Nigeria Fixed Income Weekly

The Week that was (September 3-7):  – CBN blinks on OMO rates, sending NTB yields higher

  • CBN raises OMO rates fearing liquidity impact: Fixed income markets opened the week sufficiently liquid reflecting the hangover from the prior week when the CBN did not sell any OMO paper. Accordingly, system liquidity indicators i.e. the OBB/Overnight rates declined to 2-3% at the start of the week though investors continued to under-subscribe OMO auctions waiting for the robust liquidity to force the CBN’s hand. After holding out, the CBN blinked on Thursday by raising yields on OMO sales for its 6M tenor by 35bps to 12.5%. Subsequently, benchmark Nigerian Treasury Bill (NTB) tenors tracked higher (+30bps on average): 91-day (discount: 13.31%, effective: 12.54%), 182-day (discount: 12.7%, effective: 13.3%) and 364-day (discount: 12.41%, effective: 13.89%). In all, the CBN closed the week on an aggressive note with OMO sales of NGN499billion relative to OMO maturities of NGN294billion. That said, the system remains liquid with OBB/Overnight rates closing the week at 2.8% and 3.4% respectively.
  • NTB calendar shows neutral FG borrowing stance: CBN released Q4 2018 NTB issuance calendar which showed a net neutral borrowing stance, as in Q3 2018, with planned issuance of NGN1.02trillion (-2.3% q/q) exactly matching maturities over the period. Given the over concentration on the 1-year NTB (79% of planned borrowings) and pressure building on the CBN at the OMO auctions, we are likely to see more spikes on the 1-year tenor primary window over Q4 2018.
  • Bond yields continue uphill climb: FGN bond yields climbed 20bps on average driven by big increases in short maturities 2021 (+109bps), 2020 (+33bps) and the 2036 (+26bps) with most other segments of the curve holding largely quiet. Markets continue to reprice the pick-up in ST yields as markets now expect some form of monetary tightening.

In all the entire yield curve has moved higher (even though inflation remains sub 12% and oil prices remain higher than in 2017) thanks to combination of careless monetary tightening talk, unwarranted negative news from the political side and overhanded regulatory activism.

Figure 1: Naira Yield Curve

NGN yield curve

Source: NBS

  • Current account surplus expanded in Q2 2018: The National Bureau of Statistics released Q2 2018 trade data which showed a 8% q/q (+400% y/y) rise in the trade balance to NGN2.3trillion (7.7% of Q2 2018 Nominal GDP). The gains continue to reflect the gains higher oil prices supported by a drop-in imports (-20% y/y, -16% q/q) on account of a big drop in oil imports (down 54% q/q, 48% y/y). CBN also put the Q2 2018 BoP numbers which showed Nigeria’s CA surplus widened (+63% q/q, +325% y/y) to USD5.7billion (6.8% of Q2 2018 nominal GDP) thanks to the positive trends in the oil trade as stated earlier and robust remittances which came in at USD5.9billion. The strong gains are likely to have held over Q3 2018 though capital account pressures as EM/frontier market turmoil tempered impact of these gain on FX reserves.

Figure 2: Nigeria: Current Account

 CA

Source: CBN

The Week Ahead (September 10-14): The only way is UP and Inflation to hold steady.

  • In the trading week ahead, system maturities rise to NGN377billion (from NGN294billion) split between OMO bills (64%) and NTB (36%). In addition, we see two CP maturities: Dufil Prima (NGN7.5billion) and FSDH (NGN14.1billion).
  • The NBS is set to publish August 2018 inflation numbers which are the first set following the end of base effects in July and this reading is likely to give a firm idea of the CPI trajectory over the rest of 2018. August marks the onset of the harvest period in Nigeria though major activity commences in September and usually a seasonal drop-off in the monthly CPI print from the elevated price trends over the lean season months (May-July) is likely. This informs my guess of monthly CPI sliding to 1% (July: 1.1%) which results in the annualized reading likely to come in between 10.9-11.2% y/y (July 11.14% y/y).
  • We interpret the raised rates at the OMO auction to be the new normal for the time being. Though we think liquidity is likely to pose a concern, markets are likely to adjust the new level. On the long end, we think markets remain edgy and will continue to look for reasons to be bearish ahead of the elections. Given fresh turmoil across EM/frontier markets last week, we see scope for resumption of offshore selling of bonds.

Abbreviations

  • 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
  • MPC: Monetary Policy Committee
  • NBS: National Bureau of Statistics

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