Nigeria Fixed Income Weekly

The week that was (December 18-22)

CBN resumption of OMO issuance triggers profit-taking: In the penultimate week of trading in 2017, the CBN returned to calm fixed income markets with OMO bill issuance of N353billion across 3M and 6M tenors at respective marginal clearing rates of 13.2% (effective: 13.65%) and 14.9% (effective 16.69%).  Though system maturities stood at N159billion, the carry-over from the prior week’s meant that a liquidity surfeit weighed down on interest rates with OBB/Overnight rates opening the week at 2-3%. Post the OMO sale, traders booked profits driving a sell-off across both the short (up 48bps) and long (up 30bps on average) segments of the yield curve.

Figure 1: Naira Yield Curve

NGN yield curve

Source: FMDQ,

Inflation grinds to a halt in November: Last week, the National Bureau of Statistics (NBS) reported that inflation held still at 15.9% y/y in November as both core and food inflation climbed to 12.75% y/y (up 4bps) and 20.3% y/y (up 2bps) respectively. A look at the monthly readings show that after slowing over most of H2, inflationary pressures were re-emerging in farm produce for as yet unclear drivers as food prices have been generally trending downwards and petrol prices were essentially flat in November. Given the re-occurrence of fuel scarcity worries in December, monthly inflation is likely to have climbed over the month on account of the higher petrol prices but the high base in 2016 means headline might act less sluggish and decelerate more quickly in December to 15.75-8%. In any case the monthly reading is close to the trend level of 0.7-0.8 over the last decade during normal times.

Figure 2: Average annual and monthly inflation (%)

Annual inflation

Source: NBS

In the event inflation settles at these levels, the high base in H1 2017 when it averaged 1.55% means headline will drop rapidly over early 2018 due to base effects – unless the NBS manages to come up with even more interesting data patterns.

Heightening media pressure on Senate over MPC quorum: As I noted last week, media pressure cranked up several notches over the week about the lack of quorum for the January MPC thanks to legislative grandstanding. At the heart of the legislature’s refusal to confirm the incoming nominees is its insistence that President Buhari should withdraw his nominee for the anti-corruption ombudsman (the EFCC) who has now been in acting capacity since 2015. It would be interesting to see what happens in coming days but for markets, the meeting was going to be a dead rubber anyway: CBN was unlikely to adjust interest rates at the January or even the March meeting. However, the failure to hold an MPC would certainly form cannon fodder for the media leading to a greater likelihood for bad international press publicity. However to close watchers of Nigeria’s debt markets, MPC meetings have been effectively rendered pointless. If in doubt consider this, the MPR has been static since July 2016 at 14% but interest rates have moved on a roller coaster up and down driven by OMO rates at variance with the MPR. The problem with bad publicity is its impact on foreign participation in domestic debt markets which would predictably stay on the sidelines over January.

The week ahead (December 27-29)

In the week ahead, which is the last trading week in 2017, system liquidity remains robust with N218billion OMO maturities on Thursday and FAAC inflows (which climbed in November to N533billion).  In line with the pattern in the prior week, any OMO issuance is likely to remain infrequent and focused on the 3M and 6M windows.

2017 would go down as a heady year for fixed income markets as a hawkish CBN pushed short-dated interest rates to record levels over the first half of the year with record net OMO bill issuance all in its quest to squeeze naira liquidity to stem dollar demand. The policy raised the opportunity costs for holding long-dated papers leading to a sell-off and spike in bond yields and more expensive borrowing costs to the FGN. Following improvement in oil revenues and slowing inflation, CBN’s retracement on its hawkish stance allowed for a debt market rally with the S&P Nigeria bond index on track to close 2017 up 25% up.

2018 will holds promise of several twists and turns to the Naira yield curve. Will the FGN commit to its debt strategy of shrinking local paper issuance and higher foreign borrowings? Will inflation slide down just enough to allow the CBN embark on modest symbolic easing of its MPR accompanied by flooding the system with excess liquidity as in December? Will fresh summits in crude oil prices allow for a more relaxed CBN grip on naira determination? How will IFRS implementation drive local pension fund investment patterns? On balance, dovish inclinations appear on the horizon and investors should be keenly aware of the impact of bulging naira liquidity on yields. Given the positive outlook for the current account, my sense is that we would see a return of liquidity skirmishes between the CBN and financial markets which prevailed over much of the Sanusi Lamido Era. CBN’s focus will be on creating a floor for interest rates conducive to ensure sustained FPI support for Naira but balanced against the emerging disinflationary picture.

Season’s Greetings and have a prosperous 2018!

 

 

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