Nigeria Fixed Income Weekly

I begin this review with an apology to my readers for the ‘radio silence’ over the last two weeks, I was away on a road trip and a period of intense activity followed but I can assure you that regular service is back.

In my absence, the Naira yield curve continued to inch southwards driven by a mix of CBN net OMO repayments, declining inflation and increased concerns over lower paper issuance as the fiscal side switches away from Naira borrowings to deal with fears over rising debt-service costs and while monetary authorities crow dovish tunes alongside benign inflation forecasts.

Figure 1: Naira yield Curve

NGN yield curve

Source: FMDQ, NBS

2018 Budget: President Muhammadu Buhari outlined his third Federal Budget wherein the FG intends to spend N8.6trillion (up 16% y/y) driven by higher recurrent expenditure (up 17% y/y), debt service (up 21% y/y) and capital spending (up 12% y/y). To fund the spending plan, the FG projects a 15% rise in oil receipts to N2.4trillion backed by oil price and production assumption of $45/bbl and 2.3mbpd. Both estimates appear reasonable in the light of higher oil prices and the start of Total’s 200-250kbpd Egina oil field next year providing upside to production.  On the non-oil side, there is a display of some caution with the forecast just 1% at N1.4trillion higher than in 2017 driven by tamer estimates of VAT (-14% y/y) and CIT (-2% y/y). That is where the bearishness ends as the FG projects independent revenues at N807billion well clear of N323billion and N238billion in 2015 and 2016 respectively. Similar optimism on recoveries mean that its estimated fiscal deficit of N2trillion (1.8% of GDP) is likely to be understated. That said, regular watchers will have realized that fiscal deficits targets are largely a function of capex implementation. If one believes the FG would go all out to implement its capex outlay then the deficit will be higher than projected otherwise as in recent years the number is likely to be very tame.

October 2017 Inflation: The National Bureau of Statistics (NBS) also put out the October Inflation report which showed that headline CPI continued its slow descent sliding to 15.9% y/y. As I have said in earlier posts, 2017 CPI prints are being distorted by base effects and as such the headline reading is not very informative of the underlying movements. Specifically, the m/m reading printed at 0.8% — well below the H1 average of 1.6% m/m supported by deceleration in food to 0.8% y/y (H1 average: 2%) and core 0.8% (H1 avg 1.1%). The downward sticky nature in recent months reflects the softer base effects in H2 2016 relative to the first half of 2016 when fuel and electricity price shocks spurred a sharp rise in inflation.

Moody’s out of step ratings downgrade: Despite a recent climb in FX reserves to 33-month highs alongside similar upward movements in Brent crude prices, Moody’s announced a one-notch ratings downgrade to B1 stable. This move brings its rating on Nigeria in line with S&P but below that of Fitch. In justifying its decision, the agency cited a failure to grow non-oil revenues and fiscal balance sheet susceptibility to further external shocks. How the first point impacts likelihood of a debt default is not straightforward as while debt service is at 45% over the first seven months of 2017, 90% of it is in Naira. Importantly, on oil revenues, which has historically been the larger share of fiscal revenues, Have a look at the chart below on oil prices in different currencies. Following the sizable depreciation, Brent in NGN is now higher than the level it was in 2014 and given the recovery in oil production, we are right where we started in 2014 in naira terms! So Moody’s claims that because the government has not improved non-oil revenues, there is increased likelihood it will do the impossible and default on debt payments in its own currency is a bit of a stretch.

Figure 2: Rebased Brent crude prices (Dec 2013=100)

Brent NGN and USD

Source: Bloomberg

A far better assessment would be to look at Eurobond yields with comparable countries. Nigeria’s papers trade more in line with Senegal and Ivory Coast than with Angola or even higher rated Ethiopia.  Fundamentally, we are on the cusp of a recovery in oil prices, but observe that Moody’s just downgraded Angola and is likely lining up to downgrade South Africa. So basically, to me it looks like it already had a view to downgrade SSA sovereigns and was merely working towards the answer.

The Week Ahead (November 20-24)

The week ahead is loaded event wise with the NBS set to release Q3 2017 GDP numbers on Monday, the two-day monetary policy retreat over the next two days, the monthly FGN bond auction with N100billion on sale and likely issuance of the recently approved $5.5billion Eurobonds. In terms of the maturity profile, there is N200billion OMO maturity on Thursday and the system is likely to be fairly liquid.

Base effects to flatter Q3 2017 GDP growth print: The numbers are likely to be flattering due to base effects as the corresponding period in 2016 was the trough of the recession. Specifically, we would be comparing oil production of 1.6mbpd in Q3 2016 with average of 2mbpd in Q3 2017 which implies oil GDP likely printing over 20% y/y. However, Telecommunications GDP is likely to be a drag as subscriber numbers are down 9% y/y which could drive a 4% contraction in the sector’s growth. Elsewhere trade GDP could remain in a contraction mode thanks to tight monetary policy. That said, I expect the strong oil GDP growth print to mask the aforementioned issues alongside continued positive trends in manufacturing, with above 50-PMI readings and agriculture. In all my guesstimate is for real GDP growth printing at 2.5-3% y/y with oil GDP printing at 27%y/y.

MPC to HOLD on Tuesday: Though the CBN governor, in an uncharacteristic swagger of late, has been serving sufficiently dovish signals about interest rates at every available opportunity, I think we are likely to see a hold at the last MPC in 2017. Central to this point is the optics: Headline inflation remains above the MPR and the CBN would like to see real policy rates so cutting now would be viewed as preemptive.

Eurobond to go on sale this week: Following Senate approval and an international road show in the prior week, the DMO and the finance ministry look set to tap global debt markets this week for at least $2.5billion or more in maturities of between 10-30 years. Whether the 30-year will work remains to be seen but the recent rally in global crude prices and Nigeria’s relatively low non-concessionary USD debt bolsters prospects. A successful sale holds very dovish implications for the Naira yield curve given the CBN forward guidance about lower policy rates in 2018.

The monthly bond auction: In line with its calendar, the DMO is set to issue N100billion in FGN bonds equally split between the five year and ten-year maturities which currently trade at 14.88% and 14.92% with coupons of 14.5% and 16.2884% respectively. The higher coupon on the 10-year implies greater demand from pension funds. On the side of caution bid ranges of 14.5-14.8% for both tenors sound like a safe bet.

Have a great week. Good to be back!






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