Nigeria Fixed Income Weekly

The Week that was (February 11-15): Yields decline as the buy-side strengthened ahead of the elections, CBN in holding pattern

  • CBN’s momentary reprieve on liquidity pushes NTB yields lower: Interbank liquidity remained under pressure over the week with a net debit picture over large parts of the week which pushed OBB/overnight rates to an average of 23.7%/26.3% (last week: 18.6/19.7%). However, things improved with the big OMO maturities on Thursday of NGN630billion as well as a lukewarm posture by the CBN towards this liquidity with only NGN545billion in OMO sales over the week. Accordingly, NTB yields reclined (30bps on average) to 12.2% (91-day), 13.26% (182-day) and 17.5% (1-year).
  • Bond markets rally, but spreads remain wide and volumes thin: The long end of the yield curve continued to witness strong buying interest from offshore and local investors keen to get in on the action. FGN bond yields declined on average 10bps to trade between 14.27-14.68%, though I must add that some tenors compressed by as much as 40-50bps over the week and some were offered at close to 14%. However, bid-offer spreads remain wide which suggests that the market still sees uncertainty around the elections which the postponement is likely to amplify. The spreads also suggest trading activity is likely thin and current moves largely reflect a few trades.

Figure 1: NGN Yield curve

NGNYC15FEB2019

Source:  FMDQ, NBS

  • Q4 2018 GDP report card: Tentative signs for a stronger growth out turn: The NBS reported that Nigeria’s economy expanded 2.4% in Q4 2018 – up from the 1.8% expansion reported in Q3 2018. The Q4 2018 print, which is the fastest pace of growth since Q3 2015, implies that the economy grew 1.9% in 2018 (2017: 0.8%). Key to the pick-up was the improvement in non-oil GDP (+2.7% y/y) which helped offset the drag on the economy from lower oil production (average: 1.91mbpd vs 1.95mbpd in the prior quarter). The slump in oil output is surprising given that we production averaged 2.01mbpd in October which would suggest big disruptions over the rest of Q4. Looking ahead, oil output is likely to inch up in 2019 as Egina, whose output is largely condensates (80%), ramps up production following first oil in December. Non-oil GDP should pick-up after the electoral cycle and I’m looking for a 2.3-2.4% growth number for 2019.

Figure 2: Quarterly GDP growth

Q4 2018 GDP

Source: NBS

  • Headline inflation ticked down in January 2019: In line with my views, the NBS reported a slight moderation in inflation to 11.37% y/y (December 2018: 11.44% y/y).  Given that monthly inflation was unchanged from December levels at 0.74%, the lower reading merely reflects a higher base from January 2018. The key readthrough from the CPI report is the absence of any evidence of inflationary pressures as most line items were barely unchanged. Importantly, it provides another ammunition to dispel the ‘urban legend’ (myth) about inflationary pressures during elections in Nigeria. Going forward, the monthly print in January, which is likely to be the pattern over the rest of H1 2019, implies that the inflation trajectory in 2019 is now looking like a southward one. With no shocks ahead to the USDNGN, fuel or electricity price, we are likely to see inflation stuck in a going-nowhere territory between 11.4-11.5%. That said, post the transition in May 2019, I expect our economic managers to get to the difficult work of dealing with the revenue shortfall of a lower oil price and a higher recurrent budget which will cascade into either an electricity and/or fuel price hike in the latter part of the year. Depending on who wins the 2019 elections, we may (or may not) have currency pressures ahead which could present headwinds to inflation. For now, I’ve penciled in average inflation at 11.8% y/y for 2019.

Figure 3: Sensitivity Analysis of Headline Inflation

2019 CPI Sens

Source: Authors Estimates

The Week Ahead (February 18-22): Political risk premiums to come back on the table? Bond auction ahead

  • In the trading week following the 2019 election postponement, we have OMO bill maturities of NGN579billion and one corporate bond maturity: Chellaram Plc (NGN0.05billion). This week sees the monthly bond auction where the DMO will look to sell NGN150billion (same as in January) evenly split across the 5-year, 7-year and 10-year tenors.
  • The unexpected announcement of a 7-day shift in the presidential elections to next weekend is likely to induce panic across offshore and local investors. The former, which appeared to be pricing an uneventful election, is now likely to grow cold feet which will lead to a pause in bond buying. For local investors, the announcement could accelerate moves to take some profits which could trigger sell-offs across the curve. Markets do not like uncertainty and having waited for political risk premiums to disappear this past weekend, bond traders are likely to become impatient with prospect for a sell-off in the week ahead. The CBN is likely to be more aggressive towards NGN liquidity in a bid to ward off currency pressures.

 

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

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