Will pension funds tap Nigeria’s domestic dollar bond?

Nigeria is embarking on a strategic move with its Domestic Dollar Bond Programme, aiming to raise up to 500 million US dollars from both international and domestic investors. The total worth of the program is set at 2 billion, with hopes of surpassing this initial target. Niyi Falade, Group Executive Director at Custodian Investment, shared insights on the potential success of this initiative. Falade expressed optimism in the government's plan, highlighting it as a means to mop up excess dollar liquidity in the environment. With data indicating a significant rise in foreign currency balances in local banks, reaching around 29 billion US dollars, the bond program presents an opportunity to tap into these funds. The attractive yields offered by the bonds compared to Euro bond markets further enhance the prospects of successful subscription. However, challenges exist within the pension fund industry regarding investment regulations in FX-nominated instruments. Historically, guidelines have restricted pension funds from accessing foreign exchange instruments without presidential approval. Discussions have been held with the Central Bank of Nigeria (CBN) to address these limitations, particularly in light of the Eurobond being listed among previously banned items. Uncertainty remains regarding access to FX for pension funds, hindering their potential participation in the bond program. Despite these challenges, the pension fund industry has shown commendable growth in 2024, reaching over 20 trillion Naira by mid-year. The industry has been actively pursuing higher yields in the fixed income space, with increased allocations to money markets and high-yield instruments. However, the impact of inflation on fund performance remains a concern, emphasizing the need to diversify investments, including FX instruments, for better returns. Falade emphasized the importance of managing the balance between investment diversification and currency stability to protect pensioners and retirees. As Nigeria navigates economic challenges and regulatory constraints, the success of the Domestic Dollar Bond Programme hinges on addressing access issues for pension funds and ensuring prudent investment strategies within the industry. In conclusion, the bond program represents a strategic move to leverage dollar liquidity, but addressing regulatory barriers is crucial to maximize industry participation and drive sustainable growth in the pension sector.