Nigeria: Investors interest in T-Bills increase over rising rates
Nigeria’s fiscal deficit has deteriorated, prompting the country’s government to issue attractive interest rates to ensure investors take up any security it issues to raise money to finance the deficit whether in the money market or capital market. The rise in Treasury bill rates has reflected the Central Bank of Nigeria’s monetary tightening policy, influenced by the high inflation environment and the country’s fiscal deficit. Effective interest rates are now reflecting the CBN’s policy, according to Bismarck Rewane, managing director/chief executive officer of Financial Derivatives Company Limited. The rates have increased to 6.5% in November 2022, the highest since 2019, according to data from the CBN.
Treasury bills, short-term investment securities issued by governments to finance national borrowing requirements, have been in high demand by investors, resulting in the narrowing of the negative real rate of return on investment. Investors are demanding higher returns for government securities, which has partly been influenced by the high inflation environment and tight monetary policy stance by the CBN. However, the rate remains much lower than the inflation rate, resulting in negative real returns.
Higher Treasury bill rates make it more difficult for the private sector to raise cheap funds, as companies will have to issue securities at rates higher than that of the government if they must succeed. This increases the cost of capital for firms, negatively impacting their earnings. It is, therefore, not surprising that the stock market is negatively affected as fund managers tend to switch from equities to fixed income securities. The higher cost of funds for firms could equally contribute to higher inflationary pressure as the cost of commodities rise.
Despite the challenges, the rise in Treasury bill rates may help attract capital to the private sector and the capital market in the short term, according to Taiwo Oyedele, head of tax and corporate advisory services at PwC Nigeria. He attributes the trend to sustained interest rate hikes by the central bank and rising yields on fixed income securities.
The CBN is expected to issue a total of N1.14 trillion Treasury bills in the second quarter of 2023 as the same amount will be maturing between March and May this year. The Treasury bills programme consists of a total of N23.67 billion for 91-day tenor, N34.70 billion for 182-day tenor, and N1.08 trillion for 364-day tenors.
The CBN issues Treasury Bills twice a month to help the Federal Government fund its budget deficit, support banks in managing liquidity in the system, and curb inflation. Nigeria’s inflation rate increased to 21.82% in January 2023, the highest since September 2005, from 21.34% in the prior month. The rising inflation rate, combined with the country’s fiscal deficit, highlights the importance of the CBN’s monetary tightening policy and the need for attractive interest rates to attract investors and raise funds to finance the deficit.
