Nigeria Fixed Income Weekly

The week that was: (Feb 17-21): Interest rates grind lower on higher liquidity, DMO stuns debt markets and higher inflation.

  • Interest rates decline further on robust system liquidity: System liquidity remained buoyant following the NGN1.4trillion inflow during the previous week and OMO maturities of NGN630billion over the course of the week. Accordingly, money market rates remained in low single digit levels (OVN: 3.8%, OBB: 3.0%). However, NTB yields in the NTB expanded 51bps to an average as market participants unloaded positions to participate in the FGN Bond auction. At the secondary bond market, yields contracted by 38bps to sub-10% levels largely due to spill-over demand from market participants’ unfilled bids at the auction.

Figure 1: Naira Yield Curve

Source: FMDQ, NBS.

  • DMO trims borrowing appetite in February…: At the monthly bond auction, where the DMO had NGN140billion on offer, bid-cover ratio slowed to 2.84x (January: 4x) inclusive of NGN60billion non-competitive bids. Nevertheless, average marginal rates across the three tenors dropped to 10.53% – the lowest level since November 2015. Given the lower levels at the auction relative to the secondary market close across the three tenors, the DMO appears to have moved from playing market neutral to actively leading the bond market lower. Given the large bond sale in January as well as plans for Sukuk in Q1 2020, the DMO seems to be running well ahead of its local borrowing plans which suggests prospects of increased bond supply will increasingly be less of a concern for local debt markets.
  • …clarifies Eurobond sale plan: In addition, the DMO provided a clarification on the rumoured USD3.3billion Eurobond sale, noting that concessionary sources remained its first line of action in meeting the budget approval of USD2.8billion for foreign borrowing in the 2020. However, as Nigeria has a USD500million Eurobond maturity in January 2021, which would be rolled over with a new tap, it was expedient that this issue be sold in 2020 as the maturity is earlier. (You can read whatever you want about the implied view on Nigeria’s FX cash position). As such at the minimum Nigerian will issue USD500million with the rest conditional on progress in accessing concessionary financing. This means any Eurobond sale is likely to be delayed until H2 2020 at the least.
  • FX reserves maintain downturn as Nigeria exhausts ECA balances: Nigeria’s FX reserves maintained the declining pattern thus far in 2020 with a 1.4% w/w drop to a 27-month low of USD36.7billion (5months of import cover). YTD, FX reserves are down about 5%. Last week, the Accountant-General of the Federation (AGF) revealed that the balance of the Excess Crude Account (ECA) fell 78% m/m to USD72million following a transfer to the Sovereign Wealth Fund (Nigerian Sovereign Investment Authority) approved in Q4 2019 by the National Economic Council. The ECA has seen better days peaking at USD20billion in the 2000s helped by record oil prices. Its existence helped cushion Nigeria’s economy during the global financial crisis and its depletion helped exacerbate the descent into recession in 2016 following the oil price collapse.
  • Inflation climbed higher in January 2020: The National Bureau of Statistics (NBS) reported that headline inflation climbed to 12.13% y/y (December: 11.98%) with a quicker acceleration in Food (+18bps to 14.85% y/y) relative to core inflation (+2bps to 9.35% y/y). Looking at the monthly prints, headline quickened to 0.87% (December: 0.85%) largely driven by food component relative to core. As December marks the end of the main harvest period in Nigeria, the pick-up suggests that harvest supplies of grains and tubers (the most common crops in Nigeria) are thinning out which is allowing prices move higher.
  • Looking ahead, inflation is set to trend higher in response to the VAT hike which came into effect in February which will impact a host of items. Though there is increased chatter about electricity tariff increases (on average 45%), I will hold back from including it in my projections for inflation until they go into effect. In all, I expect inflation to average 12.9% over 2020 under this scenario with average monthly inflation of 1.03% over the year.

Figure 2: 2020 Inflation trajectory: Scenario Analysis
2020 inflation forecast scenario

Source: Authors computation

The Week ahead (Feb 24-29): GDP print, liquidity deluge to remain intact and CBN’s descent into the abyss of unorthodoxy

  • In the week ahead, system maturities remain heavy with over NGN1trillion split across NTB (NGN111billion) and OMO (NGN927billion). There will be an NTB auction on Wednesday where the CBN, on behalf of the FGN, will look to refinance the NGN111billion on offer. Given the liquidity surfeit, we could see yields compress to fresh lows.
  • Q4 2019 GDP report to show modest improvement: The NBS looks set to release the last GDP report for 2019 and my guess is for the economy to have expanded anywhere between 2.5-2.8% for the last quarter which should brings 2019 full year to 2.3-2.4%. Underlying my view is for oil production to have averaged 2.01mbpd in Q4 2019 (Q3 2019: 2.1mbpd) after some issues in November and into December. Latest NNPC data shows that production averaged 2.05mbpd in October. In all, oil GDP likely expanded between 4.5-5% in Q4 2019. On the non-oil side, NCC data shows that total subscribers closed 2019 at 184million lines (+11.8million lines over Q3 2019) which should support strong ICT growth. Elsewhere, border closures mean that trade and manufacturing data is likely to remain soft though Agriculture should pick-up over Q4. In all, the non-oil sector likely grew between 2-2.5%.
  • CBN’s shift towards monetary policy unorthodoxy: Over the weekend, a leaked document showing minutes of the recent bankers committee meeting provided further affirmation to rumours across local financial markets about CBN’s present state of mind as it gears up for a likely FX crisis. Consistent with the posture, the CBN governor re-affirmed the usual party line: no NGN devaluation is on the cards. But the other segments of the minutes outlined several measures (possible increase in CRR to 40-50%, removal of short-term loans from LDR calculation, a 1% interest rates on deposits, etc). This measures suggest that as with the 2016 FX crisis, the CBN is set to pursue unconventional policies to avoid a devaluation while trying to keep a lid on the large intermediation losses on its balance sheet. However, as I noted after the January 2020 MPC meeting, these policies should not viewed as some grand strategy to stimulate economic growth, rather it is the CBN merely buying time that developments elsewhere turn favourable (like oil prices move up) which will allow it fix the balance sheet. Under the current run-rate, FX reserves are likely going to hit USD30billion by mid-year though ahead of this we are likely to see progressive ramp-up of unconventional policies. Whatever you do stay nimble!

Figure 3: FX Reserves: Historical and Forecast

FX reserves forecasy
Source: CBN, Authors computation


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