177 
There are indications that the Federal Government’s domestic borrowing will further escalate in the second half of the year, H2’21, as records show additional N680 billion, a huge 20.6 percent jump to N3.98 trillion from first half, H1’21, closing figure of N3.3 trillion.
This is also coming at the backdrop of a modified deficit funding plan accompanying the just concluded supplementary budget.
The FG modified 2021 fiscal plan provided a supplementary revenue projection of about N135 billion on a total supplementary expenditure of N982.7 billion, an indication that the supplementary budget would increase the annual deficit by N847.729 billion.
The Supplementary Appropriation also indicated that the deficit would be financed through a debt of about N802.102 billion; aid/grants N6.045 billion; and restructured loans of N39.582 billion.
The FG has a N5.6 trillion fiscal deficit in the initial 2021 budget and with the inherent deficit in the supplementary budget the combined fiscal deficit for 2021 now hovers around N6.5 trillion. This is about 16.1 percent above the initial plan and approximately same level with 2020 actual deficit.
Among other things the FG plans to borrow N3.1 trillion from local investors to fund the N6.5 trillion fiscal deficit of 2021, while the balance will be funded through external borrowing.
To attract lending from local investors and thus achieve its domestic borrowing target for the year, the FG through the Central Bank of Nigeria (CBN) and the Debt Management Office (DMO) increased interest rates on the FGN Bonds and Nigeria Treasury Bills (NTB) and the FGN Savings Bonds.
Consequently, the CBN increased the stop rate on 364-Days treasury bills by 6,990 basis points (bpts) to 8.2 per cent in June 2021 from 1.21 per cent in December 2020. The apex bank also increased the stop rate on the 182-Days bills and 91-Days bills by 2,500 and 2,000 bps respectively to 3.5 per cent and 2.5 per cent in July from 1.0 and 0.5 per cent in December 2020.
On its part, the DMO increased the stop rates on the 15-Years and 25-Years FGN Bonds by 6,300 and 6,250 bpts respectively to 13.2 per cent and 13.25 per cent in July 2021 from 6.9 per cent and 7.0 per cent in December 2020.
The DMO also increased the interest rate (coupon) on the 2-Years and 3-Years Savings Bonds by 7,030 and 7,530 bpts respectively to 8.35 per cent and 9.35 per cent in June 2021 from 1.32 per cent and 1.82 per cent in December 2020.
This development led to the 2.3 per cent increase in total sales (allotment) of the three debt instruments to N3.98 trillion in 7MTH-21 from N3.89 trillion in 7MTH-2020.
Aanalysis showed that the FG borrowed N1.66 trillion through FGN Bonds, N2.31 trillion through NTBs and N5.82 billion through Savings in 7MTH-21.
Total FGN bonds sold in 7MTH-21 rose, YoY, by 7.1 per cent to N1.66 trillion from N1.55 trillion in 7-MTH-2020.
Analysis of the bond auction results showed that while the DMO increased the amount of bonds offered by 29 per cent, YoY, to N1.05 trillion in 7MTH-21 from N745 billion in 7MTH-2020, the amount of bonds demanded by investors (total public subscription ) fell by 41 per cent, YoY, to N2.08 trillion in 7MTH-21 from N2.92 trillion in 7MTH-2020.
As a result, over-subscription to the bond offerings fell to 98 per cent in H1’21 from 292 per cent in H1′ 2020.
Total NTBs (bills) sold by the CBN in 7MTH-21 rose, YoY, by 6.2 per cent to N2.31 trillion from N2.17 trillion in 7MTH-2020.
Analysis of the NTB auction results showed that the CBN increased the amount of bills offered by 27 per cent, YoY, to N2.29 trillion in 7MTH-21from N1.81 trillion in 7MTH-2020, the amount of bills demanded by investors (total public subscription ) rose by 18 per cent, YoY, to N4.55 trillion in 7MTH-21 from N3.86 trillion in 7MTH-2020.
However, the oversubscription to the bills offered fell to 98 per cent in 7MTH-21 from 114 per cent in 7MTH-2020.
The Savings Bonds sold by the DMO in 7MTH-21 rose sharply by 156 per cent to N5.82 billion from N2.27 billion in 7MTH-2020.
The above trend, according to investment analysts, will persist in the remaining part of the year.
While projecting sale of N2.2 trillion and N1.3 trillion respectively for NTBs and FGN bonds in H2’21, analysts at CardinalStone Research said: “The Medium Term Expenditure Framework (MTEF) estimates the 2021 budgetary deficit at N5.6 trillion, which is to be partly funded by domestic and foreign borrowings in equal proportion.
“This distribution implies that targeted local borrowings approximate N2.3 trillion, or N3.1 trillion if you account for the domestic portion (N722.5 billion) of the new supplementary budget of N895.8 billion. In H1’21, the combined net issuances of bonds (N1.4 trillion) and NTBs (N350.9 billion) amounted to N1.8 trillion which is 57.6 per cent of proposed domestic fiscal borrowings for 2021. At that rate, a combined net issuance of N1.3 trillion in H2’21 would be needed to meet the domestic budgetary borrowing target for 2021.
“However, we note that the 2035 and 2050 instruments (conduits for c.80.4% of the last FGN bond raise in H1) are discount bonds, suggesting that the net issuances may have to be much higher than N1.3 trillion. Assuming the 35.2 per cent excess issuance over maturities in H1’21 subsists, our overall prediction for gross issuance at the NTB and bond fronts is N2.2 trillion and N1.3 trillion, respectively, for H2’21.”
Highlighting the factors that will enhance demand for fixed income instruments (dominated by FGN bonds and NTBs) in H2’21, analysts at United Capital Plc said: “Following evaluation of the several factors expected to shape the financial markets in H2-2021, we harmonise these factors and provide our expectations for the equities market and the yield environment as well as our preferred strategies. We expect to see periods of oscillation in the yield environment, albeit with an overall downward bias.
“Our expectation is built on three key factors; improved system liquidity via instrument maturities, deployment of financial repressive tactics by sovereign debt managers and status quo stance on monetary policy.
“That said, despite our expectation of a moderation in fixed income yields, we do not see a rate crash similar to that of 2020. As a result, we expect demand for fixed income instruments to remain upbeat particularly among domestic investors, limiting prospects for improved flows to risk assets like equities.”
Analysts at Afrinvest Securities however lamented the impact of increased borrowing activities of the FG on its debt service burden, stressing the need for measures to prevent the nation from falling into another debt trap.
They said: “Going forward, we project FG’s actual revenue for 2021 to settle around N5.8 trillion as against the budgeted amount of N7.9 trillion, while we estimate debt service to print around N3.7 trillion as against the budgeted amount of N3.1 trillion.
“This will translate to a debt-service-to-revenue ratio of about 63.8%, as against 35.2 per cent stipulated in the budget. “Hence, we recommend that the FG prioritize expanding its revenue base, reduce the size of government to curtail recurrent expenditure, and ensure proper deployment of borrowed funds to prevent falling into another debt trap.”
