BusinessDay 07 Jan 2019

Monday 07 January 2019
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BUSINESS DAY
63
www.businessday.ng www.facebook.com/businessdayng @businessDayNG @Businessdayng Monday 07 January 2019
64 BUSINESS DAY
Cover Story
Cover Story
A Fixed income guide for Nigeria in 2019
YOUR QUESTIONS
LOLADE AKINMURELE
Fixed income investors,
from retail to
institutional buyers
like the banks and
pension funds, can
look forward to a rewarding
year in 2019.
After a record breaking 2017
for government bond yields
which peaked at 18 percent,
2018 saw yields fall to 14 percent
on average amid lower inflation
rate and reduced bond supply
from the federal government
which tweaked its debt strategy
to borrow less domestically in
favour of external debt.
However, there are signs of
a higher yield environment in
2019 and those signs started
flashing as early as late 2018.
Rising global interest rates
which sparked sell-offs in
emerging markets and political
uncertainty that coloured
the second half of the year, saw the
Central Bank of Nigeria push yields
higher in the fourth quarter of 2018
using Open Market Operations
(OMO) auctions, to attract foreign
portfolio investors and tame inflation
ahead of the system liquidity
that accompanies campaign
spending in an election year.
The OMO auctions laid down
a marker for fixed income yields,
with one-year government Treasury
Bills rising as high as 17 percent
while average bond yields
rose nearly 200 basis points to 15
percent.
Enter 2019 and there are atleast
three key reasons why fixed income
yields will sustain the upward momentum
that started late last year.
First is the expectation for higher
inflation this year. Consensus
forecasts point to an uptick in inflation
to 12.8 percent from 12.2 percent
average in 2018. The factors
that will drive inflation higher in
2019 include the implementation
of a minimum wage hike; expectations
for pre-election spending,
which will trigger increased system
liquidity, and a likely increase in
food prices as the lasting effects of
flooding and violence in the middle
belt take a toll on prices.
Yields typically need to stay
above inflation if investors must
make real returns. Therefore, the
higher inflation rate goes the higher
fixed income yields climb and
vice versa.
The second reason why bond
investors can expect higher yields
this year rides on the back of increased
CBN monetary tightening.
The price stability mandate of the
CBN means if inflation rises, interest
rates are likely to be raised. The
apex bank relied heavily on raising
interest rates in the latter part
of 2016 when inflation soared to a
high of 18 percent. The CBN hiked
benchmark rates to 14 percent
from 11 percent over that period
and that’s where it has stayed for
nearly two years now.
The outlook for higher interest
rates in the United States
and sustained foreign capital
outflow this year will only pile
more pressure to the CBN to
tighten even further.
The consensus forecast for
interest rates in 2019 is a 50-basis
hike to 14.5 percent. The
Monetary Policy Committee
is scheduled to hold their first
meeting of 2019 this January.
The last reason why yields
look set to jump in 2019 is the
Federal government’s widening
budget financing gap which
would only boost local bond
supply and bid yields higher.
The Federal government’s
2019 budget has a N2.3 trillion
deficit and is predicated on revenues
of N7 trillion.
Both scenarios are threatened
by disappointing revenues
which naturally feeds into a
wider deficit that will leave the
government with limited options
than to borrow.
Capital expenditure bore
the brunt of disappointing
revenues in the past two years
but 2019 will give the government
less wriggle room given
the spike in recurrent expenditure
which cannot be easily
made away with like capital
spending.
Non-debt recurrent expenditure
alone will hit N4 trillion
this year. If government revenue
is to perform as it did in
2017 or 2018 where only 50 percent
of the target was met, then
worker salaries, overhead costs
and statutory transfers will be
higher than total revenue, before
considering capital expenditure
and debt servicing.
The total non-debt recurrent
expenditure will equate to 128
percent of the government’s
projected N3.5 trillion revenue
for the year. N3.5 trillion is half
of the N7 trillion 2019 revenue
projection.
What that implies is that
the government would have
to borrow just to maintain an
over bloated bureaucracy. Add
capital expenditure as well as
debt servicing obligations and
there could be a fiscal crisis on
the cards for the government in
2019.
The fear of a fiscal crisis is
why the government will be
keeping a keen eye on oil prices
which has recently slumped to
$55 per barrel, $5 higher than
the budget predication of $60
per barrel. Although most oil
price forecasts, as off the mark
as they have been over the years,
point to an average of $70 per
barrel, if prices remain sticky at
$55 then there is a fair chance of
the government missing the oil
revenue target.
The oil production benchmark
gives even more cause for
worry.
The budget benchmark is
N2.3 trillion, but an OPEC-induced
cut threatens to restrict
production to 1.6 million barrels
daily, 30 percent lower than
the target. This implies that the
expected revenue from oil could
be 30 percent lower only from a
production perspective. Nonoil
revenue will rely largely on
company profitability at a time
when economic growth has
stalled and average incomes are
shrinking.
When revenues failed to
meet up to expectations, the
government turned to borrowing,
with the debt stock more
than doubling since 2014 to N24
trillion as of the end of 2018, according
to the Debt Management
Office (DMO).
Rising debt service cost as a
percentage of revenue, which
hit a high of 66 percent in 2018,
didn’t deter the government,
with bond investors emerging
big beneficiaries of attractive
yields on money lent to the government.
Is my car an asset or liability?
I
get often confused whether
my car is really an asset
or just another liability given
how much it costs me to
maintain it.
While some argue that cars are
assets because they can put a decent
amount of money back into
your pocket once sold, others say
the hidden costs of owning a car
makes it a liability despite it being
a liquefiable investment.
These expenses include fuel
costs, repair and maintenance,
registration, sales tax, insurance
and toll fees.
I am torn between both arguments
and would like a logical
advice on whether to consider
my car an asset and if it features
in my net worth. I would also
like to know how to calculate
the worth of my car if I eventually
deem it fit to be an asset.
Should I have a joint account with my husband?
One of the main conversations
I have avoided so
far with my husband is
whether as a couple we should
have a joint account.
While some couples feel
that marriage is a partnership
in which everything should
be shared, including bank accounts,
others value autonomy
more highly.
What are the advantages
and disadvantages of having
joint accounts, and there are
any fast rules about the best
type of account?
My main fear has always
been that if things turn bad in
our relationship, my spouse has
the ability to clean out the account
and take all the money,
even if it was deposited by me.
I would like to know the
thoughts of financial experts.