The Weeks that were (Oct 1-15)
Tight liquidity conditions push interbank rates over 16%: Following the September 2022 MPC meeting where the CBN delivered a 150bps hike in the key MPR rate and more importantly a 500bps increase in the CRR to 32.5%, liquidity conditions across the banking system have generally thinned out. This is evident from looking at trends in overnight borrowing rates which have climbed from around 13-14%, in the lead up to the MPC meeting, to a range of 16-17%. This has pushed placement rates for large corporates towards 18-21%. The liquidity squeeze follows over NGN800billion worth of CRR debits passed by the CBN in late September. This was complemented by the recent CBN circular which proscribed access to its standing lending facility (SLF) windows on FX and bond auction days which places a greater strain on bank funding. Bank borrowings at the SLF window have averaged over NGN100billion daily thus far in October vs NGN26billion (September), NGN43billion (August) and NGN78billion (July). A consequence of the tight liquidity conditions is the bearish trends across debt markets where yields have repriced 40-50bps higher to 13-15.5% levels.
Figure 1: Naira Yield Curve
Oil production slides further in September: Nigeria’s oil production (including 199kbpd condensates) averaged 1.13mbpd in September, down 4% from August levels. The big drag over the month came from Bonny where output averaged 7.1kbpd (97% down from its January 2020 levels) and to a lesser extent Escravos (-14% to 119kbpd). Overall, Nigeria’s oil production remains weak due to shut-ins along large parts of Bonny, Brass and Forcados (with cumulative capacity using January 2020 levels of +600kbpd) which are operating at over 97% below levels seen in January 2020. These shut-ins reflect the impact of illegal bunkering and rampant theft along the pipelines which feed these export terminals, all located along the Western axis of the Niger Delta where there have been reported instances of illegal connections and shipments. Given these issues, terminal operators have had to declare several force majeure to carry out repair work leaving them generally offline.
Figure 2: Oil Production by Regime
Source: NUPRC, Author
Nigeria’s external account improves, but large errors and omissions: The CBN put out preliminary balance of payments data for Q2 which showed surpluses across the current account (USD5billion, 4.8% of GDP) and the capital account (USD3.1billion, 2.9% of GDP). The positive trend in the current account reflects improvements in the trade balance where Nigeria recorded a surplus of USD5.7billion driven by faster export growth (+46% y/y to USD18.2billion) relative to imports (+10% to USD12.5billion). The export growth reflects feedthrough from stronger oil prices while muted import trends likely is a fall-out of FX illiquidity issues over the period. Though outward income transfers income for foreign firms (USD2.6billion) and the services deficit (USD3.6billion) were large, these were contained by remittances at USD5.6billion leaving the CA balance in the black.
Figure 3: Nigeria Current Account Balance (USD’bn)
On the other hand, the trends in the capital account were surprisingly positive driven by large net portfolio inflows of USD4.5billion (mostly other loans) which offset FDI outflows (USD1.4billion). However, reserve assets decline over the period suggests another narrative at work. If the current and capital accounts are positive, why are reserve assets declining and more importantly why is the currency under pressure with tight USD liquidity. This is where the large negative errors and omissions (EO) data at USD8.1billion (7.6% of GDP) sheds some light. EO is the plug-in data for any issues with measurement of external account transactions and ideally should be closer to zero. The large number is suggestive of either suppressed (read as uncaptured) import demand which is being met outside the official sector (likely via the parallel market) and uncaptured remittance flows. The EO size exceeds the current account surplus which is indicative that significant transactions are occurring outside the official financing sector.
Money supply accelerates on higher fiscal borrowings despite tighter monetary policy: Latest data from the CBN showed further expansion in monetary aggregates over August despite a shift to policy tightening in May. Through August 2022, broad money (M3) and narrow Money (M1) aggregates rose at annualized rates of 19% and 27% respectively – higher than the usual 10% CBN target. Looking across, domestic credit growth remains the key impetus (given looser monetary policy at the start of the year) with private sector (+21% to NGN40trillion) and lending to the government (+86% to NGN21trillion). The outsized expansion in government is likely reflective of large CBN Ways and Means support given the FGN struggles with revenue at the start of 2022.
Figure 4: Trends in Money Supply Growth
Nigeria fiscal accounts improve, finance minister gaffe: In what now looks like a Freudian slip, Nigeria’s finance minister, Zainab Ahmed set the cat among the pigeons with acknowledgment that Nigeria was looking at options to ‘restructure’ its debt. Well not just options, Mrs. Ahmed even went as far as stating that Nigeria had hired a ‘consultant’ to look at ways to obtain relief on some loans. These remarks were made in response to questions on a Bloomberg TV interview at the ongoing IMF/World Bank meetings. Within the context of talks that Ghana was looking at negotiating haircuts with domestic and Eurobond debt holders, this lack of sensitivity from the finance minister was rather jarring but not surprising as her Bloomberg interviews now appear to be the choice platform for delivering announcements about new policy ideas with significant implications on debt markets. Though the DMO and a combination of the minister CBN governor and budget office czars would look to walk back the comments over the course of last week, the attempts remain unsettling. In a bid to provide some comfort to investors, the finance minister provided an update on fiscal accounts which showed that FGN retained revenues came in at NGN3.66trillion (66% of target) with expenses at NGN8.2trillion (82% of target) implying a fiscal deficit of NGN4.61trillion (92% of target). Debt-service to revenue came in at 84% down from the over 100% print in the January-April period. In response, Nigeria’s Eurobond yields moved anywhere between 100-150bps over the course of the week, which under the atmosphere of rising US interest rate hikes, continue to rule out scope for any possible issuance.
The Week Ahead (October 17-21)
System liquidity is likely to remain challenged with soft coupon inflows (NGN54billion). The week should see the release of September 2022 inflation numbers and the October 2022 bond auction.
September Inflation likely cleared 21% on higher food prices: The Nigerian Bureau of Statistics (NBS) looks set to publish the inflation numbers for September which will likely show further acceleration in headline CPI. Though September is the start of the main harvest in Nigeria, flooding across large parts of the Niger-Benue trough has devastated farmlands and roads across an area that is a major food belt. Alongside, the lingering effects of higher diesel prices on transport costs, headline likely to come in between 21.2-21.4% y/y with the monthly number sticky around 1.7-1.85% m/m.
October bond auction should see yields return to 15%: The DMO will look to sell NGN225billion worth of bonds across the FGN 2029 (7yr), FGN 2032 (10yr) and FGN 2037 (15yr). In the secondary market, these bonds are hovering around 14.30-14.55 (2029), 14.85-15.00 (2032) and 15.35-15.60 (2037). Given tight liquidity conditions and the surge in interbank rates, my guess is that the auction likely closes around 2029 (14.75-14.85%), 2032 (14.95-15.05%) and 2037 (15.4-15.6%). Demand likely stronger for the 2037s and 2032s but less so for the 2029s.