian bond market has never been so appreciated or patronised like we have seen in the last few years. FGN Bonds are debt securities of the Federal Government of Nigeria (FGN) issued by the Debt Management Office (DMO) for and on behalf of the federal government. The FGN Bonds are considered as the safest of all investments in domestic debt market because it is backed by the ‘full faith and credit’ of the federal government, and as such it is classified as a risk free debt instrument.

They have no default risk, meaning that it is absolutely certain your interest and principal will be paid as and when due. The interest income earned from the securities are tax exempt. Looking at the recent types of bonds used by the federal government, for instance the FGN Savings Bond which was launched in March 2017 to help enhance the savings culture among Nigerians while providing all citizens irrespective of income level, it provides an opportunity to contribute to National Development; as well as the comparatively favourable returns available in the capital market.

Funding Infrastructure Projects from Bonds

Under this, the Nigerian Stock Exchange (NSE) has listed a total of N6.951 billion Federal Government of Nigeria (FGN) Savings Bond since its commencement in 2017. Also, the Sovereign Sukuk is a non-interest bearing security and the proceeds will be used exclusively to fund the construction and rehabilitation of 25 roads across six geopolitical zones in the country. The offer for Nigeria’s debut sovereign Sukuk in the sum of N100 billion opened on September 14, 2017 and was oversubscribed by about N6 billion.

Green Bonds, also known as Climate Bonds, are fixed income securities issued to finance projects that have a positive impact on the environment and provide solution to climate change. Green Bonds can be issued by governments or private sector organisations. Recently, the DMO announced that the debut Sovereign Green Bond offered to the general public in December, 2017 was very well received by a wide range of investors.

Nigeria, became the first country in Africa to issue a security that raises funds for environmental projects when it launched its green bond on December 18. The offer, which will be listed on the NSE, is the first tranche of a N150 billion programme, Moody’s Investors Service recently said in a statement. The DMO had offered N10.69 billion Sovereign Green Bond for a tenor of five years and coupon of 13.48 per cent.

For the Diaspora and Eurobond, it is been raised and used to finance infrastructure projects of the federal government that is geared towards transforming the nation’s socio-economic landscape. The DMO listed $300 million Diaspora Bond and $3 billion Eurobonds on NSE and FMDQ OTC.

Speaking recently, at the 2017 Nigerian Debt Capital Markets Conference and Awards, organised by the FMDQ OTC Securities Exchange in Lagos, the director-general of DMO, Patience Oniha, said that the borrowing would enable the country to bridge the gap in the 2017 budget currently facing liquidity problem to finance some capital projects. She said that Nigeria needed to build stronger and responsive institutions that could support infrastructure agenda of the government.

Bonds as Investment Option

Oniha said that government had proposed to channel new borrowings into the capital investments instead of consumption. “The debt ratio is not tangible and adequate components of borrowing, because it is not going into funding other than capital investment,” she said. On the N100 billion Sukuk Bond, the director-general said that the federal government had identified 25 road projects to be funded with the proceeds.

She said that among the roads listed were Ore-Sagamu Road, Kaduna Bypass, Enugu- Port-Harcourt Road, Kano-Maiduguri and Benin-Lokoja Road, among others. According to her, government has also decided to finance other trunk ‘A’ roads which will provide the needed support to accelerate the nation’s developmental goals. She said that Nigeria should build stronger and responsive institutions that could support infrastructure agenda of the government.

Oniha said that the acceptance of the offer was an indication of the viability of the instrument as an investment option, as well as a demonstration of utmost faith in the economy. She also commended the federal government for the policy support that led to the success of the initial offer. The director-general said that it had been encouraged to introduce new instruments to aid government’s funding, saying investment experts were optimistic that with the issuance, a new instrument had been introduced to the Nigeria’s capital market. Oniha said that the new instrument would add to the variety of products available for domestic issuers and investors.

Attracting more Liquidity into Capital Market

The CEO of NSE, Mr Oscar Onyema lauded the DMO Nigeria to providing instruments like the FGN Savings Bond, Diaspora Bonds, Eurobond amongst others for the debt market. He assured the DMO that the NSE will remain a veritable platform that will support viable debt instruments, aimed at boosting Nigeria’s economic growth. Capital market operators said that the re-introduction of Federal Government of Nigeria (FGN) bonds in 2003 has improved liquidity, and bonds issued.

However, they note that a number of factors are hindering the development of a bond market in Nigeria, saying “they include inadequate knowledge of the product, lack of market focus, infrastructural weaknesses and the absence of relevant skills to maintain a secondary market.”

Managing director of APT Securities and Funds Limited, Mallam Kurifi Garuba said that the initiative of the government to finance domestic debt with the issuance of bonds is a good idea, saying that bonds are a natural investment outlet for these long term funds. According to him, the Nigerian bond market is attractive to investors as bonds issued in Nigeria are tax exempt and may be issued with long tenors.

Garuba noted that the huge infrastructure deficiency in Nigeria in telecommunications, transport, housing and power sectors provide viable prospects for project bond issuance. He noted said that the dwindling oil prices and its ripple effect on the Nigerian economy has had its toll on the Nigerian bond market.

Also, managing director of HighCap Securities Limited, Mr. David Adnori stated that crash in crude oil prices, has led to a massive fall in government revenue. Government has thus had to ramp up borrowing to finance critical projects. Also, analysts at Afrinvest Limited said that Nigeria’s aggressive borrowing spree from domestic and international capital markets started since 2016.

They explained that since the start of a prolonged global oil price drop in second half of 2014, the Nigerian economy has recorded a significant downturn in performance as plummeting government revenues and the resultant foreign exchange crisis dragged the economy into its first recession in 25 years. “As a result, an expansionary budget of N6.1 trillion was adopted in the 2016 fiscal year to boost growth and fund more capital projects, with a deficit of N1.8 trillion estimated for the period.

“In order to plug this deficit, the federal government embarked on an aggressive borrowing spree and this has been sustained into 2017,” they said. They further stated that “following improvements in domestic investment landscape at the turn of 2017, Nigeria returned to the International capital market after a three-year hiatus, successfully raising $1.5 billion through Eurobonds and $300 million in diaspora bond.

“On the domestic front, the DMO has continued with its monthly bond auctions and took it a step further by introducing a typical bonds such as the Savings Bond and a N100 billion Sukuk. According to the DMO, FGN total debt stood at N10.9 trillion as of year-end 2015 but has risen an astonishing 48.1 per cent in 15 months to N16.2 trillion in first quarter, 2017.

The rising debt profile is not surprising given the widening budget deficit and large depreciation of the naira, however, the cost of servicing the mounting obligations took up more than 60 per cent of revenue in first half of 2016 and has become a major source of concern on debt sustainability.

Also, managing director of Dependable Securities, Mr. Chinenyem Anyanwu pointed out that the dearth of infrastructure in Nigeria has been attributed to various factors including but not limited to, lack of political will, corruption, bad maintenance culture and paucity of requisite funds. He noted that dwindling government, coupled with an ineffective internal revenue collection mechanism have led governments to depend on alternative financing arrangements to fund their year-on-year budget deficit.

He pointed out that for years, bank loans at high interest rates have played a significant role in funding the said deficit, saying that with the re-emergence of the bond market in 2003, has offered government both federal and state a viable option to reducing the said deficit and investing in numerous long term capital projects at comparatively lower cost.

In conclusion, with bonds raising as a veritable source of funding to bridge Nigeria’s infrastructure deficit, such bonds will only be attractive to investors if the underlying projects are viable, properly developed and satisfy the bankability test.









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