Nigeria Fixed Income and FX Market Weekly

The Week that was (January 21-25): CBN net withdraws liquidity driving front end higher, long end rises in response to the prospect of higher fiscal supply

  • MPC post-mortem – nothing to see here: The CBN held its first monetary policy committee meeting for 2019 and as expected it retained the status quo by a unanimous vote of all the eleven members. This MPC meeting is the one just before the elections so naturally, policy makers were likely to stick to the neutral gear on the MPR for now.
  • CBN drains system liquidity leading to higher front-end yields: Despite the pause on the MPR, the CBN stepped up OMO issuance over the week with the sale of NGN737billion (inclusive of STABs) relative to OMO bill maturities of NGN381billion and FGN bond coupon inflows over the week. The net effect of the higher issuance was to drive NTB yields higher, the 3M bill (+30bps w/w to 12.16%).
  • Finally, the delayed Q1 2019 calendar is out, higher FGN borrowing ahead: The DMO released the long-delayed bond calendar which showed pick-up (+27% q/q, +14% y/y) in the mid-point of planned FGN bond issuance to NGN400billion from Q4 2018 levels. In terms of the projected range, we climb from NGN270-360billion in Q4 2018 to NGN360-445billion over Q1 2019. Given the fact that planned FGN borrowings in the proposed 2019 budget are roughly square, the uptick in bond supply suggests a plan to build-up cash buffers to be in a position to pay-down FGN principal maturities due in June (NGN351billion) and October (NGN234billion). In terms of bonds on offer, as I noted two weeks ago, the preferred maturities would now switch to the 2023 (5-yr) and 2025 (7-yr) though the DMO retained the 2028 (10-yr). In response to the  the prospect of higher issuance, bond yields re-rated higher to 14.99%-15.71% after declining over much of the week on rising foreign demand.

Figure 1: NGN Yield curve

26jan2019 yield curve

Source:  FMDQ

  • 2018 FAAC data shows recovery in fiscal revenue distributions: The NBS released the 2018 annual FAAC distribution data which showed that total distributions to all three tiers of the Nigerian government climbed 36% y/y to NGN7.4trillion. the biggest beneficiaries were state governments who saw central distributions rise 43% y/y to NGN2.6trillion with local government share up 31%y/y to N1.7trillion. In terms of split, FGN share declined to 43% (2017: 44%) while State governments share climbed 2pps to 35%. The improvement in FAAC distributions follow the pick-up in oil receipts on account of the recovery in crude oil prices over the year with Brent averaging USD71/bbl in 2018 (2017: USD55/bbl).

Figure 2: FAAC allocations

faac allocation

Source:  NBS

Starting this week, I will be expanding coverage of Nigerian markets to include commentary on weekly trends in FX markets.

Strong recovery in offshore interest in NGN assets: Following the less hawkish commentary by the US Federal Reserve, capital flows to emerging/frontier markets appear to have recovered with asset prices across these markets showing bullish signs lately. Given the political premiums on NGN assets, we seemed to have missed the boat. Or so it seemed. The Naira has strengthened at the IE window appreciating to NGN362/$ as it appears that investors are betting on a likely peaceful scenario post-election as a catalyst for a rally across NGN assets.  This has resulted in a bounce in the equity market as well as modest rally in debt markets. FX reserves were stable at USD43.1billion unchanged from last week.

The Week Ahead (January 28-Feb 1): Higher political risk premiums again, higher paper supply, higher rates ahead

  • In the trading week ahead, system maturities drop: OMO bills (NGN198billion) and NTBs (NGN255billion). For non-sovereign paper, this week sees two commercial paper maturities: FBN Merchant Bank (NGN110million) and Sterling Bank (NGN14.4billion).
  • There are two scheduled auctions in the week ahead with the first FGN bond auction in 2019, where the DMO will look to sell NGN150billion evenly split across 5-yr, 7-yr and 10-yr bonds. In addition, there will be an NTB auction on Wednesday where the CBN, on behalf of the FG, will look to rollover NGN255billion split across 3M (NGN7.9billion), 6M (NGN69.6billion) and 1-yr (NGN177billion). In addition, Union Bank of Nigeria should close on its dual tranche sale of 3M and 6M commercial papers (total offer of NGN20billion) on Tuesday.
  • Following President Buhari’s decision to suspend the Chief Justice of the Federation on Friday last week, we are likely to see a pick-up in negative press around Nigeria which will drive a pull-back in foreign demand for NGN debt instruments as well as possible sell-off. The likely heavy discounting on NGN assets due to political risk premiums ahead of the election is set to work against the recent rebound in foreign appetite until conclusion of the presidential elections in Mid-February at the very least.

Abbreviations

  • 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

 

 

 

 

 

3 comments

  1. Good read as always. Please, what’s your source info on system maturities? FMDQ?

    1. Hi Lad, I make use of CBN data from the downloadable spreadsheets on this page for OMO bills. https://www.cbn.gov.ng/rates/GovtSecurities.asp . For NTBs, the NTB calendar contains NTB weekly maturities.

      1. I see. Thanks, wallesmith

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