(The week that was Feb 19-23)
Yields slide on improved system liquidity: After climbing at the start of the week due to an aggressive CBN posture with OMO issuance of NGN120billion as against maturities of NGN56billion, yields pulled back after the DMO displayed some cost sensitivity at the monthly bond auction and FAAC inflows came in at the end of the week. At the short end yields dropped on average 54bps across benchmark Nigerian Treasury Bills (NTBs) as the strong FAAC inflows pushed overnight/OBB rates into single digits from the double digit levels at the start of the week.
Figure 1: Naira yield curve
DMO stares down debt markets: At the monthly bond auction, which was the first since the USD2.5billion Eurobond sale, markets seemed to be trying to test the mettle and revenue position of the FGN as the upper range of bids at the auction jumped to 16% (though lower bid range remained unchanged at 12.5%). As in January, bid-cover ratios continued to slide (down 14% m/m to 1.2x) with markets seemingly avoiding the five year bid despite a higher coupon in favour of the new 10-year. However, the DMO was not ready to play ball as it held the line on marginal clearing rates with the 5-year sold at 13.7% and the 10-year at 13.9%. Notably, it allocated only 80% of its intended offer and 68% of bids. Unsurprisingly bid losers turned bullish over the rest of the week to cover short positions which drove bond yields lower from the start of the week down 7bps on average.
Figure 2: Marginal rate and Bid-cover ratio
The Week Ahead (February 26 – March 2)
In the week ahead, system maturities rise to NGN369billion split between 70:30 between NTB and OMO maturities which implies an NTB auction on Wednesday and a likely pick-up in CBN sterilization activity. In between the NBS looks set to release the Q4 2017 GDP report.
Economic growth GDP to remain soft: As in Q3 2017, much of the momentum in headline growth is likely to come from the oil sector with average production over the Q4 2017 of circa 2.03mbpd (up 15% from Q4 2016). This should provide a boost to oil GDP growth which I estimate should expand by around 17% y/y in Q4 2017. After contracting in Q3 2017, I expect Non-oil GDP to return to growth driven by a lower contraction in telecommunications as subscriber growth picked up over Q4 2017 with mobile lines rising 3% q/q but still down 6% y/y. Furthermore, manufacturing activity should move into expansion in line with upbeat PMI readings and improved FX liquidity. Though agriculture should expand over 3% y/y, trade and construction activity is likely to remain subdued leaving non-oil growth at a paltry 0.1% y/y. In all real GDP growth is likely to print at 1.2%-1.4% y/y for the quarter and 0.6-0.8% for 2018.