The Nigerian Bond Market- A viable investment opportunity?
The Nigerian Bond Market is undoubtedly in the process of dominating Nigeria’s economic sector. Investors seeking to invest in emerging markets like Nigeria have recognised our bond market as a viable way of ensuring steady returns on investment as opposed to equities.
A total of 35 Federal and 5 State Government bonds have been issued since year 2003. The Director General of the Nigerian Stock Exchange reported that as at June 2007, over 50% of all Federal Government bonds were held by foreign investors.
Bonds are an attractive high-return and low-risk investment opportunity. Investors enjoy high and stable returns - up to 17% per annum for tenors of 7 years and above in some cases. Bonds are less risky than stocks, as they attract interest at a predetermined rate and have guaranteed returns.
Government bonds enjoy some level of tax exemption and are free from default risk, as they are secured on the Nation’s assets. Bonds can be used as collateral for borrowing from Banks and other financial institutions. Also, they are easily tradeable on the Nigerian Stock Exchange (NSE) before maturity.
The market has two purchase windows: a primary market for fresh issues and a secondary market for trading of issued bonds. The secondary market is fairly liquid, with a volume of N483.4 billion trades in 2006.
Bonds can be classified as Government bonds (Federal or State) and Corporate bonds. Government bonds are issued to finance developmental projects. Corporate bonds are issued by corporate entities to finance business expansion and diversification. Corporate bonds have not matched the growth in Government bonds, mainly because it does not enjoy the same tax exemptions as Government bonds.
The regulatory framework in place for developing a thriving domestic bond market include:
· The establishment of the Debt Management Office (DMO) in 2001 to centrally coordinate the management of Nigeria’s debt. In restructuring the Government’s deficit funding from shorter to longer tenor borrowing and encouraging long-term savings, the DMO introduced the sale of Federal Government Bonds in October 2003.
· In August 2006, a Primary Dealership/Market Maker (PDMM) network was established. There are currently 19 PDMMs. PDMMs play an active role in the issuance, sale and marketing of all Government Bonds to be issued.
· The Bond Market Steering Committee (BMSC) comprising of major public and private sector stakeholders was inaugurated in 2006, to ensure speedy development of the market by coordinating the activities of the market.
There have been some notable transactions in the Nigerian bond market. These include:
· The floating of N446bn bond in 2007 by the Federal Government to finance domestic debt.
· A 13.5bn convertible bond issued by Access Bank in 2006.
· The launch by the Lagos State Government of a N275bn Bond in 2008 to aid transformation of the State into a mega city.
· The proposed issue of a 20 year Bond by the Federal Government to finance its deficit budget in 2009.
Despite its immense potentials, the domestic bond market is still in its infancy. The volume of transactions in the market is a minute part of the global market valued at over $50 trillion. Impediments which have stalled its development include:
· A limited diversity of investor base - presently, the major market players are limited to Banks, Discount Houses and Pension Fund Administrators.
· Floating of Government bonds experience bureaucratic delays. For instance, the legal requirement that an Irrevocable Standing Payment Order must be issued by the Accountant General of the Federation in respect of every bond issue, before an application is granted creates a bottleneck.
· Corporate bonds do not enjoy tax exemptions as Government bonds, resulting in the small percentage issued. The BMSC in 2008 recommended a 10 year income tax exemption on corporate bonds to the National Assembly in year 2008, to encourage growth.
· A costly issuance process – The Securities and Exchange Commission, Nigerian Stock Exchange and other regulatory bodies charge high fees for raising debt capital. Thus, companies with relevant credit ratings to save costs, go to the Eurodollar markets for bond flotations. For instance, GT Bank in 2007 raised $350m in the international market with a five-year bond issue. Currently, transaction fees are being reviewed to motivate corporate entities to seek financing from the domestic market.
· Infrastructure for trading in bonds is inadequate. Bonds are currently traded on the Stock Exchange and over the counter. The BMSC is advocating for the implementation of an automated IT bond auctioning and electronic trading platform to fully revitalise the Nigerian bond market.
In the wake of the global crisis and the volatility of the Nigerian Stock market, will the bond market become a refuge for investors? Time will tell!
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