Nigeria Fixed Income Weekly

Apologies to regular readers of the site. Starting from this week, in conjunction with Nairametrics, we began publishing the Fixed Income Weekly to their distribution mailing list.

The Week that was (May 7- 11) – CBN picks up the tightening gauntlet

  • Rates rise as CBN hardens its resolve on tightening: Continuing a pattern observed in the prior week, when the Central Bank of Nigeria (CBN) mopped up excess NGN liquidity aggressively via its weekly OMO auctions, the apex bank tightened the screw further with the sale of NGN454billion worth of OMO bills. As the amounts sold were in excess of OMO maturities of NGN291billion, the system went short liquidity perhaps for the first time in 2018 which forced interests rates higher across board. Negative system liquidity naturally translate into spikes in the overnight/OBB rates, which jumped to 65/75% from single digit levels in the prior week. In addition to a higher volume of Naira sterilization, the CBN also continued raising the discount rate at which it sells its OMO bills which are now up to 15-20basis points to 11.05% (which implies an effective yield of 11.5%) and 12.2% (which implies an effective yield of 13.2%) for the 3M and 9M tenors respectively. The impact of the higher OMO rates was that it pushed Nigerian Treasury bill rates higher over the week with effective yields on benchmark tenors higher to between 13.9% and 14.1%. Bond yields also tracked higher to 13.2-13.5%.
  • So why is the CBN now embarking on tightening measures, despite a declining inflation picture and its own dovish forward guidance on interest rates? My thinking is that the policy twist reflects concerns over the exchange rate, where pressures have re-emerged on the global front following the rise in US bond yields and the accompanying USD strengthening which has triggered a sell-off in emerging/frontier markets. This turmoil has seen many selloffs in several EM currencies (Argentina & Turkey especially with the latter approaching the IMF for a bailout loan) and driven slight depreciation at the I&E window has predictably led the CBN to re-evaluate its position on interest rates. To ward off any Naira troubles, the CBN has now begun raising local interest rates to induce continued foreign buying of Nigerian debt.
  • Caution is the word from the personal statements of the inaugural MPC minutes: The CBN released the personal comments of members of its reconstituted MPC at the April 2018 meeting. At the meeting, the MPC unanimously voted to hold the key policy rate at the record 14% level and the personal statements revealed largely cautious approach by the new members. Worthy of note is that the new CBN members all echoed largely the same sentiments which suggest the old order of lining up behind the governor remains intact. While the independents, who were likely to new to catch up to the CBN member gimmicks, all largely kept it short (except Robert Asogwa) and maintained the common sense view at the time of holding rates, there was nothing noteworthy that stood out from their comments. Perhaps it is too early to lay a marker on their posture and stance but they have large shoes to fill in relative to the last batch of independents well noted for voicing dissent with the CBN position.
  • Corporate debt market showing signs of life: Given the compression in interest rates, at least relative to the elevated 2017 levels, the natural impetus was for Nigerian corporates to re-engage debt markets. Media reports already point to a ramp-up in corporates coming and MTN joined the fray this week with plans to tap local debt markets for NGN400billion, which follows earlier announcements by Dangote Cement with a NGN330billion bond program. Mid-week, breweries giant Nigerian Breweries Plc opened another series of the commercial paper program which seeks to raise NGN15billion in 3M and 6M tenors.

The Week Ahead (May 14-18): Inflation to slow and Delay is not denial

  • In the week ahead, system maturities rise to NGN330billion largely dominated by OMO bills (80%). Off the remaining 20%, consistent with the DMO refinancing plan, the CBN will seek to issue half of expected NTB maturities.
  • On Thursday, the NBS is set to release April 2018 CPI report, where I expect monthly inflation to print at 0.82% which will translate to headline CPI print of 12.4% y/y (March: 13.33% y/y). the declining pattern reflects base effects and a largely stable exchange rate backdrop which has helped anchor expectations about key prices across the economy.
  • While this should support increased arguments for monetary policy easing at the May 2018 MPC, CBN actions across money markets suggest that the apex bank is more concerned about Naira stability. In a replay of 2017, my thinking is that this will inform continued hikes in OMO discount rates in an attempt to provide investors some spread over inflation. This pattern may put off the CBN from cutting rates at the May 2018 MPC slated for the next week. That said, this delay will not be a denial as I still expect the CBN to slash rates in June when inflation will likely be at the single digit door-step and hopefully USD angst will have cooled providing EM/frontier markets some breathing space.

Figure 1: Naira Yield Curve

NGN yieldd curve

Source: FMDQ


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