Nigeria Fixed Income Weekly

The Week that was (October 15-19):  – Renewed hawkish signaling by CBN drives NGN yields higher

  • CBN hikes OMO clearing rates again: After the covert 100bps hike in OMO clearing rates in September following re-introduction of the 1-yr OMO bill at 13.5% (effective yield: 15%), the apex bank jerked rates up by 50bps to 14% (effective yield: 16.3%) last week. As in September the CBN action appears geared towards offsetting the downward impact on interest rates of its continued net liquidity injections into money markets as last week OMO sales of NGN275billion trailed OMO maturities of NGN347bilion. Amid a pick-up in FX market interventions with reserves down 1.1% over the week, the hike in OMO rates alongside relatively thin system liquidity at the start of the week (following aggressive sterilization activity in the prior week) implied that markets were relative tight which was evident in higher average OBB/Overnight rates of 22.5%/24.7% over the week.
  • Accordingly, secondary market yields repriced higher with benchmark NTB yields up 38bps higher on average: 3M (+6bps to 12.52%, effective: 12.91%), 6M (Discount: 12.8%, effective: 13.6%) 1-yr (Discount 13.69%, effective: 15.73%). In a similar vein, FGN bond yields also closed higher (+15bps on average).

Figure 1: Naira Yield Curve

NGN yield curve

Source: FMDQ, NBS

  • PMA Auction Report card: At the NTB sale on Wednesday, where the CBN, on behalf of the FG, sought to roll over NGN148billion, the drop-in system liquidity was evident with bid-cover ratios for the auction sliding to 1.3x (last 3.3x). As a result, rates closed higher across board from the last auction: 3M (+6bps to 10.96%, effective: 11.27%), 6M (+60bps to 12.7%, effective: 13.55%) 1-yr (+10bps to 13.45%, effective: 15.53%). As I noted last week, the National Assembly approved the DMO’s plan to tap global debt markets with a fresh Eurobond sale of USD2.8billion. Furthermore, the DMO seems undeterred by recent comments about Nigeria’s growing debt pile as it has started pushing out news about a fresh sukuk sale in Q4 2018.
  • Inflation rises but tracks well behind market expectations: The National Bureau of Statistics (NBS) released the much-anticipated September 2018 CPI report which showed a 5bps rise in annualized headline inflation to 11.28% y/y (August: 11.23% y/y). While the direction was in line with market expectations, the magnitude of the rise tracked well behind the average guess on Broad Street of 11.5% y/y. The disappointment reflects a third consecutive slowdown in monthly inflation to 0.84% (August: 1.05%) which implies that the rise in headline is merely a statistical distortion as the underlying pattern is downward. This is clear from an evaluation of the monthly trends in food and core inflation which decelerated to 1% (August: 1.42%) and 0.64% (August: 0.78%) respectively. The impact of the latter meant that core inflation (which the CBN should focus on) slipped back into single digits for the first time since January 2016. The slowdown in food is consistent with harvest and suggests that the much-feared flood shocks were overblown, which if true implies a less hawkish inflation outlook and I now expect the 2018 average to converge at 12.2% (2017: 16.5%).

Figure 2: Monthly Inflation trends

Monthly inflation

Source: NBS

The Week Ahead (October 22-26): Yield curve inversion on the cards and who really ‘crowds out’

  • In the week ahead, system maturities drop to NGN284billion (from NGN494billion) entirely made up of OMO bills. Market focus this week will be on the FGN bond auction on Wednesday where the DMO is looking to sell NGN115billion across the 5yr (NGN35billion), 7-yr (NGN35billion) and 10yr (NGN45billion).
  • Following the hike in OMO rates with the 1-year now over 16% on an effective yield, markets are likely to open up on a bearish note with the 1-year NTB now likely to move towards 16%. This will likely result in an upward repricing of the NGN yield curve. Though this CBN will use inflation as a useful alibi for its renewed hawkish behaviour, the truth is closer to developments in the FX market where falling reserves and net FPI outflows are driving currency pressures at the I&E window. The logical thing is to let the NGN weaken a bit, but the CBN seems desperate to provide costless hedging to exiting briefcase investors while embarking on a crusade of financial repression on domestic borrowers who will now pay more. Following the legislative assent to the DMO Eurobond sale, markets need to be wary of a yield curve inversion re-appearing as a successful foray into global debt markets over the next few months will drive lower issuance yields at bond auctions with the knock-on effect driving bond yields lower. With the CBN pushing the front end higher, we could see a re-appearance of the hump along the curve.
  • Who crowds out better? Conventional textbook definition of crowding out is that excessive fiscal borrowings will crowd out the private sector from credit markets. But is this true in Nigeria? Keen followers of Nigeria’s debt markets will know that there are two big issuers and the big bad wolf is not the government even though the press encouraged by the CBN pushes this view.
  • In the chart below, I plot data on CBN share of banking assets (defined as the ratio of the sum of reserves requirements and banking claims on CBN to banking sector assets) and government share of banking assets (defined as banking sector claims on FG, state and local governments) between 2010 and 2017. In the race for banking sector assets between the monetary and fiscal authorities, the CBN won the battle by 700bps in 2017 as roughly 21% of banking sector assets were warehoused with it as against 14% captured by the various tiers of government. Looking back, it appears the race has been closely fought for some time, but the new gap reflects the regime change in OMO issuance by the CBN in 2017 which went to uncharted waters.

Figure 3: Banking sector claims on Monetary and Fiscal Authorities (% of Banking sector assets)

Crowder chart

Source: CBN

  • At the front end of the yield curve, outstanding NTB i.e. the amount of debt issued by the FGN stands at NGN2.7trillion while the stock of outstanding CBN bills stands at NGN9.9trillion as at October 2018. FGN longer dated debt stock stood at NGN8.9trillion while all-in FGN debt stock is at NGN12.1trillion. Basically, the CBN has liabilities which are the equivalent of 83% of the FGN debt but of less than 1-year duration as the CBN statutes do not allow for such. Make of it what you will but the CBN is just as big a contributor to the crowding out effect across debt markets as is the FGN.

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
  • PMA: Primary Market Auction
  • FAAC: Federal Accounts Allocation Committee
  • I&E: Investors and Exporters Window
  • MPC: Monetary Policy Committee
  • NBS: National Bureau of Statistics

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