The week that was (June 10-14)
Divergent patterns across the curve: Interest rates moved in different directions across the short and long end of the Naira yield curve last week. Short term interest rates declined (-46bps) in response to a liquidity build-up during the four-day trading week after the CBN held off from undertaking an OMO auction on Thursday likely in a bid to accommodate the NTB sale re-scheduled from Wednesday to Thursday. The improvement in system liquidity was evident in the over 500bps w/w drop in the open buy-back and overnight borrowing rates to 5.3% and 5.7% respectively. However, the long end of the curve was bearish as the mid-week slump in oil prices induced fresh selling pressures which pushed yields higher (+12bps on average) for the second consecutive week.
Figure 1: Naira Yield Curve
Source: FMDQ, NBS
Rising imports swings current account into deficit: CBN reported that Nigeria posted a CA deficit of USD1.1billion (1.2% of Q1 2019 nominal GDP) driven by a strong increases in imports of goods (+27% y/y to USD12.8billion) and services (+47% y/y to USD9.1billion). Relative to the rise in the import bill, exports climbed modestly (+4% y/y to USD15.1billion) with weakness in oil (-4% y/y to USD12.8billion) likely reflecting weaker output. Trends in remittances were relatively flat at USD5.8billion over the quarter. The weak CA trends largely follows from strong expansion on the import side relative to exports and should this continue, a deficit over the 2019 looks likely which suggests that the exchange rate would require greater capital flows to remain stable.
Figure 2: Current Account Balance (% of GDP)
Source: CBN
Portfolio flows into debt dominate the capital and financial account: As in recent quarters, much of the FX reserve accretion continues to come from FPI inflows into debt markets. Over the quarter, this number printed at USD6.5billion (+46% y/y) driven an attraction to elevated interest rates of 17-18% in January-February.
In the corporate space, Dangote Cement and Flour Mills have commercial paper sales ongoing.
The week ahead (June 17-21)
In the week ahead, OMO bill maturities of NGN106billion occur over the week and we should see some CBN action at the start and on Thursday to try to curb recent dip in front end yields. For bond yields, markets now seem to be concerned about oil prices and patterns there are likely to induce selling pressures ahead of the NGN351billion FGN 2019 bond maturity at the end of the month.
Inflation is likely to have slowed in May on base effects: The NBS is set to put out inflation numbers for May today and my guess is that base effects from May 2018 (+1.09% m/m) would work to dampen the momentum seen in the annualized headline print in April. May is the start of the lean season in southern Nigeria which means that food prices are seasonally rising and could provide some upside to food inflation. However, largely reflecting stability in the fuel, FX and electricity core inflation continues to dig deeper into single digits (April: 9.2%) which continues to anchor a subdued oil for inflation. Looking for a monthly print of 1% for May which should translate to headline of 11.3%.
Softening CA fundamentals and reliance on FPI debt has costs: The largely unanticipated deterioration in the CA balance means that Naira fundamentals are much weaker as the fundamental underpin for FX reserves is on shaky ground. Furthermore, CBN reliance on portfolio flows into short-dated debt instruments which printed at USD15.7billion at the end of April 2019 hints at potential roll-over risks to the NGN in the next 6-8months. The guessing game around how the CBN will respond will dominate fixed income sentiments in H2 2019. Will the CBN play conventional and hike OMO clearing rates or will the governor dabble into the unorthodox as in Q4 2015. Throw in the recent slide in oil prices and outlook looks cloudy. Perhaps now is the time for the CBN to start providing some useful forward guidance.
Abbreviations
- 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
- REER: Real Effective Exchange Rate
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