Nigeria Fixed Income Weekly

The Week that was (October 22-26):  – Yield curve inversion commences as CBN fires up tightening gears

  • CBN raises OMO rates further: For the second week in a row, the CBN hiked the discount rate at its weekly OMO auction by a further 50bps to 14.5% (effective: 16.7%). Consistent with the pattern in recent weeks, the CBN continued to inject liquidity into the financial system on a net basis with OMO sales of NGN186billion relative to NGN284billion in OMO bill maturities. In addition, and perhaps indicative of its newfound tightening bias, the CBN also raised the discount rates on the 3M and 6M tenors by 25bps each. Accordingly, front end yields repriced higher with benchmark NTB yields closing the week 18bps higher on average: 3M (discount 12.62%, effective: 13.02%), 6M (discount: 12.63%, effective: 13.37%) and 1-yr (discount: 14.2%, effective: 16.38%). With the 1-yr crossing over 16%, the ‘hump’ observed across the yield curve for much of 2017 re-emerged.
  • So why is the CBN tightening? In my view, these moves should be interpreted in view of the threat to the real monetary policy anchor (the exchange rate) following the recent slide in FX reserves. Faced with the prospect of USDNGN devaluation which will draw the ire of the fiscal side, the CBN has elected to raise the returns on holding NGN in a bid to reduce USD demand pressures.
  • October Bond Auction Post Mortem: At the monthly bond auction, the Debt Management Office (DMO) cleared 77% (September: 107%) of its planned NGN115billion offer at an average yield of 15.16% (September 15.13%). While the 5-year and 7-year tenors were undersubscribed with bid-cover ratios of 0.5x and 0.7x respectively, the 10-year was 2.3x oversubscribed. The overall sense is one of a less desperate DMO amid fairly robust market demand. FGN bond yields closed the week marginally higher (+1bps).

Figure 1: Naira Yield Curve

NGN curve

Source: FMDQ, NBS

  • 2019-21 MTEF: Fiscal consolidation on the cards? The Federal Executive Council (FEC) released its proposed the 2019-2021 medium term expenditure framework from which the 2019 budget will feed from. The Buhari government proposes to spend NGN8.73trillion (2018: NGN9.2trillion) with oil price and production assumptions of USD60/bbl and 2.3mbpd respectively. 2019 real GDP growth is projected at 3.01%, inflation at 9.9% and the exchange rate at NGN305/$. Though details remain sketchy, President Muhammadu Buhari will be present the full budget to the National Assembly in November which will contain more details. On balance, the sense is one of consolidation and my guess is that the 2019 budget will provide some dose of realism given recent revenue disappointments on the non-oil side and rising debt service costs.

The Week Ahead (October 29-November 2): Yield curve inversion to appear fully, MPR hike on the cards in November

  • In the week ahead, system maturities climb to NGN527billion (from NGN284billion) split between OMO bills (72%) and NTB (28%). There will be an NTB auction on Wednesday where the CBN, on behalf of the FG, would look to sell NGN145billion across the 3M (NGN9.5billion), 6M (NGN48billion) and 1-yr (NGN88billion). Following the CBN action with OMO last week, the yield curve will likely reprice higher and the FGN will be in firing line starting with the NTB auction where markets are likely to force PMA yields closer to secondary market levels. My suspicion is that the CBN holds off on its OMO hikes with effective 1-year yields at near 17% which should be more than adequate compensation for investors with real yield spreads of 500-600bps.
  • MPR hike likely in November: To long time watchers of Nigeria’s debt markets, CBN moves at its OMO auctions are usually a prelude to eventual MPC decisions. Given the hawkish tilt to the MPC at the July and September meetings with more members calling for a 25bps hike and the CBN’s sudden inclination towards paying more at the OMO window in support for its stated commitment to NGN stability, a hike in the MPR is very likely at the November 2018 MPC. How much? My guess is that it will be small (+50bps) as the current OMO tightening is likely to short-lived in the knowledge that post the 2019 elections, FPI flows are likely to recover which will drive a moderation in the USD demand pressures. Ceteris Paribus! Furthermore, while inflation forecasts are generally higher, any forecast above 12% by year end is simply not credible.

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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