Nigeria Fixed Income Weekly

The Week that was (July 9-13):  – CBN breaks OMO radio silence but bulls slowly return

  • CBN returns but limited impact on debt markets: After a two-week hiatus, the CBN returned to trim rising NGN liquidity with an OMO sale on Thursday of NGN315billion to take out NGN313billion in OMO maturities at unchanged stop rates of 12.15% for the 210-day tenor. The return of the CBN to its mop-up activity across markets is the strongest indication of what is the floor for NTB rates. That number seems to be when NTB yields looking to drop below the headline inflation rate at 11.6% y/y given its implications for foreign portfolio inflows. Nevertheless, system liquidity remained robust and helped push overnight and OBB rates to 8.9% and 9.4% respectively from double digit levels at the start of the week. Accordingly, the robust liquidity levels at the front end pushed yields on benchmark Nigerian Treasury Bills (NTB) down 15bps on average: 91-day (discount: 11.37%, effective: 11.7%), 182-day (discount: 11.85%, effective: 12.58%) and 364-day(discount: 12.29%, effective: 13.49%).
  • Farther out the curve, bond yields were largely quiet as foreign sales slowed and local bargain hunters induced yield declines. For the record FGN bond yields closed the week largely flat to lower on average at between 13.3% to 14.1%.
  • May 2018 MPC minutes reveal overtly cautious CBN: The CBN released the personal statements of the 9 committee members at its May 2018 meeting. At the meeting the CBN voted 8-1 to leave its key monetary policy rate (MPR) unchanged at 14% with the dissenting member (Deputy Governor Okwu Nnanna) plumbing for a 50bps rate hike. Consistent across board was the acknowledgment that the pace of disinflation and slack growth picture amid a firm current account picture created a strong case for a rate cut. Nevertheless, members were in consensus regarding the risks to the currency from turmoil across emerging/frontier markets in response to the rise in US bond yields. Assuming no change in the oil price picture, then CBN focus is likely to return to trends in portfolio flows and impact on the FX. In the event that this translates to USD pressures, it is safe to say the apex bank will likely opt for retaining its MPR hawkish illusion while conducting its actual monetary policy via the OMO rates.

Figure 1: Naira Yield Curve

NGN yieldd curve

Source: FMDQ

  • Nigeria repays USD500million Eurobond debt: Nigeria redeemed the July 2018 USD500million Eurobond which was issued in 2013. The redemption implies a drop in Nigeria’s stock of external borrowings to USD21.6billion (6% of GDP) of which USD8.3billion are Eurobonds. Though Nigeria plans to borrow another USD2.8billion in H2 2018, this redemption is Nigeria’s first Eurobond repayment and is important for dispelling the histrionic press coverage (often citing over-the-top doomsday like IMF reports) post the Eurobond sales.
  • Nigerian Breweries opens NGN8billion Commercial Paper sale: Leading beer producer, Nigerian Breweries Plc announced over the week plans to raise NGN8billion via the sale of 91-day commercial paper with a discount rate of 12.59% (effective yield 13%). The offer is at 130bps premium over similar dated NTB paper which suggests NB have learned from their first failed attempt much earlier in their year when they planned to issue roughly in line with the FG. The offer closes on Tuesday and you can contact your broker for more. Thus far in 2018, we have seen CP sales by banks, (FSDH Merchant Bank, Sterling Bank and Coronation Merchant Bank) as well as Dangote Cement. As I noted last week, the step-up in issuance by blue chips for working capital is eats away at banking sector revenues from this segment. Nigerian corporates account for roughly 60-70% of banking sector loans so their replacement with CP will increasingly start to show in subdued lending activity. In the pipelines are plans for bond sales by some Tier II banks.

The Week Ahead (July 16-20): Higher liquidity ahead and much ado about delays

In the week ahead, system maturities rise to NGN609billion (split between NGN178.4billion in NTB and NGN430.2billion in OMO bills. The NTB maturity implies an NTB sale during the week of the same amount split across NGN5.8billion (3M), NGN26.6billion (6M) and NGN146billion (1-yr).

Delayed FAAC inflows, DMO Q3 borrowing calendar and June Inflation: Last week, three events I expected to occur did not materialize for varying reasons. First, following disagreements between State governments and the FG, FAAC allocations have been delayed since June 27, 2018 to the point that labour unions are starting to grumble about no salary payments across around half of Nigeria’s 36 states. The states seem to claim under-remittance from NNPC and refusal. The hardline stance by states reflects increasing demands from governors to fund campaigns ahead of the 2019 elections which will see more of the same in coming months. In an ordinary year, this would mean longer periods of thin liquidity with potential to drive rates up, but given the large maturity profile in 2018, this is unlikely to be an issue for now.

In a similar vein, the National Bureau of Statistics (NBS) delayed publishing the June 2018 inflation numbers to July 23 citing circumstances beyond its control. My expectations were, and still remain, that the southward grind in inflation will continue though at a much more subdued pace with my forecast at between 10.9%-11.1% y/y  (May 11.6% y/y) reflecting continued base effects and the stability across the exchange rate. Completing the triumvirate of delayed releases was the DMO’s Q3 2018 bond calendar. This should now occur this new week when the DMO lists the Green Bond issued in December on the NSE. As I noted last week, with the passage of the budget, we expect to see a pick-up in domestic borrowings in Q3 but plans to tap global debt markets for Eurobond imply that these issuances will remain tame.

Figure 2: Historical NTB yields

hist NTB yelds

Source: FMDQ

Abbreviations

  • 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

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