The Week that was (December 7-11, 2020)
Thin demand at the PMA drives spike in 1yr NTB: At the NTB auction where the CBN, on behalf of the FGN, planned to roll over NGN50.9billion, though total auction demand was fairly decent at 2x what was on offer (last auction: 2.96x), the bid-cover ratios on the 1-yr was surprisingly thin at 1.1x. Markets appeared to have been spooked by uncertainty over the issuance yield of the eagerly awaited CBN Special Bills with word on the street about a possible 3% on the 90 instrument. As a result of the thin subscription and with the DMO needing to rollover to pay Thursday maturities of the same magnitude, the auction had to close higher on the 1year.
No surprises on CBN Special bills: Bearish sentiments characterized the bond market at open on the day after the PMA shocker with wide bid-offer spreads on most instruments (30-year: 400bps). However, as news filtered through about CBN credits of its new Special Bill at 0.5%, the mood calmed and spreads repriced on the long-end to 60-70bps though overall yields inched higher reflecting the selling sentiment. Though the introduction of the new securites are liquidity neutral as no liquidity has come in, the size (circa NGN4.2trillion) has potential ramifications for market supply in the event banks find a way to sell these instruments. Furthermore, it appears unlikely that on maturity the CBN will pay down these securities as the wording of the circular suggests they are here to stay. In the run-up to the maturity in March, markets are likely to succumb to another round of bearish sentiments. Nevertheless, the CBN reinforced its dovish view on rates as it cut the discount rates at its weekly OMO bill sales where it sold NGN70billion offered across the three tenors: Short (-14bps to 1.85%), Mid (-15bps to 4.7%) and long (-9.5bps to 6.15%)
CBN continues to improve liquidity in FX markets, Naira appreciates at the parallel market: The Naira showed some appreciation across the FX market: +0.25% to NGN395/$ at the Investors & Exporters window despite a slowdown in average turnover USD103million. At the parallel market, it closed flat at NGN475/$. Nigeria’s FX reserves declined 0.46% w/w to USD35.01 billion
CBN’s dovish posture reflected in money supply aggregates: Latest data on monetary aggregates (end October) provided firm evidence of CBN’s shift to a dovish posture throughout 2020. Though growth in Broad money (M3) is largely muted (+4.5% annualised) well behind CBN’s usual 10% guidance, trends in the other aggregates M2 (+28.8% annualised) and M1 (+41% annualised) showed strong signs of the expansionist monetary policy posture. A point of note here is that Nigeria redefined monetary aggregates in 2019 to capture the liquidity effect of OMO bills with the result being that we now define broad money as M3 which is M2 + OMO bills. Thus looking at the sub-parts, M3’s subdued growth over 2020 largely stems from the drop in CBN bills (-94% to NGN389billion) as the CBN net repaid OMO bills held by non-banks following its October 2019 decision to bar access to these securities. The liquidity unleashed by the decision (NGN5.6trillion) ended up in demand and fixed deposits. The need to curb this liquidity to limit impact on the exchange rate would seem to explain CBN’s aggressive CRR debits over the period with total bank reserves (ie CRR debits) of NGN11trillion over the period.
Week ahead (December 14-18, 2020)
In the week ahead, market focus is on the last bond sale for 2020, the World Bank’s board meeting on the USD1.5billion state loan request and to a lesser extent November’s inflation numbers. In terms of liquidity, maturities are around NGN345billion dominated by OMO bills as there are only NGN7billion worth of NTB maturities.
Tariff increases to drive fresh upside in inflation over November 2020: For November inflation, the key story is the increase in electricity tariffs effected over the month. In the negotiated adjustments agreed with the labour unions, tariffs were frozen for customer categories D and E (with a power supply of fewer than 12 hours daily), while the higher tiers A, B and C experience average increases of around 68%. However, following the end of the #ENDSARS protests which resulted in some supply chain disruptions for food items, farm produce inflation should moderate slightly. In all, I am looking for an expansion of 2-2.3% in monthly inflation which translates to headline print of 15.3-15.7% y/y for headline inflation. (October: 14.2%)
Chart 1: Trends in Headline, food and core inflation
DMO likely to move to a market neutral posture at the last FGN bond auction: Ahead of the last bond sale for 2020, the World Bank board meets to consider Nigeria’s request for USD1.5billion loans for the states. This is different from the USD1.5billion budget support loan the finance ministry is pushing which does not appear to be on the front burner. The state request is likely to be approved but doubts remain over the fiscal support and my view is that this gets delayed further. At the auction, the bonds on offer have climbed from levels at the last auction 2035s (from 5% to 6.15%) and 2045s (from 5.785% to 6.88%) and my guess is that the DMO will remain market neutral by cutting off bids at the secondary market levels.