Nigeria’s bond market on the verge of a revolution – SEC boss

Ms Arunma Oteh

WorldStage Newsonline The Director General of the Securities and Exchange Commission (SEC), Ms Arunma Oteh at the weekend said that the Nigerian bond market is certainly on the verge of a revolution buoyed an improved, competitive and conducive environment that attracts issuers and investors alike.

In her keynote address at the  two-day Capital Market Correspondents Association of Nigeria, (CAMCAM) 2013 National workshop held in Lagos, he noted that the yield curve of the FGN bonds which has been extended to 20 years provides a good benchmark for issuers of all stripes to leverage the bond market to attract capital, both foreign and local, adding that the market will continue to attract significant amounts of capital internationally since the FGN bond attracted inclusion into the emerging markets indices of Barclays and JP Morgan.

Oteh who was represented by the Commission’s Head of Corporate Communication, Mr. Obi Adindu said that the total domestic debt stock had exceeded N12 trillion.

The total domestic debt stocks is made up of N4.2 trillion FGN Bonds, N2.5 trillion Nigerian Treasury Bills, N334 billion Treasury Bonds, N4.35 trillion AMCON Bonds and over N1.45 trillion state/corporate bonds.

The SEC DG said that the domestic bond market was on an upward swing with total capitalization of about N5.65 trillion.

She explained that there was increasing interest in the bond market by corporate and State Government, adding that since 2010, State Governments have issued bonds worth over N421 billion and the amount of corporate bonds raised from 2010 to date is more than two and half times all the bonds issued by corporations from 1960 to 2009 in nominal terms.

The SEC boss noted that the domestic bond market in Nigeria has historically been much smaller than the stock market even though internationally.

She noted that the global bond markets are three times the size of stock markets with the combined global bond markets worth $157 trillion out of the total $212 trillion of capital stock while stocks are worth $55 trillion.

She said that since 2003 when the Debt Management Office (DMO) revived the FGN Bonds market, Nigeria’s bond market still trails the domestic stock market, while by 2010, the domestic bond market comprised principally of FGN bonds, some corporate bonds and a few state government bonds. The Securities and Exchange Commission (SEC) began to take a series of steps aimed at reviving the Corporate Bonds and State Government Bonds segments of the market.

She assured that the interest in the nation’s domestic bond market is not limited to local issuers as the reformed environment is attracting interest from multilateral financial institutions such as the IFC and the ADB.

On recent regulatory reforms being put in place by the commission  to grow the bond market she said that they have started by getting support from a Resident Bond Advisor who was sponsored through the Efficient Securities Markets Institutional Development (ESMID) program, which is hosted by the International Finance Corporation (IFC).

This she said enabled the Commission to review and streamline the entire bond issuance process. One of the primary hindrances to the growth of the bond market in Nigeria was the absence of a proper regulatory environment.

She noted that they have steps in the assessment of issuance and transaction costs in the primary and secondary markets to make issuance competitive both for the issuer and the investor.

She added that SEC also led advocacy initiatives aimed at eliminating legal impediments to bond issuance and transactions, including investment regulations and tax issues.

“For example, we successfully pushed for the elimination of tax discrimination on different categories of bond investors i.e. those investing in FGN bonds and those investing in Corporate/Sub national bonds.”

Speaking further the Director-General, Debt Management Office, Dr. Abraham Nwankwo while presenting his paper titled: “the Role of DMO in the Transformation of the Bond Market” said that the achievements recorded in the development of the domestic debt market led to the recognition and endorsement of the FGN Bond market by reputable international financial institutions such as JP Morgan and Barclays Capital.

The DG who was represented by Mr. Joe Ugoala Head, Policy, Strategy and Risk Management, said that it had led to increased foreign exchange inflows, which have contributed to the growth in external reserves and stability of the Naira – as at the end of December 2012, foreign investors holdings in FGN securities amounted to US$5.112 billion, compared to about US$500 million as at the beginning of 2012.

“Increase in the relative share of foreign investors’ holdings in FGN securities - while foreign investors accounted for 1.66% as at end-2011, their share had increased to 10.26% as at the end of 2012, while average holding between January and June, 2013 was 16.09%.

“Significant reduction in government’s cost of borrowing - fall in yields by about 400bps between August and December, 2012; Growth and further diversification of the investor-base for FGN securities; and, Creation of more borrowing space for other domestic borrowers to access funds in the local market, which addresses the perceived notion of crowding-out the private sector.

He noted that the achievement made Nigeria to return to the International Capital Market (ICM) in July 2013, where it successfully raised US$1.00 billion – 5.125% US$500 Million Jul 2018 and 6.375% US$500 Million Jul 2023. The offer was four times over-subscribed.

The DMO boss added that apart from creating two additional benchmark instruments in the ICM for future borrowing by other economic agents, the exercise was also aimed at further sensitizing and updating the foreign investors with Nigeria’s credit story supportive of FDIs.