The Week that was (December 3-7): – CBN’s low tolerance for NGN liquidity pushes Naira yields higher
- CBN cranks up its liquidity tightening gears, pushing interest rates higher: As I noted last week, the CBN’s response to exchange rate pressures at the parallel market was to ramp up its mop-up of Naira liquidity in the financial system via OMO auctions. Consistent with this position, the CBN maintained that aggression this week with the total sale of NGN1.33trillion OMO bills over the week (relative to NGN685billion in OMO maturities over the week). This resulted in a jump in OBB/Overnight rates (which are good thermometers of system liquidity levels) to 24%/26% at the end of the week from single digit levels at the start of the week. Cumulative impact of the CBN attack on system liquidity was the rise in front end interest rates over the week (+97bps w/w on average) to 15.11% (3M), 14.52% (6M) and 17.41% (1-yr). In a similar vein, FGN bond yields climbed on average 13bps over the week to 14.87-15.97%. Presently, most segments of the Naira yield curve are now higher or at least at par with levels obtained in December 2017 even though inflation is much lower now than then.
Figure 1: Naira Yield Curve
Source: FMDQ, NBS
- DMO opens NGN100billion Sukuk bond sale: The DMO announced opening of the second Sukuk bond sale on the following terms: NGN100billion, 7-year tenor and a rental yield of 15.74%. Sukuk I was issued in September 2017 at a yield of 16.47% which has tightened to 15.42% at the end of Friday. The new supply is being priced off the 7-year FGN bond. The strength of the Sukuk is that is helps to crowd-in a class of investors in Nigerian debt outside the traditional investor profile. For example, Middle-East based Islamic fund managers looking for exposure to high-yield EM/frontier local currency instruments have been scouting around for fresh issue given the high yield. At the investor forum, the sense one got is that demand for the sukuk issue could overshoot the planned amount on offer. Retail investors are also provided a window as the sale will include stockbrokers as against only banks for the first sale. The offer will close on December 17 with subscribers able to buy NGN1,000 per unit subject to a minimum subscription of NGN10,000.
- H1 2018 budget accounts shows lower budget deficit on zero capex implementation: The Budget Office released the Q1 2018 and Q2 2018 budget implementation reports which showed that despite revenue challenges which saw the FGN revenues miss forecasts by nearly 52%, zero implementation of NGN1.4trillion capital budget for H1 2018 resulted in a lower than budget fiscal deficit of NGN771billion (budget: NGN997billion) or 1.3% of H1 2018 nominal GDP. From the looks of things, it appears that the Buhari government has reverted on to the perennial trick with Nigeran budgets where lack of credibility over capital budget implementation translates to ‘fiscal savings’ in the event of revenue disappointments. Revenue misses roughly stemmed from oil (-33%), non-oil (-40%) independent revenues (-48%) and the various plug-in items included to massage the budget: recoveries, debt & fines as well as proceeds from oil asset sales. For implementation, the budget was passed in June so talk of capex implementation is moot. For the record, the widely watched debt-service to revenue ratio remained elevated at 61% (or 62% inclusive of sinking fund debt contribution, 2017: 69%) given the revenue disappointments.
Figure 2: Fiscal Revenues, Expenditure and balances (% of GDP)
Source: Budget Office, * H1 2018
- Delayed 2019 budget shows signs of fiscal consolidation but doubts over execution: Perhaps reflective of the wild misses in 2018, the 2019 budget process which is already well-off the usual calendar schedule for passage looks likely to be presented either this week or next. For context, President Buhari presented the proposed budget to the National Assembly in November in 2017, but this time, he was required to sit-in for over two hours last week Friday to ensure presidential assent to the draft 2019 budget. While details are sketchy, fiscal deficit and borrowings are forecast lower but oil prices at USD60/bbl sounds a tad optimistic in view of the steep plunge in oil over November 2018. In my view the 2019 budget as with all election year budgets in Nigeria is unlikely to record any serious implementation in terms of execution as fiscal inertia is likely to exist over the first half of the year due to the election and lengthy transition period.
Figure 3: 2019 Budget highlights
Source: Newspaper reports, Minister of Budget
The Week Ahead (December 10-14): CBN aggression to continue, Inflation and Q3 2018 GDP report card
In the trading week ahead, system maturities fall slightly to NGN552billion (from NGN695billion) split between OMO (90%) and NTB (10%). As the DMO has indicated plans to redeem all NTB maturities in December, there will be no auction on Wednesday. However, I expect the CBN to maintain its hawkish stance on NGN liquidity by maintaining the momentum as per the frequency of OMO bill issuance and likely increments to stop rates. This week also sees a raft of economic data with November 2018 inflation likely to be released as well as the long delayed Q3 2018 GDP print.
Subdued inflation and growth reading on the cards: For inflation, food prices are likely to remain under downward pressure thanks to harvest which means that monthly inflation is likely to hover between 0.7-0.75% which translates to annualized November inflation holding between 11.18% -11.24% y/y. For GDP, oil GDP is likely to show a bigger contraction than in Q2 2018 with mean oil production of between 1.85-1.9mbpd over Q3 2018 which is lower than the 1.98mbpd in Q3 2017. This oil drag is likely to mute any impact of any improvements on non-oil GDP leading to overall GDP anywhere between 1-1.4% y/y over the period. These readings are likely to raise questions again over the tight monetary policy stance though currency concerns mean the CBN is likely to ignore these for now.
- OMO: Open Market Operations
- CP : Commercial Paper
- DG: Deputy Governor
- 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
- REER: Real Effective Exchange Rate