The Week that was (September 17-21): – Yields moderate as CBN mellows on liquidity
- Yields moderate as CBN allows liquidity build-up ahead of NTB auction: After last week’s uncoordinated sterilization activity (which saw the CBN re-introduce a one-year OMO bill at higher yields) resulted in higher rates at the NTB auction, the CBN adopted a more accommodative posture towards FG borrowings. Specifically, it delayed its OMO activity till after the NTB sale, allowing a build-up in NGN liquidity force market participants to become less aggressive in bidding at the auction which resulted in the FGN rolling over the NGN182billion maturities with the 1-yr paper (92% of offer) clearing at 13.475% on discount (effective 15.6%).
Table 1: Results of NTB Auction
- Thereafter the CBN resumed its liquidity curbing actions with a NGN355billion OMO sale on Thursday at yields rates unchanged from last week. Overall the CBN was relatively passive which kept money markets in bullish territory in secondary trading with benchmark Nigerian Treasury Bill (NTB) tenors closing the week down 68bps on average: 91-day (discount: 12.36%, effective: 12.75%), 182-day (discount: 13.25%, effective: 14.43%) and 364-day (discount: 13.47%, effective: 15.24%). Bond yields also closed lower down 28bps.
- Money supply and credit growth remained below target in July: CBN updated data on money supply through to July 2018, which showed that underlying money supply and credit growth indicators continued to trail monetary policy targets with annualized growth of M1 (narrow money) and M2 (broad money) growth at (-5.7%) and 6.9% respectively. Both are behind the provisional 10.4% target. Crucially, net domestic assets continued to contract (down 37.4% annualized) due to continued declines in private credit (-0.2% annualized) and interestingly credit to government (-8.7% annualized). The decline in government borrowing reflects a net repayment pattern over the first half of 2018 while private sector reading is consistent with contraction in lending across the banking sector. The money supply data sits well with a declining trend in core inflation and weak macroeconomic recovery.
- 2017 budget accounts point to limited fiscal space: The Budget Office released the Q4 2017 and FY fiscal accounts which showed that fiscal expenditure came in at NGN6.4trillion (87% of budget) driven by 95% recurrent implementation and 66% capex execution. The capex number printed at a record NGN1.44trillion (1.3% of GDP) as the FGN continued capex implementation right through to 2018. The exertion on capex and revenue disappointments (due to higher JV cash call payments and the perennial optimism on non-oil) drove a fiscal deficit of NGN3.8trillion (3.3% of nominal GDP) – which is above the minimum 3% of GDP limit contained in the fiscal revenue act 2007. Accordingly, the costs of the fairly credible budget execution implied sizable borrowings and the associated costs with debt service to revenue ratio printing at 69% (2016: 47%). Clearly, this level of fiscal spending is unsustainable and over the medium term if unchecked will require either a sharp fiscal consolidation or sizable NGN devaluation to keep things going.
Figure 1: Fiscal Metrics (% of GDP)
Source: Budget Office, NBS
The Week Ahead (September 24-28): September 2018 MPC and Bond Auction…
- In the trading week ahead, system maturities fall to NGN260billion (from NGN400billion) entirely of OMO bills which implies a likely OMO auction on Thursday. On Wednesday, the monthly bond auction takes place next week with NGN90billion on offer across the 5-year (NGN25billion), 7-year (NGN25billion) and 10-year (NGN40billion). The amount on offer is lower than the NGN112billion sold in August.
- In addition, the CBN holds its two-day monetary policy retreat this week and consensus is for the committee to leave the MPR unchanged at 14% as well as other policy parameters constant. Given recent turmoil across Emerging/frontier markets which has seen currencies plummet, tightening within the context of balance of payments would be to support the capital account against outflows. However, thanks to higher oil prices Nigeria’s current account surplus has rebounded to pre-2014 levels which provides a ready offset against capital account concerns. In any case, the onset of the 2019 elections and the recent shenanigans by the CBN (though they now sound conciliatory) imply that even if we hike rates to 20% very few portfolio investors would be interested in Nigeria. But more importantly, on the economic side, growth remains weak and core inflation (which should be the focus of monetary policy as against headline) has remained subdued. Under this scenario, the optimal monetary policy decision should be to hold rates as real yields of between 200-300bps should be enough compensation for any risk.
- However, given the rise in headline inflation (which always gets the on the news headlines) and the growing calls by independents, one cannot rule out an outside chance that the core CBN doves get outflanked into a tiny hike in MPR. At the July 2018 MPC, two more hawks (Deputy Governor Aishah Ahmad and independent Aliyu Sanusi) joined long-term hawk Deputy Governor Okwu Nnanna in tugging for a rate hike. This has raised concerns that the MPC is turning hawkish especially if more independents join the CBN ‘rebels’ in September. The current balance sees 6 CBN members and 4 independents. Interestingly, the recent moves in the OMO window with a hike in clearing rates and the re-introduction in one-year OMO bill, appears to hint at an upward adjustment in the MPR. Thus, while the optimal policy decision is for a retention of the status quo, events seem to be pointing to some tightening bias at the MPC for September. On balance we could see a hold.
Figure 2: Naira Yield Curve
Source: NBS, FMDQ
- 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
- PMA: Primary Market Auction
- FAAC: Federal Accounts Allocation Committee
- I&E: Investors and Exporters Window
- MPC: Monetary Policy Committee
- NBS: National Bureau of Statistics