The Week that was (March 19-23)
Renewed CBN aggression drives front end rates higher: Given the expected rise in system liquidity (with OMO maturities of NGN151billion and FGN’s plan to only roll-over half of the planned NGN107billion in NTB maturities), the CBN stepped up OMO issuance to NGN248billion to prop interest rates. This net OMO bill issuance had the intended effect of driving up yields on benchmark NTB maturities which closed the week 27bps higher: 91-day (discount: 13.95%, effective: 14.45%), 182-day (discount: 14.01%, effective: 14.45%) and 1-yr (discount: 13.37%, effective: 14.45%).
FGN reluctance at borrowing tempers selling pressures: Average clearing rates at the monthly bond auction declined to 13.51% (from 15.84%), as subscription levels climbed to 2x (February: 1.2x) where the Debt Management Office (DMO) put up NGN70billion on offer. Despite the robust demand and lower rates, the DMO slashed actual borrowings to NGN64billion which is testament to a much improved fiscal revenue profile as oil prices have averaged USD67.2/bbl YTD relative to a budget benchmark of USD45/bbl amid largely stable oil production. It appears markets are struggling to adjust to a tight-fisted DMO with secondary market bond yields largely unchanged over the course of the week
Senate confirmations restore MPC quorum: The Senate banking committee during the week confirmed the appointments of two Deputy Governors (Mrs. Aishah Ahmad and Mr. Edward Lamatek) and three independent MPC members but rejected the appointment of Dr. Asheikh Maidugu who appears to be an employee of the taxman (FIRS). This point was viewed by the Senate as maligning his independence. Nonetheless, the confirmation of the 5 presidential nominees to the CBN, alongside existing members implies that 6-member hurdle for the MPC quorum has been crossed. Accordingly, the new members have roughly a week to settle into office for next week’s rescheduled MPC meeting while President Muhammadu Buhari would have to re-appoint a new independent member to replace Dr Maidugu.
Higher USD borrowings drives deterioration in debt ratios: The DMO released official debt data for 2017 which showed that Nigeria’s debt climbed 26% y/y to NGN18.6trillion (USD60.1billion) largely driven by higher external borrowings following the USD4.8bn worth of Eurobonds sold in 2017. Given a tamer rise in nominal GDP in 2017, debt-to-GDP climbs to 16.1% (2016: 14.3%). In addition, debt-service data released places average interest costs on domestic borrowings at 12.5% while Nigeria pays roughly 3.1% on external debt. At NGN1.6trn in actual debt service payments for 2017, the widely watched debt-service to revenue ratio falls to 39% by my estimates from 44% in 2016. Gains here largely reflect a recovery in fiscal revenues from the depressed levels in 2016.
Figure 1: Debt Metrics
In summary, divergent patterns were observed along the curve as while benchmark NTB yields tracked higher (up 27bps on average), bond yields were largely static as markets struggled to digest the continued FGN reluctance at borrowing at the bond auction.
The Week ahead (March 26-29)
In the short trading week ahead, with the Easter holidays on Friday, there is roughly NGN189billion in OMO maturities on Thursday which implies the CBN will likely step-in over the course of week. Alongside likely FAAC inflows over the week, the absence of any natural supply source means markets are going to struggle to deal with liquidity levels which points to softer rates over the week.
Figure 2: NGN Yield Curve