The Week that was (January 14-January 18): Lower securities issuance and higher offshore demand drives yields lower
- Higher system liquidity drives rates lower: Due to higher OMO bill maturities as well inflows from bond coupon payments (NGN103billion), the financial system was liquid over the week which resulted in a drop in OBB/Overnight rates to 15.33/16.17 from 31.67/35.25 seen at the start of the week. Though the CBN tried to take out some of this liquidity via its OMO auctions, on net basis, it effectively net injected liquidity into the system as total OMO bill issuance (NGN575billion) tracked behind OMO maturities over the week. Consequently, the improvement in liquidity applied downward pressure on short term interest rates with the yield on the 91-day Nigerian Treasury Bill, down 257bps w/w to 11.86%. However, the 6M and 1yr papers climbed over the week to 14.27% and 17.19% respectively with the latter reflecting market repricing of the 1-yr at the NTB auction on Wednesday.
- Offshore bond buying recovers: Despite higher inflation (see below), FGN bond yields declined (on average 6bps decline w/w) to 15.03-15.59% largely reflecting a pick-up in offshore demand. Following recent dovish comments by the US Federal Reserve, there has been a rebound in foreign inflows into emerging/frontier markets which was evident in Nigeria with a pick-up in average FX turnover through the IE window (USD331million vs USD189million in the prior week). This has resulted in Naira appreciation at the IE window (0.4% w/w to NGN362.79/$). However, it is important to note that bid-offer spreads on FGN bonds widened, which resulted in thin trading, as local institutional investors remained on the sidelines in anticipation of the release of the Q1 2019 bond issuance calendar.
Figure 1: NGN Yield curve
Source: NBS, FMDQ
- But yields track higher at the NTB auction on Wednesday: At the primary auction, CBN, on behalf of the FG, rolled over only NGN152billion of the NGN225billion on offer. Stop rates on the 91-day maturity cleared at 11.00% (+10bps), 182-day remained stable at 13.10% and the 1-Year bill cleared at 15.00% (+50bps). Interestingly, the FG elected not to take up around NGN74billion worth of bids on the 1-yr which priced above the 15% stop rate, even though this would mean out-of-pocket expenses to meet the maturities due on Thursday. One can imply two things, either they would look to meet up the short-fall in the future or they are trying to keep fiscal borrowing activity market neutral. This latter view is consistent with what happened at the December bond auction and suggests fiscal coffers remain flush with the Eurobond proceeds lessening the need for any borrowing.
- Inflation tracks higher due to adverse base effects: NBS reported that inflation accelerated to 11.44% y/y in December 2018 (November: 11.28% y/y) largely driven by a pick-up in food inflation to 13.56% y/y (November: 13.3% y/y) as core inflation slowed to 9.77% y/y (November: 9.79% y/y). On a monthly basis, inflation rose by 0.74% relative to an increase of 0.8% in November which implies that the deceleration in the annualized inflation owed much to adverse base effects from December 2017 when monthly inflation printed at an unusually low reading of 0.6%. The report which rounded off inflation reporting for 2018, implied that prices on average climbed 12.1% over the year down from 16.5% in 2017. The strong disinflationary pattern observed in 2018 largely reflected the broad stability in the prices of key cost items in the economy with no changes in fuel and electricity prices and only modest depreciation in the exchange rate.
Figure 2: Inflation: Monthly and Annual average
The Week Ahead (January 21-25): Lower liquidity, the Nothing-burger MPC and a stable inflation outlook for 2019
In the week ahead, system maturities drop to NGN382billion made up entirely of OMO bills which implies that we should look forward to OMO auctions over the week especially Thursday. In terms of events to look forward to, the week sees the first MPC meeting of 2019. With less than one month to the 2019 elections, the CBN is likely to be in a policy neutral state and this means a nothing-burger MPC meeting on the cards. Elsewhere, bond markets are likely to finally get clarity on fiscal borrowing plans for Q1 2019. At least a bond offer circular should come out tomorrow accompanied by the calendar. In any case, the return of offshore demand to local debt markets looks like an inflection point for yield direction over the near term. Given the gap to inflation, these early birds seem to be setting the stalls ahead of an anticipated post-election rally. The 2019 elections see two northern Fulani Muslims vie for the post of presidency which lowers risk of widespread violent outcome either way the elections go.
2019 Inflation outlook: In talking about inflation in 2019, the central point is to ask questions regarding possible changes around the key supply side prices in the Nigerian economy: fuel, electricity and the exchange rate. For fuel prices, the recent downswing in global oil prices mean that the required adjustment of the retail pump price to the open market price is now smaller. At current Brent price levels, the open market price of petrol is likely between NGN160-170/litre as against the over NGN190-200/litre price when prices jumped to USD70-80/bbl. The current oil price level also implies that local diesel prices are susceptible to a plunge if the NNPC decides to intervene as we saw in periods over 2018. Overlaying this fundamental picture with the political cycle over the next 6-months, where there is little impetus to raise fuel prices, this item is unlikely to constitute a source of inflationary pressures. For electricity tariffs, while there were hitherto plans for a 30% hike in July 2019, discussions with industry insiders point to 2020 as the year for likely price increments. Lastly, for the exchange rate, the near-term outlook speaks to a greater ability by the CBN to hold the line, a development bolstered by the recent dovish twist by the US Federal Reserve which will drive portfolio inflows to frontier markets as we are starting to see. In all, the absence of these shocks point a subdued inflationary undertone with monthly inflation readings stabilizing around 0.9-1% level which translate to inflation holding between 11-12% over the first half of 2019.