The Week that was (July 23-27): – Rates rise as CBN raises the notch on liquidity mop-ups
- Rise in OMO sales nudges NTB yields higher: Under mounting pressure from workers following unpaid salaries, state governors blinked and grudgingly agreed to approve the release of the June FAAC allocations of nearly NGN822billion, which alongside OMO maturities of NGN293billion implied a fairly robust system liquidity at the start of the week. In response, CBN picked up the pace of OMO issuance with the sale of NGN585billion at unchanged rates of 11.4% and 13.1% for the respective 3M and 9M tenors on offer. Though money markets remained still relatively liquid, the rise in OMO sales drove a repricing at the front-end of the curve with yields on benchmark Nigerian Treasury Bills (NTB) up 34bps on average: 91-day(discount: 11.02%, effective: 11.33%), 182-day (discount: 11.98%, effective: 12.73%) , 364-day(discount: 11.69%, effective: 12.71%).
- Bond yields remain flat but rise at primary auction: At the monthly bond auction, the Debt management office (DMO) sold NGN66.7billion relative to an offer of NGN90billion at an average marginal rate of 13.99% (June: 13.7%). Amid lower subscriptions with bid-cover of 0.86x (June 1x), the DMO decision to resist borrowing over 14% suggests fiscal revenue profiles continue to remain strong thanks to higher oil receipts. At the secondary market bond yields remained largely flat over the week.
- MPC holds but monetary policy now looks at cross purposes: The CBN left its key Monetary Policy Rate (MPR) unchanged at 14% by a 7-3 vote with dissenters pushing for rate hike. Beneath the usual excuses, the decision reflects growing policy inertia as while there is no reason to raise rates given the declining inflation and robust reserve pictures, it would appear CBN’s perennial dilemma over how to handle liquidity is driving a resistance to monetary easing. Where and how does this translate to a desire for easing? The CBN seems to be source of the unease as the MPC communique seemed to hint at growing concern over slack growth in credit and money supply aggregates which are well behind target levels.
- Specifically, despite a credit growth target of only 5%, actual credit growth is -0.1% annualized to June. As for money supply measures: M1 is down 8.5% relative to target growth of 8.5% while M2 is only up 2.8% relative to a target growth of 10.8%. Clearly all the talk of excess liquidity is not filtering through the wider economy and banks are not lending. So much so that the CBN now unveiled a desire to directly boost lending via talk of purchasing corporate commercial papers and releasing CRR liquidity. Clearly the purchasing CP talk is QE by another name and has dovish implications for interest rates. That the CBN included mention in the MPC statement is telling enough about a desire to boost credit growth? So why not cut interest rates? This goes back to the deep lying issue of an ineffective monetary policy transmission mechanism which renders the CBN jobless when currency worries are not on the horizon and inflation is declining as we presently have. In the coming days, the CBN will unveil that strategy till then markets will keep watching the OMO auctions for signals.
- Inflation continued to slow in June but appears to be bottoming out: The National Bureau of Statistics (NBS) released the long-delayed June 2018 CPI report which showed further deceleration in inflation to 11.23% y/y (May: 11.6% y/y) as base effects remained supportive. However, on a monthly basis, inflation climbed to 1.24% (May: 1.09%) on account of higher prices of farm produce. The pick-up in monthly inflation is not surprising as June-July is the peak of the lean season (the period when food supplies are thin across major markets) as harvest commences in August-September.
Figure 1: Inflation
Source: NBS *Jan-June Average
The Week Ahead (July 30- August 3): Near term yield curve normalization?
In the new week, system maturities are at NGN474billion split between OMO (57%) and NTB (43%). This means there will be an NTB auction on Wednesday, where the CBN, on behalf of the FGN, will try to auction NGN216billion split between 91-day (NGN9.5billion), 182-day (NGN69.6billion) and 1-yr (NGN137billion). For the rest of the week, focus will be on how CBN deals with the liquidity build-up over the rest of H2 2018 which raises prospects of a yield curve normalization. I expect this to be short-lived as it forces pension funds to go further out the yield curve in search of higher yields which will flatten things out. In addition, CBN talk about purchasing commercial papers is likely to quicken the supply of such instruments with Lafarge Africa Plc announcing plans for a fresh issue even as some banks and corporates are working out bond sales in Q3 2018.
Figure 2: Naira Yield Curve
- OMO: Open Market Operations
- CP : Commercial Paper
- NTB: Nigerian Treasury Bill
- FGN: Federal Government of Nigeria
- CBN: Central Bank of Nigeria
- DMO: Debt Management Office
- PBoC- Peoples Bank of China
- FAAC: Federal Accounts Allocation Committee
- I&E: Investors and Exporters Window
- NBS: National Bureau of Statistics