Nigeria – Fixed Income Weekly

Inflation declined thanks to base effects in December, but monthly trends show no signs of easing:  The National Bureau of Statistics (NBS) put out the last monthly CPI data for 2022 which showed a moderation in the headline number to 21.34% from 21.47% in the prior month. This was not too surprising given the large base from 2021 when the monthly read was 1.82% which implied that we needed to get a big print from trailing 3-month average of 1.33% for the headline number to move higher. Indeed, the monthly print did come in heavy at 1.71% which reflects issues in the fuel price basket which explains why the CBN dismissed the slowdown in inflation at the January 2023 MPC (more on this later). Overall, 2022 inflation averaged 18.8% (2021: 17%) which reflects the shocks to energy costs (in particular diesel) with its feedthrough to food inflation alongside Naira depreciation over the year.  

Figure 1: Annual Inflation

Source: NBS, Authors

In 2023, the sense is inflation looks set to remain stubbornly high (18-20%) by my estimates as we are likely to see further adjustments to the petrol price (possibly towards NGN250-300/litre or even NGN400-600/litre if you believe campaign promises by the three leading contestants to remove fuel subsidies are to be believed). 

Despite hawkish monetary policy stance, money supply accelerated over 2022 driven by CBN monetization of FGN deficits: CBN updated data on money supply aggregates through December 2022 which showed that the key measure of broad (M3) rose 19% over the year to a record NGN52.1trillion (29% of GDP) despite the CBN adoption of a contractionary monetary policy stance. For context the CBN set its M3 growth target for 2022 at 15.2%. The expansion in M3 stems from growth in net domestic credit (+37%) which reflects solid gains across its sub-parts: credit to the government (+85% to NGN24.7trillion) and credit to the private sector (+19% to NGN41.8trillion). Of the two components the big driver was growth in public sector lending which essentially reflects CBN borrowing to the fiscus via the much-maligned Ways & Means (W&M) channel. In sum, despite raising its key policy rate by 500bps to 16.5%, the CBN increased money supply in nominal and real terms by lending to the government. As Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon”.

Figure 2: Money Supply

Source: CBN

There has been much debate over the planned securitization of Ways and Means facilities by the FGN. While its clear that the CBN and FGN abused the limit, as I have noted the deed has been done and monies spent and it’s time to move beyond rhetoric to action. The securitization should be allowed to go ahead but the key actors (i.e the heads of the CBN and Finance Ministry) should be liable to prosecution to serve as a deterrent for the future. Electing to deny as some have provocatively suggested is foolhardy given the profound implications for the CBN’s balance sheet and monetary policy. 

CBN delivers another rate hike, hawkish forward guidance:  At its inaugural meeting for 2022, the CBN continued from where it left off in 2022 with a 100bps hike in the key monetary policy rate to a record 17.5% while leaving other parameters constant. The hike was unexpected and in the light of the ongoing demonetization (wherein the CBN is looking to replace old notes with new notes) reflects a clear hawkish bias. From the communique, the CBN saw through the base effect driven dip in inflation and remains uncomfortable with inflation over 20%. This would suggest further hikes until inflation structurally heads south.

Moody’s knocks Nigeria down further: Late on Friday, Moody’s delivered a knife to Nigeria’s credit rating profile by lowering it to Caa1. This is uncharted territory and is the lowest level since 2006 when the big ratings agencies commenced coverage on Nigeria. Interestingly, the analysts for the downgrade report were the same tag team (Ms. Lucie Villa and Mr. Matt Robinson) that downgraded Ghana to Caa1 around the same time a year ago which set the stage for a descent into an economic crisis. The Caa1 is another tier in the junk non-investment grade category which implies a higher level of risk. That said, external holders of Nigeria’s Eurobond debt are likely junk bond investors more accustomed to this possibility. The report rehashes familiar themes: while Nigeria has a relatively low external debt burden this is offset by a high interest burden and weak fiscal revenue profile. Despite higher oil prices, the FGN only earned a paltry amount from oil thanks to the unwieldy subsidy arrangement. The ratings is ominous as it could potentially mean that Nigeria is shut out of Eurobond markets unless the FGN finds a way to improve USD oil exports flows by improving pipeline security and reducing the size of the petrol subsidies. That said, whoever is Nigeria’s next finance minister must look to deliver some sort of expenditure reduction plan, one that is more credible than the farce called fiscal consolidation put forward by the Finance Minister in the 2023 budget.

Liquidity surfeit drives bullish trends across debt markets despite raised borrowing target:  Despite the bellicose rhetoric from the CBN, fixed income markets have been bullish over the last week driven by a liquidity deluge. Following FAAC credits and heavy coupon payments, opening system balances cleared NGN1trillion daily which applied a gravitational effect on interest rates across the front-end of the yield curve. This was most evident at the NTB auction where rates slid to under 5% for the 1yr paper and the discount rate on the 3M NT-bill crashed to 0.3%. This heavy positioning on the front-end reflects a desperate desire by banks to take cover from expected CRR debits by the CBN. Indeed, those debits duly arrived on Friday when the CBN took out +NGN800billion.

In the week ahead, the DMO will look to sell NGN360billion evenly split across four bonds FGN 2028, FGN 2032, FGN 2037 and FGN 2049. In the secondary market yields across those bonds are trading at 14.25% (2028s), 14.95% (2032s), 15.28% (2037s) and 15.4% (2049s). Yields had rallied in the lead-up to Friday’s CRR debit which could drive a recovery in money market yields. The DMO is likely to want to contain upside in yields and could look to manage the auction by allotting more to the sub 15% papers (2028s in particular) though pension fund demand is likely to focus on the >15% tenors. Demand is likely to be strong given the liquidity within pension funds following coupon payments. My sense is that the auction closes at respective yields of 14%, 14.5%, 15.3% and 15.5% across the 2028s, 2032s, 2037s and 2049s papers.

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