Nigeria – Fixed Income Weekly

Tight liquidity and MPR tightening drives bearish trends in Naira fixed income     

The week that was (May 23-27)

Q1 2022 GDP: Non-oil GDP growth rebounds strongly: The National Bureau of Statistics (NBS) put out Q1 2022 GDP data which showed that Nigeria’s economy expanded by 3.11% y/y, slower than the 3.98% clocked in Q4 2021. Non-oil GDP sprung 6.1% y/y while oil GDP plunged 26% y/y given the much publicized production issues that saw oil output average 1.49mbpd relative to 1.7mbpd in Q1 2021. Given strong seasonality issues, Nigerian data does not yield itself to q/q analysis. Looking through the non-oil components, the heavy lifting sectors were: Telecoms (+14.5% y/y) as subscriber growth recovered given the weak base of 2021, Trade (+6.5% y/y) as the borders were now fully re-opened and Manufacturing (+5.7% y/y) where solid growth was observed in the food and beverage sectors (+10% y/y) in tandem with strong results by listed FMCG companies.  

Figure 1: Real GDP, Oil and Non-oil

Source: NBS

CBN delivers first rate hike since 2016, appears symbolic: At the May 2022 monetary policy meeting, in line with my expectations (and a surprise to most market participants), the CBN raised its ‘key’ monetary policy rate (MPR) by a unanimous vote though with some variation as six (6) members pushed for a 150bps hike to 13%, with the remaining five members calling for a more modest 50-100 basis points increase. As I had noted in my preview, the CBN had simply run out of excuses to delay tightening, and unsurprisingly the communique was written to reflect a desire to be seen to be fighting inflation. From my reading of the release, the focus appears to be hinged on dealing with Naira depreciation by ensuring attractive interest rate differentials for foreign capital flows.

Does this mean the CBN is returning to policy normalization? This does not appear to be the case as despite hiking the MPR, the CBN elected to retain the asymmetric corridor of -700/100bps as against returning to a symmetric corridor as I called for. This implies that the standing deposit facility, the rate at which banks can deposit money at the CBN (which theoretically is the floor for T-bill rates and bank placement rates) is still anchored at single digit levels (6%). Keeping it at this level implies that the CBN still wants deeply negative real returns for savers though lenders can hope to narrow their negative real return gap as the standing lending facility (the upper end of the corridor) sits at 14%. Given the daily cap (NGN7.5billion) on how much banks can deposit at the window, the CBN is still trying to signal low returns for savings which is inconsistent with a hawkish monetary policy posture. Indeed, the CBN governor would later clarify in the press conference that interest rates on its intervention lending facilities as well as ‘certain’ sectors would remain at 5-9%. This sort of muddled approach to raising rates is out-of-sync with a return to core price stability but sits well within the unorthodox approach to monetary policy that has come to be associated with the present CBN governor, wherein the returns to savers is deeply negative in real terms. In my view, keeping the asymmetric corridor while raising MPR is tantamount to tightening in the ‘mind’ but still in a dovish mode in the ‘physical’. As such in time fixed income markets are likely to come round to the idea that the rate hike is largely totemic.

 Figure 2: MPR and Market Interest rates

Source: CBN, Bloomberg

NTB auction levels reprice in tandem with SDF, but CBN holds the line on OMO yields: Following the CBN hike, attention turned to the NTB auction on Wednesday where the apex bank would, on behalf of the DMO, look to rollover NGN153billion worth of treasury bills. At the sale, demand was soft with bid-cover at 1.55x (Last: 2.96x) and in line with depressed liquidity conditions, the stop-rate repriced higher across all maturities on offer: 3M (+76bps to 2.5%), 6M (+89bps to 3.9%) and 1yr (+179bps to 6.49%). Elsewhere, at the OMO auction, the CBN offered and allotted NGN20.00 billion worth of bills to market participants and maintained stop rates across the three tenors at 7%, 8.5% and 10.1%.

Figure 3: NTB and SDF rates

Source: CBN

Tight liquidity conditions spur bearish sentiments along the Naira Yield Curve: Liquidity conditions across the financial system remained depressed with banks being net borrowers from the CBN window for the second consecutive week which placed upward pressure on interbank borrowing rates which climbed 140bps w/w to 14% in tandem with the MPR hike. (CBN has introduced a cap on interbank rates with the upper ceiling at the SLF rate). The depressed liquidity conditions amid the ‘surprise’ rate hike created a condition for panicked NTB and bond liquidations which drove yields higher along the curve. On the front end, OMO and NTB secondary market yields jumped around 40 and 14bps higher across while bonds sold off with the long end (>20year) surging to 13.34-13.40% from 12.9-13%. However by Friday, fixed income markets had cooled and yields retraced towards the 13-13.10% levels as buyers returned to snap up the attractive yields on offer.

Figure 4: Naira Yield Curve

Source: Bloomberg

Naira falls to record low, FX reserves maintain downtrend: At the supposedly ‘flexible’ Investors & Exporters (IE) window, run by the CBN’s associate company (FMDQ), the apex bank continued to stage manage a theatrical performance:  wherein the naira continued to roam around an artificial rate of NGN419.5/$. However, liquidity at the segment remained thin with a daily traded average of USD86million over the week (2021 average: USD133million).  That said if you really needed dollars, media reports placed the rate at NGN610/$ (down 0.7% w/w) which places the parallel market premium at 49% – which is consistent with the last time the CBN proscribed USD sales to BDC operators.  External reserves declined further (-0.64% w/w to USD38.6billion) despite oil prices remaining over USD100/bbl.

Figure 5: CBN Dollar Sales to BDC operators and Parallel Market Premium

Source: CBN

Though the MPC communique made mention of a desire to raise interest rates to induce capital flows to manage the currency, this looks like another meaningless token the CBN throws around. As long as the CBN persists with the ostrich-head-in-sand approach towards the BDC segment amid continued demand from political actors as political parties head into the last week of a testy primary season, we could see further downside in the Naira at the segment.

Fixing the problem requires that Nigeria return to the path of credibility across fiscal (reduce or slash the petrol subsidy causing oil USD bypass to external reserves) monetary (deliberately look to raise yields along the Naira curve) and exchange rate policy (return to the 2014 WDAS approach to FX management). With the present administration with less than a year to go, it appears unlikely that our fiscal policy supremo (Zainab Ahmed) and the Buhari government will be convinced of the merits of jettisoning their statist welfarist philosophy towards fiscal policy management despite the obviously colossal fiscal costs. In a similar vein, its difficult to see the CBN making a clean return to an orthodox approach to monetary and exchange rate management in the light of the purported rumours of a dismissal that dominated the airways over last week. We are likely to remain in this phase of inward policy inertia but outward cosmetic economic policy announcements. Under this scenario, its easy to see the Naira freefall towards record lows of NGN650-700/$ in the coming months.  

The Weak Ahead (May 30-June 2)

Into the last week of May and the usual FAAC credits alongside some FGN bond coupon payments (NGN5.6billion) and OMO maturities (NGN20billion) should provide some relief to system liquidity. Market will look to digest the MPC outcome.

All eyes would be on how the CBN rolls over the next batch of Special Bills (SPEBs) as they mature this week. Assuming the rollover occurs at unchanged rates, that is likely the last confirmation that the rate hike is largely symbolic. To tighten in the conventional sense, the CBN will need to engineer a liquidity strain that forces short-term rates (NTB/SPEB/Bank placements) to rise towards 10-12% or higher which would force longer dated yields to rerate higher. Absent any set of actions which yields this outcome, then we can pretty much assume that rates are going nowhere anytime soon.

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