Build-up in system liquidity from NTB redemptions drives bullish trends across debt markets: Over the last two weeks, financial markets have been robustly liquid which has pushed interbank rates to 14-15% from the 16-20% range in the preceding weeks. The liquidity appears to have emanated from the nearly NGN2trillion of NTB redemptions by the DMO over the Q4 including NGN1.8trillion in November alone! As this was left unchallenged by the CBN, banks who are the major recipients of these inflows have sough to deploy this into NTB as a way to insulate themselves from excess CRR debits. For evidence, look no further than the NTB auction on Wednesday where bids in the region of NGN729billion showed up despite this being a tiny auction with only NGN54billion on offer. Unsurprisingly the stop-rate on the 1-year closed lower at 13.05% (previously: 14.84%) which fueled a 290bps w/w compression in NTB yields. Elsewhere, though bonds had rallied over the last one week, the approaching monthly FGN bond auction saw mixed trends across the curve with upward movement along on-the-run papers and declines everywhere else.
Figure 1: Naira Yield Curve
Nigeria’s oil production rises for the second consecutive month as Forcados resumes liftings: Nigeria’s oil production rose 15% over November to a seven-month high of 1.4mbpd as the Forcados export terminal enjoyed a full month of uninterrupted flows. The terminal which resumed operations in the latter part of October delivered roughly 229kbpd which is in near its normal capacity and accounted for the uplift in overall output. Furthermore, it appears that Bonny likely resumed operations late in the period which would be consistent with NNPC reports during the week that Nigeria’s out put was now over 1.6mbpd in December. With 3 (Bonny, Forcados and Qua Iboe) out of the 4 major export terminals now back online (just Brass still offline), it’s a fairly straightforward path to 1.8-2mbpd for production which could deliver upside to growth and FX flows over H1 2023.
Figure 2: Nigeria Oil Production.
Nigeria’s debt data as at 9M 2022: The DMO put out public debt data as at the end of Q3 2022 which showed that total government debt climbed to 11% from the end of 2021 to NGN44trillion or the equivalent of USD102billion using the CBN official exchange rate. As a share of the economy, total public debt stands at 23.2% of GDP up from 22.8% in December 2021 (For context, Ghana’s debt-GDP ratio is at 75.9% as at 9M 2022). In terms of mix, Nigeria’s debt remains dominated by domestic debt (61% of total debt) or NGN26.9trillion split across the FGN (NGN21.6trillion) and States (NGN5.4trillion). External debt stands at USD39.7billion split across multilateral (47%) comprising loans to the IMF/WB, Bilateral (12%) and Eurobonds (39%). Interestingly, Nigeria now has syndicated loans from AFC-Rand Merchant Bank now added to the debt mix. In terms of debt service costs, USD costs using the 9M 2022 numbers are around 4% while NGN debt is running at 8.8% due to the low single digit NTB papers which will term out over 2022.
Figure 3: Nigeria – Borrowing Costs
Source: DMO, Authors Computation
Nigerian Eurobonds Catch-up: Despite the strong pull-back in oil prices over the last few weeks, Nigeria’s sovereign Eurobonds pared back some of the YTD losses recently in tandem with the positive sentiment across US treasuries. From highs of 14-15% earlier in the year, the curve now trades between 10-12.4% despite ratings downgrades and ahead of the 2023 election cycle which could mean investors viewed the earlier mispricing relative to oil credits like Angola as overdone in the face of the recent recovery in oil output. If US Treasuries continue to react positively to talk about a slowdown in tightening especially if the Fed delivers a 50bps hike in December, we could see some further yield compression over the near term.
Figure 4: Nigeria Eurobond Curve
Waiting for Godot on the FX: Nigeria’s external reserves slid 0.4% w/w to USD36.9billion consistent with CBN claims about limited inflows from crude oil sales. In terms of the Naira, the CBN continued to allow the IE window rate to weaken with the latest close at NGN446/$ though the parallel market rate has held steady at NGN745-750/$.
In the week ahead, markets will face up to the last bond auction for 2022 and the NBS is set to release the penultimate CPI report for 2022. System liquidity likely
One last hurrah for 2022: At the last bond sale for 2022, the DMO has NGN225billion on offer across the 2029, 2032 and 2037 papers after gross bond sales of NGN2.9trillion (inclusive of the recent NGN130billion sukuk). Adjusted for the NGN605billion FGN 2022 bond maturity and including net NTB sales of NGN783billion over H1 2022, the DMO appears to be 85-90% of the NGN3.5trillion target for 2022. This leaves a number possibly between NGN350-400billion heading into the last auction. Given robust liquidity conditions, the auction could be well bid with headroom for the DMO to at least touch 15% and 16% for the 2032 and 2037 respectively while the 2029 will likely close in the 14.5-14.6 region.
Figure 5: Average Primary and Secondary Market FGN Bond Yields
Inflation likely climbed to 21.5% in November: The NBS is set to release the November 2022 CPI report which is likely to show higher prices over the month. My expectation is for a number between 21.4-6 driven by m/m 1-3-1.6%.