LAGOS: Nigeria's latest bond auction fell short of its target as low yields deterred investors worried about the naira currency's weakness and rising inflation in Africa's biggest economy.

In yet another worrying sign for the government, which is already facing a funding crisis due to the decline in oil revenues, Nigeria raised 44 billion naira ($221 mln) at the bond auction on Wednesday, short of its target amount of 70 billion naira, the Debt Management Office (DMO) said on Thursday.

"For them to sell more bonds, the DMO would have had to increase its stop rate (yield ceiling), which it did not want to do," one trader said.

The naira has hit a series of record lows on the parallel market after the central bank three weeks ago curbed access to hard currency on the official interbank market for importers of a wide range of goods. Total subscription stood at 119.53 billion naira, the DMO said, down from 130.85 billion last month.

A total of 28 billion naira was sold in 5-year bonds at 15.28 percent, from 14.42 percent at the last auction in June.

The 20-year bond was issued at 15.29 percent to fetch 16 billion naira, compared with 14.24 percent last month.

Investors asked for yields as high as 16.745 percent for the 5-year paper and as much as 17 percent for the 20-year bond, the debt office said.

Nigerian inflation rose by 0.2 percentage points to 9.2 percent in June, its highest since February 2013, and above the central bank's targeted upper limit, after disruptions to fuel distribution affected food prices.

http://www.brecorder.com/business-a-finance/managed-funds/248738-nigerian-bond-sale-misses-target-investors-seek-higher-yields.html

In summary, the Federal Government tried to borrow 70 billion Naira but only managed to borrow 40 billion Naira as investors are demanding higher interest rates from the FG before lending to it. There are a few takeaways from this article and other articles in the past few weeks if one reads between the lines.

There have been stories of officials in the Jonathan administration returning their loot. If this is the case, why is the Federal Government still borowing on the scale that it is borrowing and why are yields rising?

Given what we have been told about the scale of looting in the GEJ administration, $20bn in an 18 month period per Sanusi to cite one example, even taking into consideration the fall in oil prices, why isn't there any substantial improvement in the Federal Government's fiscal position now that the looting has presumably stopped?

I am sure all these matters will go over the heads of most Nigerians but it does raise serious questions as to the health of our economy.

Economics is a balancing subject. The abuse of an economic policy tool sooner or later invites distortions into the economy. The Nigerian economy has been badly managed in the past year.

Many would have us believe that decreasing oil revenue is responsible for the current economic mess. Nothing could be further from the truth. The inept policy response to decreasing oil revenues is the major cause of loss of confidence in the economy, now manifest in the exchange rate of the naira.

Why would a sane investor then put his money in naira denominated bonds when the naira is almost in free fall? Of course he would not, unless he gets higher interest rates!

Volksfuhrer:
Economics is a balancing subject. The abuse of an economic policy tool sooner or later invites distortions into the economy. The Nigerian economy has been badly managed in the past year.

The mismanagement of the economy in the past still does not explain why borrowing continues apace, despite claims that loot is being returned and that looting, which occurred at ginormous levels in the past, has stopped.

4Play:


The mismanagement of the economy in the past still does not explain why borrowing continues apace, despite claims that loot is being returned and that looting, which occurred at ginormous levels in the past, has stopped.

Perhaps the current borrowing is the result of the economic mess the current government inherited.

In any case, economic mismanagement in itself is not the issue but the loss of confidence in the economy because of it. Yes, certain looting might have stopped, but investors confidence will take time to reach previous peak levels.

Volksfuhrer:


Economic mismanagement in itself is not the issue but the loss of confidence in the economy because of it. Yes, certain looting might have stopped, but investors confidence will take time to reach previous peak levels.

You seem to be missing the point. We hear 2 things: loot is being returned and that the GEJ era looting has stopped. If both of these are true, the Govt's borrowing need will reduce and with it FGN yields.

Take the claim linked to Sanusi that $20bn was "looted" in an 18 month period. Even if you take into consideration the halving of oil prices, why is it that such gigantic revenue previously looted is not now available to the Federal Govt's coffers?

Volksfuhrer:

Why would a sane investor then put his money in naira denominated bonds when the naira is almost in free fall? Of course he would not, unless he gets higher interest rates!

This is not central to the point I am making but there is a valid counter argument to what you just posted. The market is a forward discount mechanism. GEJ's economic mismanagement is "known" information and is already priced in or should be. Yields should represent not just present economic conditions but future aniticipated economic conditions.

If investors believe that the new Govt will manage the economy properly and that future economic conditions will improve as a result, investors will price yields accordingly. If they are still demanding higher yields than even when Jonathan was president, it suggests that they do not share a lot of Nigerians' optimism.

4Play:


You seem to be missing the point. We hear 2 things: loot is being returned and that the GEJ era looting has stopped. If both of these are true, the Govt's borrowing need will reduce and with it FGN yields.

Take the claim linked to Sanusi that $20bn was "looted" in an 18 month period. Even if you take into consideration the halving of oil prices, why is it that such gigantic revenue previously looted is not now available to the Federal Govt's coffers?

The 'loot being returned' is still an unconfirmed report. There's currently not much in the treasury.

NB
My first post only responded to the article, not your summary. My apologies, if you found it off point.

4Play:


This is not central to the point I am making but there is a valid counter argument to what you just posted. The market is a forward discount mechanism. GEJ's economic mismanagement is "known" information and is already priced in or should be. Yields should represent not just present economic conditions but future aniticipated economic conditions.

If investors believe that the new Govt will manage the economy properly and that future economic conditions will improve as a result, investors will price yields accordingly. If they are still demanding higher yields than even when Jonathan was president, it suggests that they do not share a lot of Nigerians' optimism.

That the market is a forward discount mechanism is correct.

But the naira exchange rate has fallen much further than the time of Jonathan. I any case, that Jonathan has left power does not necessarily mean the effects of his government's economic mismanagement would promptly disappear.

However, I do concede that APC's current problem is not doing much for investor's optimism.