The Week that Was (May 8-12)
Nigeria calls time on Ways and Means financing after parliament approves securitization: In the prior week, the upper and lower chambers of Nigeria’s National Assembly approved the Ways and Means (W&M) securitization which converts around NGN23.7trillion worth of overdraft facilities provided by the CBN to the FGN into a 40-year bond at an interest rate of 9% and 3-year moratorium.
In terms of implications, the development implies that Nigeria’s official debt rises to NGN70trillion (2022: NGN46.3trillion) and that debt-to-GDP is now at 35% vs 23% at the end of 2022 and which favourable compares to EM average debt-GDP ratio of 50-55%. I expect this action to be ratings neutral and most rating agencies (as with the IMF) were already including the number in their assessment of Nigeria. In its 2022 Article IV report on Nigeria, the IMF used a 37% debt-GDP ratio for its debt sustainability analysis and classified Nigeria as having only a moderate level of risk. From a debt-service perspective, the W&M securitization is certainly positive as given the pricing on the bonds at 9% which translate to an annual cost of NGN2.1 trillion vs. an estimated of NGN4.9 trillion assuming the current cost of 21 percent.
Table 1: Debt Service Costs
Source: DMO, Budget Office, Authors computation
In my assessment, the securitization draws a line on the ultimate costs of managing the fall-out of the 2014-17 oil price collapse and the COVID-19 pandemic. Faced with steep revenue declines arising from these two shocks and reluctance from the political actors towards embarking on painful austere reforms, Nigeria’s economic managers (read finance ministry & CBN) resorted to an inflationary deficit monetization as the coping mechanism for the resulting economic crises. In simple terms they printed money to cover the cost of the shortfall in revenues needed to finance an expansionist fiscal stance. This is why the CBN abandoned its 2017-2019 tightening cycle and resorted to unorthodox monetary policy which entailed a mix of lower interest rates, quantitative zero-cost liquidity management and selective lending to target sectors.
In terms of impact on bond markets, the initial response was bearish as investors worried over the prospect of higher bond supply. This view reflected a misreading of events and the underlying assumption that the Ways & Means borrowings was sourced from CBN on-lending CRR debits. However, if one assumes that these monies were essentially freshly printed, then its easy to see why the DMO is stating that the transaction will not entail any bond sales to the public. Rather the W&M securitisation was merely providing legal ‘form’ to a ‘substance’ of printed monies that have already been disbursed and spent.
Given the extraordinary expansion in money supply via the printing press in keeping to form, the CBN had to undertake sterilization consistent with Nigeria’s historic fiscal-monetary nexus wherein the CBN swaps freshly printed Naira notes for petro-dollars from oil exports and curtails the liquidity impact by weekly OMO sterilizations. Having printed fresh money to fund the fiscal deficit, the CBN was certainly not going to pay any interest on the same naira being recycled into the banking system from the fiscal side. Hence the shift to a zero-cost approach to liquidity management and the descent into the arcane world of monetary policy heterodoxy. Another way to look at it is that the NGN23.7trillion represents the opportunity cost of not embarking on deep structural reforms in the face of the shocks to the economy from the oil price collapse of 2014-2017 and the COVID-19 pandemic of 2020-2021. It was the central pillar in Nigeria’s tactic of avoiding entering an IMF program, bucking the trend from SSA oil explorers over the period.
Robust system liquidity drives a moderation in interbank rates, NTB auction: Following the redemption of the FGN 2023 bond in late April, financial markets have been sufficiently liquid thus far in May. This can be seen in the high opening system liquidity positions over the course of last week (average: + NGN600billion) and banks in an aggregate net depositor position at the CBN discount window, a departure from the average of NGN147billion in April and net borrowing status at the CBN discount windows. Accordingly, at the first NTB auction for the month of May, where the CBN had NGN144billion on offer, demand was strong with bid-cover ratio of 5.7x. As a result, stop rates declined across board: 91-day 4.50% (previously 5.30%),182-day 6.44% (previously 8.00%), and 364-day 8.99% (previously 10.17%).
Bond yields decline moderately but markets remain on edge: The buoyant system liquidity levels naturally induced a return to risk-taking with FGN bond yields down 9bps on average with marked declines on front-end papers (-37bps) taking a cue from the NTB auction. Focus appeared to be on the 2024 (down 170bps) and 2025s though trends remained flat across the belly and slightly higher on the long end. The assurance of heavy bond supply at the monthly primary auction continues to limit secondary market trading by long money though yields above 15.80% drove a resurgence in bank-led buying. All eyes on the May bond auction where the DMO will look to offer NGN360billion.
Figure 1: NGN Yield Curve
PENGASSAN strike action at ExxonMobil Nigeria weighs on oil production: According to data from the upstream regulator, NUPRC, oil production declined 18% over April 2023, reaching a seven-month low of 1.2 million barrels per day (mbpd). The breakdown reveals a significant drop in liftings via Qua Iboe (-53% to 66 kbpd), Erha (-55% to 35 kbpd), Usan (-37% to 25 kbpd), and Yoho (-43% to 19 kbpd). These decreases can be attributed to a strike action initiated by the ExxonMobil wing of PENGASSAN, which accounts for approximately half of the overall decline in oil production. As a result of this strike action, a force majeure was declared; though the issue appears to have been resolved by month-end. Elsewhere despite the removal of a long-standing force majeure on Bonny-Light, output struggled over the month (down 23% to 100kbpd).
Figure 2: Nigeria Oil Production by Regime
Lagos returns to the bond market: Nigeria’s economic capital made a triumphal return to bond markets with a NGN100billion 10-year bond sale which closed at a marginal rate of 15.25%. The book was oversubscribed with strong interest from local investors. Lagos is AA-rated and per the norm comes with its usual 5-year call option, amortizing principal repayment structure.
The week ahead (May 15-19)
Inflation to remain sticky at 22%: The Nigerian Bureau of Statistics (NBS) is set to publish April 2023 inflation data which should likely see the annualized inflation reading at 22.1% only marginally higher than 22.04% in March with the monthly number at 1.75-1.8% by my calculations. The sluggish trends at 22% reflects large base effects from 2022 when monthly prints ran at 1.8% over the first four months.
May 2023 bond auction: All eyes at the May 2023 bond sale where the DMO will offer NGN360billion evenly split along four maturities: FGN 2028 (5-yr), FGN 2032 (10-yr), FGN 2042 (20-yr) and FGN 2050 (25-yr). At the end of the week, these four papers were trading at 14%, 14.9%, 15.36% and 15.83%, respectively. YTD, the DMO has issued NGN2.5trillion worth of bonds relative to its target of NGN7trillion domestic debt target. There is still a long way to go and appetite remains strong in view of revenue shortfalls from lower oil output and the hefty subsidy bill. That said, the resurgence in system liquidity could drive a return in duration chasing relative to secondary market level. My guess is for stop rates in the region of 14-14.2 (2028), 14.9-15.1% (2032). 15.4-14.5 (2042) and 15.75-15.8 (2050).