The Week that was (June 19-22): – CBN remains on the sidelines, foreign sell-off drives bond yields higher
- CBN remained passive towards system liquidity: Though the CBN opened the week with an OMO auction to lap up the excess liquidity after last week’s no show, the amount NGN136billion of OMO sales paled in comparison to the NGN244billion in OMO maturities that filtered into the system. This issuance had an instant impact with liquidity indicators climbing up as OBB and over-night borrowing rates jumped to low double digits. However, in a replay of the prior week, the CBN did not sterilize the NGN377billion in OMO maturities on Thursday which resulted in a drop in overnight and OBB rates to 2.8% and 3.5% respectively.
- But yield curve rises on account of selling pressure at the long end: Having remained largely immune from a wave of selling across EM/frontier markets and the local equities bourse, Nigerian bonds sold off during the week with some tenors nearly reaching 14%. Given the slide in inflation and relatively robust system liquidity, without a doubt the big sellers were offshore investors. As I noted in my outlook for 2018, we should expect some foreign selling induced pressure on NGN assets ahead of the elections which should drive yields higher. It would appear the USD turmoil across EM/frontier markets is bring that view much quicker than I anticipated. With bonds selling, the front end of the yield curve also tanked with yields on Nigerian Treasury Bills up 75ps on average: 91-day (Discount: 12.14.%, Effective: 12.51%), 182-day (Discount: 12.37%, Effective: 13.17%) and 1-yr (Discount: 12.41%, Effective: 13.75%).
- President Buhari grudgingly signs the 2018 budget: After another long delay and consistent with the pattern over the last decade, President Muhammadu Buhari signed the 2018 budget which would see the FGN attempt to spend NGN9.1trillion (+23% y/y) with capital spending accounting for 32% of total expenditure. The revised budget projects fiscal revenues of NGN7.2trillion (+41% y/y) underpinned by assumptions of USD51/bbl and 2.3mbpd for oil price and production respectively. In all, the budget projects a fiscal deficit of NGN1.9trillion (down from NGN2.4trillion in 2017) or 1.7% of GDP to be financed by foreign borrowings (NGN849billion) and domestic borrowings (NGN793billion). Of interest to debt markets is the financing component with the foreign component implying at least USD2.5billion worth of Eurobonds over H2 2018. In my view, the DMO will at least try to get this program over Q3 2018 to avoid lukewarm acceptance to FGN paper ahead of the elections.
Figure 1: FGN Budgets
Source: Budget Office, CBN
- Another boring NTB auction and Dangote comes to town: At the NTB auction, the DMO stuck to its the Q3 2018 NTB borrowing calendar allotting NGN66.8 billion (NTB maturity: NGN66.8 billion) with stop rates ranging between 10%-11.5%. As I noted last week, Nigerian corporates continued to approach debt markets to take advantage of low rates and last week, Dangote Cement opened its debut commercial paper program that will see it borrow up to NGN50billion (under a NGN150billion program) in 6M and 9M debt. Indicative pricing is 12.15% + spread range of (0-25bps) for the 6M paper and (25-50bps) for the 9M offering. Among other offerings, UBA is also in the market for a bond as is the mid-stream oil services company (Depthwize) which is in the hunt for NGN20billion.
- DMO releases debt data over Q1 2018: DMO released data showing that domestic debt was flat from 2017 year end at NGN12.5trillion thanks to NTB repayments over the period while foreign debt had climbed 17% to USD22billion following the sale of Eurobonds in February 2018. The DMO also released state debt numbers which cumulate to NGN3.3trillion with Lagos state at the most indebted with NGN363billion while Anambra brings up the rear with NGN2.6billion.
Figure 2: Nigeria: Debt Statistics
The Week Ahead (June 25-29): How will the DMO respond to bond sell-off at this week’s auction?
In the week ahead, system maturities drop to NGN183billion made up entirely of OMO bills which implies no NTB sale. However, there will be a bond auction DMO will seek to sell NGN60billion evenly split across 5yr, 7yr and 10yr bond maturities. In terms of how markets will trade, it appears the CBN seems to be trying to force debt markets reprice the lower inflation readings. In the event that the apex bank stays on the sidelines on Monday, the bears are unlikely to remain in charge as excess liquidity applies downward pressure on NTB yields before feeding through to bonds. In the event of a fresh OMO sale, markets are likely to remain at these levels. Either way, markets are likely to stall till Wednesday to see the results of the bond sale where a cost conscious DMO lies in wait armed with a Eurobond approval. Markets are likely to see an unfriendly DMO at the bond sale which will mean there’s scope for yields to slide towards the close of the week.
Figure 2: Naira Yield Curve
Source: NBS, FMDQ
- OMO: Open Market Operations
- NTB: Nigerian Treasury Bill
- FGN: Federal Government of Nigeria
- CBN: Central Bank of Nigeria
- DMO: Debt Management Office
- FAAC: Federal Accounts Allocation Committee
- I&E: Investors and Exporters Window
- NBS: National Bureau of Statistics