Nigeria Fixed Income Weekly

The week that was (September 16-20): Static MPC despite lower inflation, deterioration in CA balance places NGN on shaky footing

  • Largely static trends across the Naira yield curve: Money markets were flush with cast last week, helped by FAAC inflows of NGN300billion which buoyed system liquidity leading to a drop in interbank rates to single digits. Despite the liquid conditions, NTB yields climbed on average 23bps w/w driven by a selloff along the mid (+15bps) and long-tenors (+19bps) as markets increasingly adjust to CBN’s direction on the 1-yr. At the OMO auction, the CBN sold N351.08 billion worth of bills (subscription: 1.6x) wholly of 1-yr bills at its unchanged level of 13.5% (effective: 15.5%). However, FGN bond yields declined 10bps w/w with most segments of the curve holding largely static.

Figure 1: Naira Yield Curve
NGNYC23.9.2019
Source: FMDQ, NBS

  • MPC maintains pause on interest rates, calls for BIG BANG fiscal reforms: At the end of its hastily brought-forward two-day monetary policy meeting, by a unanimous decision, the CBN left all policy parameters unchanged: MPR (13.5%), CRR (22.5%) and liquidity ratio (30%). Beyond the usual talk about the need to balance growth desires against the quest to signal currency stability, the CBN introduced talk about the need for more aggressive fiscal reforms to boost FGN revenues. This is interesting in the light of the fact that the FGN posted a NGN1.9trillion unfinanced deficit in 2018 as well as the official recognition of CBN fiscal financing (Ways and Means) in the H1 2019 budget report by the finance ministry. In H1 2019, the FGN paid interest expense of NGN106billion termed Ways and Means to the CBN to service what must be a sizable debt.
  • Inflation maintains the downtrend: The NBS reported that headline inflation slowed further in August to 11.02% from 11.08% in July driven by declines across core inflation (-12bps to 8.68%) and food inflation (-22bps to 13.17%). On a monthly basis, headline inflation slowed to 0.99% (July 1.01%) driven by moderation across core (-10bps to 0.67%) and food (-4bps to 1.22%). Though core inflation is now around levels last seen in 2015, food inflation remains elevated driven by pressures in farm produce despite the onset of early harvests. Over the rest of the year, my inflation forecast band roves between 10.95%-11.1% with the 2019 average at 11.2% (12.15%). Over 2020, there exist a plethora of events with inflationary potential: recently announced VAT increases, programmed electricity tariff hikes and possible upward adjustment to fuel prices to trim the growing under-recovery bill by the NNPC.
  • The ground has shifted – Nigeria posts second consecutive CA deficit in Q2 2019: Latest CBN data show that the deterioration in Nigeria’s external balance continued over Q2 2019 with another deficit of USD2.8billion (3.2% of Q1 2019 nominal GDP) in the current account. In addition, the CBN also revised Q1 2019 CA numbers with the deficit up from USD1.billion to USD2.8billion (2.9% of Q2 2019 nominal GDP). Cumulatively, the CA deficit in H1 2019 is the worst since H1 2015 when crude oil prices slumped. Central to the pressures is the continued surge in imports of goods and services (+51%) relative to weaker export growth (+2%) and flat patterns in remittances.
  • Looking through the sub-parts starting from the goods account, export growth was only modest (+2% y/y to USD31billion) on account of softer crude oil exports (-2% y/y to USD27billion) as lower Brent crude oil prices (-10%) more than offset modest gains in oil production (1.98mbpd vs 1.91mbpd in H1 2018). However, consistent with the pattern over the last one year, imports continued to track higher (+52% y/y to USD28billion) driven by higher non-oil imports (+91% y/y to USD24billion) while crude imports declined (-29% y/y).

Figure 2: Current Account Balances (USD’bn)
q2 2019 CA
Source: CBN

  • The CA trends provides a firm explanation of the pattern in FX reserves, which despite strong FPI flows after the 2019 general elections and supportive prices have struggled to show any accretion with a resistance at USD45billion. Furthermore, the CA trends account for why the CBN is increasingly flirting with demand management with recent moves to lock out imports of milk and cassava from FX markets. At the September 2019 MPC, the CBN governor hinted at fish imports which would suggest that too is likely to become a target for FX curbs in the not-too-distant future.
  • From a long-term perspective, the present CA numbers provide signs of the tectonic shifts in Nigeria’s external balance as import demand growth underpinned by a large growing population outlasts the near stagnant growth in oil exports which reflect static trends in production and lower oil prices. Viewed from this lens, Nigeria stands at a crossroad, either we reform our FX policy or pursue import substitution. However, as history has shown, the latter approach is easier said than done.

Figure 3: Nigeria – Exports, Imports and Current Account Balance

ExIMcA

Source: CBN

The week that was (September 23-27): Longer dated yields to track higher

  • In the coming week, system maturities are at NGN440.17 billion dominated by OMO bills (NGN422billion) and coupon payments on the 2025 bond (NGN18.12 billion). Markets are likely to open the week tight due to FX debits which will apply pressure on short-term rates.
  • September 2019 bond auction – moving away from neutral: There will be a bond auction where the DMO would look to sell NGN150billion split across three maturities: 5-year (NGN45billion), 10-year (NGN50billion) and 30-year (NGN55billion). This auction is the first after the Buhari government approved some capital project implementation after its first FEC meeting and is likely to provide a sense of how desperate the FGN is to pursue its 2019 budget. I expect the DMO to look to tap as much as it can get, a departure from its market neutral posture in the prior bond auctions in 2019.

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