The week that was (April 1-5): Rates rise in response to CBN tightening and new 30-year bond sale
- CBN shows its hawkish hand: In the prior week, I noted that the CBN’s dovish twist at the MPC, where it cut its key policy rate to 13.5%, was likely a non-credible symbolic one. I did not have to wait long to see evidence, as in response to a slide in front-end yields, the CBN moved to choreograph rates higher with aggressive OMO bill sales of NGN529billion over the week including issuance of the 1-year OMO sale at an effective yield of approximately 15%. The sizable OMO sale was to offset the impact a build-up in system liquidity (from a mix of FAAC and OMO bill maturities) and it resulted in a pick-up in money market rates (+500bps w/w) with the OVN and OBB rates settling at 16.1% and 15.3% respectively. If the CBN were in a fully dovish mode, it should have allowed the liquidity build-up drive rates lower, but the CBN was never going to tolerate lower rates in view of its perennial currency fears and quickly moved to clear doubts as to the level it would like to see the Naira yield curve. As a result, NTB yields closed the week broadly higher: 3M (+107bps w/w to 11.98%), 6M (-54bps w/w to 14.04%) and 12M (+66bps w/w to 14.61%).
Figure 1: Naira Yield Curve
Source: FMDQ, NBS
- Q2 2019 calendar reveals lower but longer borrowings: The DMO released the Q2 2019 borrowing plan which showed a 23% q/q drop in the mid-point of planned fiscal bond sales to NGN100billion (range: NGN85-115billion). More interesting, the DMO introduced a new 30-year bond which stretches out the Naira yield curve by a further 10-years citing a demand for the tenor by annuity and other long-term fund managers. As expected, the DMO rolled over into the ten-year with a new 2029 paper (April) which should resuscitate liquidity/trading in the tenor even as it maintained the 2023 maturity. The move to introduce a 30-year triggered sell-offs across the long-end (>10years) presumably by these annuity funds, who now have a bond which fully covers the nature of their maturities. Effectively, it would appear that the sell-offs were intended to create liquidity in preparation for the 30-year bond sale.
- 2018 annual debt report card reveals jump in debt service costs: In other news, the DMO released the 2018 debt report which showed that Nigeria’s total debt (excluding state government debt) climbed 12.8% y/y to NGN19trillion (including SG debt the number climbs to NGN24trillion. Central to the rise was the sizable Eurobond issuance in 2018 which pushed foreign debt to USD21billion (+11% y/y). Domestic debt climbed only 1.5% y/y to NGN12.8trillion largely driven by issuance of NGN331billion in promissory notes in December 2018 to clear debts owed to downstream petroleum marketers. Excluding this item, actual FGN borrowings declined following the implementation of the NTB redemption plan which sought to use a portion of Eurobond sales to pay down NTB maturities (-24% y/y). On a sour note, debt service costs on both local (160bps to 14.1%) and foreign debt (+430bps to 7.4%) inched up with the latter reflecting the non-concessionary nature of recent additions to Nigeria’s foreign debt. Overall debt service costs as a share of fiscal revenues now appears to have closed 2018 at 63%.
Figure 2: Debt service costs.
Source: DMO (Adjusted for repayment of the 2018 USD500million Eurobond Borrowing costs drop to 4.7%)
- IMF Article IV finds modest Naira over-valuation but OK with tight CBN policy stance: In its annual review, the IMF notes that the Naira was slightly overvalued (circa 7%) in real terms which is consistent with the usual guessing game with its standard disclosure: due to faulty data and use of multiple exchange rates it would not bet that its esoteric econometric procedures were correct. Interestingly, the CBN estimates that the IE/parallel market rates are around 9% over-valued on a relative PPP basis. I wonder who to believe 🙂
- A key note on monetary policy which the IMF noted was appropriately tight, was its preference for other measures of liquidity withdrawal: such as selling govt debt on CBN balance sheet (covered bonds or AMCON bonds) and an idea I have talked about in the past: removing the daily floor on SDF deposits set at NGN7.5billion. In simple terms, the IMF appears to prefer approaches which allow for voluntary liquidity reduction as against the dictatorial nature of OMO auctions. In terms of outlook, the IMF expects lower inflation in 2019 (11.7%) and modest pick-up in GDP growth (2.1%).
The week ahead (April 8-12): Yields to stay range-bound.
- In the week ahead, system liquidity thins out with only NGN33billion in OMO bill maturities and NGN8billion CP maturities (UPDC). The thin liquidity and absence of natural supply is likely to result in sentiment driven trading. For NTB yields, markets are likely to trade up in view of CBN’s direction for front-end yields as seen with the OMO sales. Elsewhere, in the absence of fresh offshore buying, FGN Bond yields are likely to continue to fight against the gravity led by holders of the 20-year tenor (especially life insurance companies) trying to create liquidity for the planned 30-year bond. given thin liquidity conditions lately, this could cascade into higher yields. However, I expect yield rises towards 15% to trigger local and offshore bond bulls which should keep yields subdued below 14.5% over the near term.
- OVN: Overnight
- OBB: Open Buy-Back
- 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
- IMF: International Monetary Fund
- PMA: Primary Market Auction
- FAAC: Federal Accounts Allocation Committee
- I&E: Investors and Exporters Window
- MPC: Monetary Policy Committee
- NBS: National Bureau of Statistics
- REER: Real Effective Exchange Rate