INVESTOR APATHY FGN Savings Bonds crashes by 64.8 % | News Updates
By Peter Egwuatu
THE Federal Government of Nigeria, FGN, Savings Bond has recorded abysmal performance for the nine months period ended September 2018, with subscription value significantly plunging 64.8 per cent to N2.54 billion from N7.2 billion recorded in the preceding year, 2017, a situation attributable to investors’ apathy and dwindling purchasing power.
Also, the number of subscribers for the Savings Bond crashed by 51.3 percent to 2758 at the end of September 2018, from 5667 in the year 2017.
Capital market operators and stakeholders have blamed the apathy on FGN Savings Bond to uncompetitive yields, compared to other classes of asset in the fixed income securities segment of the money market.
Nigerian Stock Exchange NSE
Allotment results of the Bond from inception in March 2017 to September 2018 show decline in the value of investment and number of successful applications.
The FGN Savings Bonds was designed to offer attractive returns and low risk investment avenue to low income earners. It was also aimed at deepening the national savings culture and provide opportunity to all citizens irrespective of income level to contribute to National Development.
Though, it started off in March 2017, with two-year tenor, the Debt Management Office, DMO, since April of that year, has been issuing two tenors of the bond, 2-year and 3-year, on a monthly basis, at average interest rate (coupon) of 13.01 percent and 14.01 percent respectively. However, the rate this year has fallen to 11.36 percent and 12.36 percent respectively.
Further highlighting the disappointing performance, while the 2-year Savings Bond attracted N497.37 million proceeds at the end of September 2018, the 2017 subscription value stood at N3.841billion, representing a decline of 87.1 percent or N3.344 billion.
Similarly, the number of subscription for the two tenors dropped to 1108 in 2018, representing a decline by 4741 or 81.1 percent from 5849 recorded in 2017.
Analysis of the 3-year tenor Savings Bond in subscription value in 2018 stood at N2.039 billion, representing a drop by 39.3 percent or N1.319 billion from N3.358 billion in 2017.
Similarly, the number of subscription for the 3-year tenor bond at the end of September 2018 stood at 1650, representing a drop of 58.9 percent or 2367 from 4017 recorded in 2017.
At the end of September 2018, both value and number of subscription for 3-year tenor were over that of 2-year tenor. But in 2017, the reverse was the case as both subscription value and number of subscribers for the 2-year tenor bonds were higher than that of 3-year tenor bond.
Commenting on this development, the Head of Research & Investment, FSL Securities Limited, FSL Securities Limited, Victor Chiazor, noted: “The FGN savings bond came up as a alternative investment at a time the government needed funds and the capital market needed a boost in business activities as the stock market was significantly bearish.
At the time the rates were much higher and investors were attracted to these high rates. However, in 2018 we have seen rates drop from as high as 14 percent offered in 2017 to as low as 11 percent in 2018. This decline has forced investors to search for other higher yielding investments or return to a far more active stock market.”
Commenting as well, Michael Famoroti, an Economist at Vetiva Capital Management Limited, attributed the decline in the patronage of the Savings Bond to weaker marketing drive after the initial issues as well as the illiquidity of the bond.
He further noted that the coupon on the Savings Bond are less attractive than prevailing fixed income securities, and have been cut on a month-on-month basis in recent times.
Also speaking, Managing Director/Chief Executive, Cowry Asset Management Plc, Mr. Johnson Chukwu, however, cited the economic situation of the low income earners, who are the target of the Savings Bond, as the major factor undermining investment in the Bond.
He said: “What happened when the bond was introduced in March 2017 was that this class of investors moved their savings from banks into the Savings Bond. This accounted for the huge response to the first offer. However, their economic condition is yet to improve for them to generate new savings and thus invest more in the Savings Bond.
“Trading Inertia the DMO allows secondary market activities for the Savings Bond so that those investors can sell the bond in case they need money before maturity .The bond is indeed listed on the Nigeria Stock Exchange, trading is however extremely low. This is due to the desire of many investors to hold the product to maturity.”
He also blamed this on limited information on how to trade the product either as traders or investors as well as the structure of the instrument (not structured as a regular bond) which makes the pricing slightly opaque.
The Managing Director/CEO, APT Securities & Funds Limited, Mallam, Garba Kurfi, said: “The Savings Bonds lack machineries for advertising the product to bring understanding to common man, and the brokers commission is not adequate compared with equity.
The interest merging is not adequate to attract institutional investors and foreign investors and the maximum limit of N50million per person or institutions. However it is still better compared with all other products introduced in the market. The rising the market last year with All Share Index gained 42 percent compared with maximum of 13.45 percent.”
The Executive Vice Chairman High Cap Securities Limited, David Adonri, said: “ FGN savings bond is still attractive but purchasing power is low. Having exited the recession, the tendency for financial assets to start migrating to equity is high. Finally, the money market operators have devised means of bunching retail investors to invest in treasury bills contrary to regulations.”
Managing Director/CEO, Sofunix Investment & Communications, Mr. Sola Oni said: “The shortfall recorded in the Federal Government’s bond auction is an indication of investor’ apathy.
We must appreciate that the philosophy of the FGN Savings Bond transcends the economics of capital mobilization. The bond offering is targeted at low income earners as a way of encouraging savings culture.
At the commencement of the programme, there was intensive publicity and this enhanced patronage. However, issues such as uncompetitive yields, compared to other asset classes in fixed income securities became an obstacle. For instance, the yield on Treasury Bill became more profitable.
“However, weighed against inflation rate and Monetary Policy Rate (MPR), competition from the equity market, illiquidity of the bond on the secondary market, perception of many low income earners that such an investment is buy and hold and paucity of fund for sustained investment, the FBN Savings Bond no longer appears attractive to existing and potential investors.”
Reacting as well, the spoke person for Independent Shareholders Association of Nigeria, ISAN, Mr. Moses Igbrude, said: “Investment is all about confidence and level of safety.
All good investors invest when they consider the level of risk involved and the confidence that their investments will not be in jeopardy. Low purchasing power of shareholders is one reason among others that makes investment in FGN savings bond to decline in the 9 months ended September and the risks level of the economy has raised because of the electioneering periods and the high profile FGN debt.
The instability in the political space is making the value of investments to nosedive, so investors are now very cautious of where they put their funds and it is also an indication that most investors are moving their money to a more stable and safe environment.”
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