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Wednesday, 15 January 2014
CBN calls emergency meeting on debt settlement
The Central Bank of Nigeria (CBN) has called an emergency meeting with players in the entire money market – to be held today – in response to issues arising from its assumption of the role of a securities depository and its problematic S-4 (Scripless Securities Settlement System).
BusinessDay yesterday exclusively reported that risks in Nigeria’s debt markets have become elevated, as trading volumes drop and foreigners slow down purchases on the back of the CBN’s bungled attempt to assume the role of a depository for securities it issues, which is against global best practices.
“The market is retrogressing,” explained a market source, speaking to BusinessDay on why the CBN may have called the emergency meeting.
“The Debt Management Office (DMO) wishes to issue a new bond on Wednesday (January 15) and for the first time in a long time, the bond would not have an ISIN(International Special Identification Number) code as the CBN is incapable of issuing it. That has become a big dilemma.”
The DMO plans to issue a total of N90 billion on Wednesday, made of the N45 billion, 3 year, 13.05 percent notes due August 2016 and N45 billion, 20 year, 10.00 percent notes due July 2030.
The clouds now hanging over the planned DMO debt arise from the fact that according to market participants, the CBN would need to issue ISIN for Treasury Bills and FGN bonds that it issues, but is not recognised by the Association of National Numbering Agents (ANNA) which issues the ISINs for all securities the world over.
If the DMO goes ahead with the bond issuance, it would mean Nigerian sovereign debt would be the only investment instruments without ISINs, which is against the acceptable international global standards.
The size and sophistication of the Nigerian bond market has been increasing since 2004, with the establishment of the DMO and the appointment of primary dealers for FGN bonds.
The domestic debt stock outstanding (excluding AMCON bonds) is equivalent to N7.63 trillion ($47.6 billion) made up of FGN bonds and Treasury bills N7.03 trillion ($43.9 billion), and State or sub-national bonds N595.5 billion ($3.72 billion), according to data from the DMO.
The domestic debt stock made up 18 percent of Gross Domestic Product (GDP) as at year end 2013.
The CBN’s posture on its new settlement that threatens to derail the gains made in the bond market is a little curious because the CBN has played a lead role in deepening the nation’s fixed income market.
The announcement on the lifting of the minimum one year holding period restriction on FGN bonds by Governor Sanusi Lamido Sanusi in 2011 made offshore investors more comfortable about investing in Nigeria, leading to the more sizeable portfolio inflows.
The monetary tightening put in place by the CBN has also led to higher yields on Nigerian fixed income securities which has attracted foreign investors playing the carry trade on naira denominated assets.
These actions inevitably led to the inclusion of Nigerian bonds in the JP Morgan emerging markets index which has aided NGN stability and benign inflation expectations.
The CBN’s meeting to be held today, may be seeking ways to contain whatever damage its policy may have caused the market.
“The meeting was scheduled on concerns on how settlements are being muddled up,” said another source in response to questions.
“The CBN seems to have woken up to the urgency for possible remedial steps, since the story broke into the news.”
The Central Securities Clearing System (CSCS) had hitherto handled the clearing, settlement and delivery system for all FGN fixed income transactions, before the CBN takeover of the function.
The CBN has been struggling in its efforts to run its new depository the (SSSS) which has caused serious settlement problems for market operators and investors since its inception in early December 2013.