The Week that was (March 12-16)
FG signals lower borrowings in Q2: On Monday, March 12 2018, the Central Bank of Nigeria (CBN) released the Q2 2018 Nigerian Treasury Bills (NTB) issuance calendar which showed a NGN482billion net redemption for the period entirely on the 1-year tenor. This is consistent with the refinancing plan, announced in 2017, wherein the Debt Management Office (DMO) would utilise proceeds of the USD2.5billion Eurobond (sold in February 2018) to reduce outstanding NTBs in a bid to lower debt service costs. To affirm its much improved revenue position, the DMO then announced that it was lowering its March 2018 bond sale to NGN70billion as against the mid-point of NGN140bn in the original calendar and around 30% below its issuance in the prior two months. The impact of the lower NTB calendar was evident at the auction on Wednesday where yields declined to 11.75 (effective: 12.1%), 13 (effective: 13.9%) and 13.2 (effective: 15.2%) for the 3M, 6M and 1yr papers on offer.
Disinflation continues on base effects even as fuel supply woes show signs of easing: The National Bureau of Statistics (NBS) revealed that inflation slowed for the 13th consecutive month to an 11-month trough of 14.33% y/y (January 15.13%) largely on account of base effects. Monthly inflation now appears to be stabilizing with the February print at 0.79% largely flat from the prior month supported by softer food prices. Also notable was the moderation in the national average fuel price to NGN173/litre from NGN190/litre in January which suggests that the fuel supply picture across most parts is starting to improve after recent scarcity shocks. The normalizing trends at 0.8% m/m imply that inflation looks set to fall to single digits by H2 2018 with an average of 11.3% for 2018 by my estimate. If the fuel price trends hold firm, confidence over the annual average and re-appearance of single digits is much higher over 2018.
Figure 1: Monthly Inflation
Senate acquiesces on CBN screening hearings: Though the senate continues to hold the line on screening for President Muhammadu Buhari’s nominees to various federal positions, it had to stop playing brinkmanship over the CBN as the bad optics of toying with the economy could potentially be used against senate members in the future. Accordingly, the Senate directed its banking committee to hold screening hearings for five people: one deputy governor designate (Mrs Aishah Ahmad) and four independent MPC members: Professor Adeola Festus Adenikinju, Dr. Aliyu Rafindadi Sanusi, Dr. Robert Chikwendu Asogwa and Dr. Asheikh A. Maidugu. The committee is expected to conclude its screenings in one week with confirmation expected thereafter. This has meant that the March MPC earlier slated to hold on 19-20 has been shifted into early April 2018.
Yields decline under the combined weight of dovish influences: The cumulative impact of the reduced borrowing signal, tamer inflation reading and improved clarity over MPC meetings was evident in the downtrend across the yield curve last week with benchmark NTB yields softening on average 50bps while bond yields declined 20bps on average. This was despite fairly aggressive OMO bill issuances, the CBN upped the ante to fill in the void of lower fiscal paper supply with the sale of NGN533billion as against OMO maturities of NGN262billion.
Figure 2: NGN Yield Curve
The Week ahead (March 19-23)
Coping with the liquidity deluge: In the week ahead, system liquidity levels look set to remain central to yield direction as while NTB maturities are NGN107billion, the FG via the CBN will only issue NGN54billion while OMO bill maturities of NGN151billion are also set to mature. With that much liquidity coming through, the CBN is unlikely to stand idle so expect liquidity mop-ups to continue which in a bid to prop rates to incentivise FPI interest in NGN debt. That said, the 1-yr paper is likely to see bullish action as supply remains thin. In addition, the monthly bond auction is also set for Wednesday with the DMO offering NGN10bn (5yr), NGN30bn (7yr) and NGN30bn (10yr). The 7-yr is a new issue while the other two are re-openings with a higher coupon (14.5%) on the 5-yr relative to market pricing. In terms of events, the Senate should close out on the screening hearings for the CBN nominees hopefully without hitches which should set the stage for the MPC to take place in early April 2018.