Nigeria Fixed Income Weekly
The Week that was (November 5-9): – CBN liquidity tightening drives interest rates higher
- CBN doubles down on liquidity tightening with two OMO auctions: Though coming into the week, the maturity profile appeared tame with only OMO maturities of NGN376billion, the money market opened to a surge in system liquidity as a wave of unusual inflows (likely maturing Stabilization securities) pushed opening balances to nearly NGN900billion. This development underpinned a moderation in OBB/overnight borrowing rates to an average of 3.9/4.9% down from 7.5%/8% in the prior week. Naturally, the CBN was unlikely to tolerate that much liquidity and swiftly moved in with an out-of-season OMO sale on Tuesday of NGN316billion at the going discount rate (3M: 11.5% 6M: 13%, 1yr: 14.5%). This was followed up by its regular Thursday OMO bill sale which brought total sales for the week to NGN681billion nearly twice the amount of maturing OMO bills. The aggressive sterilization served to offset the impact of rising system liquidity as secondary market NTB yields maintained their upswing rising 51bps on average to 13.24% (91-day), 13.4% (182-day) and 16.74% (1-yr). FGN bond yields steadily repriced higher (+10bps w/w on average) to 14.74%-15.84% driven by sell-offs in the 10-12year segments.
Figure 1: Naira Yield Curve
Source: FMDQ, NBS
- MPC personal statements reveal growing tightening bias: The CBN released the personal statements of MPC members from its September 2018 meeting where it voted 7-3 to leave the MPR unchanged at 14% as well as other policy parameters. While I had earlier thought that the dissenting votes stemmed from CBN Deputy Governors Okwu Nnanna and Aishah Ahmad as well as the independent Robert Asogwa in line with their earlier votes in May 2018 and July 2018, I was wrong. Rather, the minutes showed a split between the independents on one hand and the CBN/Fiscal side on the other.
- A bit of context, the MPC is presently made up of ten members, five of whom are CBN related: The Governor, Godwin Emefiele, DG Aishah Ahmad, DG Okwu Nnanna, DG Edward Lamatek as well as CBN Board member Professor Mike Obadan. In addition, as required by the CBN Act, it includes a representative of the Finance Ministry presently in the person of Isa Mahmoud Dutse. Strangely all CBN staff in a reverse from the split pattern in July voted to hold the MPR though DG Nnanna’s hawkish tendencies shone through as he demanded a hike in CRR claiming it was more effective. From history, the fiscal rep vote always tends to be dovish given the implications for debt service so no surprises with a hold vote. Thus, with the CBN rank and file and the finance ministry in holding pattern, the dissenters were essentially independents except that the former hawk Robert Asogwa turned dovish. All other independents cited a mix of rising inflationary pressures and FX concerns as justification for tightening. That said, reading through the governor’s own statement, it appears that the decision to hold was temporary as the statement had hawkish undertones which may come to life at the November MPC.
- FG agrees to an increase in minimum wage, but costly tradeoffs lie ahead: Faced with the threat of a nationwide shutdown, the FGN acquiesced to the demands of Nigeria’s labour unions for a 67% increment in the minimum monthly wage to NGN30,000 (USD83). This change largely applies to public sector workers on the federal side as state governments who preferred a smaller increment will likely comply to varying degrees. Outside the public sector, this rule is unlikely to hold much water. In my view, the wage hike will likely translate to a 25% y/y increase in annual FGN personnel costs to NGN2.5trillion in 2019. Absent fresh moves to raise the fiscal revenue envelope, whoever emerges president at the 2019 polls might have to consider raising fuel prices or curb capital spending over 2019 to keep the fiscal deficits within the 3% of GDP limit imposed by the Fiscal Responsibility Act.
Figure 2: Fiscal Accounts (% of GDP)
Source: Budget Office, Authors estimates
The Week Ahead (November 12-16): Nigeria hits the road for another Eurobond and October Inflation
In the week ahead, system maturities climb to NGN552billion (from NGN376billion) split between OMO bills (77%) and NTB (23%). There will be an NTB auction on Wednesday where the CBN, on behalf of the FGN, will seek to refinance NGN128billion: 3M (NGN3.3billion), 6M (NGN17billion) and 1-yr (NGN108billion). Furthermore, this week will see the DMO commence a road-show with the aim of selling a USD2.8billion Eurobond with likely issuance to follow thereafter. This would provide a momentary boost to FX reserves and take pressure of the Naira ahead of the 2019 general elections. In addition, it could also cascade into lower FGN paper supply in the coming months.
October 2018 CPI Inflation: The NBS has delayed its October CPI report to 21st November 2018 but should release the fuel and food price surveys this week with the latter likely to give a firm indication of the impact of harvest on food prices. On Inflationary effect of the minimum wage increase, it is important to note that cumulative annual CPI inflation since the last wage hike in 2010 and 2018 is likely around 90-95% which compares to the 67% nominal wage increases. Furthermore, in real terms, aggregate employee compensation at the end of 2017 is down 8% from 2014 peak following the inflationary spiral brought about by the FX devaluation, fuel and electricity price increases. Simply put the nominal increase is unlikely to be a source of demand-pull inflationary pressures. Regular followers of this column will be accustomed to my long-held view: inflation in Nigeria is always and everywhere a supply side (cost-push) phenomenon. The median Nigerian wage is a dead one in real terms and given that income distribution is negatively skewed many of these low wage jobs are merely playing catch-up to inflation.
Figure 3: Minimum Wage Across Select African Countries (USD)
Source: Authors computation
- OMO: Open Market Operations
- CP : Commercial Paper
- DG: Deputy Governor
- NTB: Nigerian Treasury Bill
- FGN: Federal Government of Nigeria
- CBN: Central Bank of Nigeria
- DMO: Debt Management Office
- PBoC- Peoples Bank of China
- PMA: Primary Market Auction
- FAAC: Federal Accounts Allocation Committee
- I&E: Investors and Exporters Window
- MPC: Monetary Policy Committee
- NBS: National Bureau of Statistics