$500m FGN bond promising to economy, investors – Uwaleke
CHIGOZIE AMADI
A financial expert, Prof. Uche Uwaleke, says the recently unveiled 500 million dollars FGN bond will be of immense benefits to the economy and investors.
Uwaleke, a Professor of Capital Market at the Nasarawa State University, Keffi, is also the President of Capital Market Academics of Nigeria.
He said this in an interview with the News Agency of Nigeria (NAN) on Monday in Abuja.
According to him, the bond issuance holds a lot of promise to investors and the economy in general in a number of ways.
“It provides an opportunity to earn risk-free return on investments given that dollar deposits with banks attract little or no interest.
“The interest payable to bondholders is exempted from income tax; it affords an opportunity for retail and institutional investors to diversify their portfolios.
“It provides an alternative cheaper source to meeting government’s financing needs in a period where the cost of servicing domestic debt is made more expensive by hawkish monetary policy,” he said.
He said that the dollar-denominated bond would help to strengthen the Naira since the dollars raised would be available for intervention in the forex market.
Uwaleke said that a high demand for this debut bond would embolden the government to further explore the domestic dollar bonds market, which would reduce the Federal Government’s incursion into the Naira bond market.
“This will help to free up capital for the private sector. It promises to deepen the capital market following increased liquidity in the market on the back of the new asset class.
“Like the debut Eurobond issuance in 2011, the maiden domestic dollar bond is expected to open up local issuance of similar bonds by companies and sub-nationals. The benefits of the domestic dollar bonds outweigh the costs,” he said.
He said that the other was expected that the net proceeds would be ring-fenced and invested in critical sectors of the economy such as agriculture, education and health.
According to him, the domestic dollar bond will be the first of its kind in the country and is part of a bond programme.
He said that the programme had a total size of up to two billion dollars with the minimum subscription at 10,000 dollars and integral multiples of 1,000 dollars above the minimum size.
“The principal will be repaid after five years in the same currency it is issued, with interest payments made every six months.
“The bond will be listed and admitted for trading on the Nigerian Exchange (NGX) and the Financial Market Dealers Quotation (FMDQ).
“This will make it accessible to both non-resident Nigerians and investors resident in Nigeria who has dollar balances in their foreign currency accounts.
“The settlement date for the domestic dollar bond auction will likely be 10 days after the auction date,’’ he said.
He, however, said that it was not yet clear what the indicative pricing would be.
“However, the expectation is that it will be attractive enough to lure a broad category of prospective investors.
“My major concern with this bond issuance is that the tenor of five years seems ambitious. A two-year short-term tenor will have been better and less costly since this is a debut issuance designed to test the domestic market’s appetite for dollar-denominated domestic bonds.
“It is instructive to note that when Ghana issued its first domestic dollar bonds in 2016, it had a two-year tenor and was largely successful,’’ he said.
He said that another concern stemmed from the need to ensure that the exercise did not put further pressure on the Naira.
“Part of the plan is to bring onshore dollar liquidity to the official market. It can lead to market fragmentation, increase the cost of naira securities, and add to pressures on the Naira,” he said.
Uwaleke said that it was equally important to prevent a situation where the parallel market was made a source of funds invested in these bonds.
According to him, this speaks to whether there are adequate safeguards in relation to the Know Your Customer (KYC) principles in view of the nature of the transaction.
“For Nigerians in Diaspora in particular, a key consideration will be the effectiveness of the clearing and settlement infrastructure associated with the domestic dollar bonds issuance,’’ he said.
The News Agency of Nigeria (NAN) reports that the Federal Government through the Debt Management Office (DMO) on Thursday announced the issuance of N500 million dollars local bond to boost dollar liquidity.
The Minister of Finance and Coordinating Minister of the Economy, Wale Edun, said that dollar funding was critical for the exchange rate to stabilise.
