The week that was (March 26-29)
CBN halts OMO issuances again setting off bullish NTB activity: As I noted in the prior week that the absence of any natural paper supply meant that markets were likely to grapple with a rise in system liquidity with FAAC and OMO maturities of NGN189billion. Little did I know that the CBN would after displaying some aggression for most of March would suddenly turn docile with a surprise pause in OMO auctions. That suspension has continued into this week and naturally fuelled a bullish streak across fixed income markets with Nigerian Treasury Bill (NTB) yields down 51bps on average with the 91-day down over 100bps reflecting the build-up in system liquidity. At the start of the week benchmark rates stand at 91-day (discount: 13.2%, effective 13.6%), 182-day (discount: 14.2, effective 15.26%), and 1yr (discount: 13.22%, effective 15.1%). System liquidity looks robust with OBB/overnight rates at 3-4% down from double digit levels a week earlier.
But FGN bond yields remain unmoved though: FGN bond yields were much more subdued largely unchanged to slightly bearish as the end of Q1 likely induced seasonal selling to book profits. The 2018 bond which has traded like an NTB experienced the most swings. The rest of the long end was largely flat until the Monday when bullish activity drove dips across the deep end.
Money supply aggregates show weak growth: The CBN released data on money supply aggregates for the first two months of 2018 which showed that narrow money(M1) remained in contraction (down 16.6% annualized, 2017: -3.2%) while broad money(M2) rose tamely (up 0.4% annualized, 2017: 1.2%). The weak M2 expansion reflects offsetting impact of growth in net foreign assets (down 16.9% annualized, 2017: +67%) as net domestic assets (NDA) expanded at a brisk pace (+28.4% annualized, 2017: -38.1%). The NDA expansion reflects recovery in credit growth to the private sector (up 8.9% annualized, 2017: -1.6%) and continued expansion in borrowing to government (which on an annualized basis is up 119%). The weak money supply growth could become a useful cannon fodder excuse for the CBN as it looks set to commence monetary easing over Q2 2018.
National Assembly delays budget hearing: Despite early submission of the 2018 budget in Q4 2017, Nigeria cannot seem but revert to the mean with the National Assembly voting to extend the 2017 budget implementation to May 2018 from the earlier announced April 2018. This will be consistent with the pattern of late budget submissions which the legislators link to the inability of the various MDAs to prepare adequately for budget defence sessions. The parliamentary delays mean Eurobond issuance embedded in the new budget of between USD2.5-3billion will likely be in Q4 2018.
The Week ahead (April 3-6)
In the ahead, system maturities look set to climb with OMO maturities of NGN325billion on Thursday. At the NTB auction on Wednesday, the CBN will look to sell NGN95.2billion – half of the NTB maturities on Thursday. In the absence of OMO sales, liquidity is likely to drive yields lower especially in the event market takes the forward guidance from the April MPC as super dovish.
Drum bells of easing in the air but CBN likely to remain in holding pattern: In terms of events, market focus is on the two-day MPC which ends today. In my experience and historically, CBN’s action across money markets is perhaps the best indicator of the MPC decisions. As such their sudden apprehension at OMO sales in the face of mounting liquidity could be rightly read as a precursor to monetary easing. Nonetheless, the CBN has been effectively in an easing stance since Q4 2017 so a rate cut would not change much. Inflation outlook has improved considerably as the fuel supply picture across the country is now much improved with the NNPC now closing down the ‘war room’ opened during the intermittent scarcity periods in Q1. This means stronger than expected disinflation with analysts’ forecasts now looking at 10% y/y headline inflation by June which provides a fundamental case for easing. Perhaps the strongest case to be made involves increasing concern over the distortive impact of the current policy stance (of attacking system liquidity via OMO issuance) on financial intermediation. Amid growing noise over the large bank profits booked on CBN balance sheets, with little loan growth in 2017, the CBN could look to close this tap. How they deal with it is tricky but it is very likely that the CBN will still try to draw a floor on rates which could see the return of the symmetric 200bps corridor around the MPR. On the MPC, I think the CBN will hold out till May when inflation numbers lead the way. That said as I’ve long noted, the MPR is a pointless rate in the schematics of the Nigerian fixed income markets, the real policy rate which sets tone for the yield curve is the OMO auction rate. And on that the CBN has been fairly static on discount rates at such auctions thus far in 2018.
Figure 1: NGN Yield Curve