Nigeria Fixed Income Weekly

The weeks that were: (Jan 27-Feb 7): Front end rates rise in response to CRR hike, FG blows fiscal deficit ceiling in 2019

  • Short-dated interest rates rise post CRR debits: Following the various CRR debits over the last two weeks, front-end yields have climbed as markets grapple with reduced banking sector liquidity. The debits have resulted in a pick-up in short term interest rates with intermittent spikes observed in OBB/OVN rates. Nevertheless, these spikes tend to be short-lived as rates adjusted lower with inflows of OMO bill maturities for non-bank financial institutions facing a dearth of investment outlets. This was evident at the NTB auction in the prior week, where the FGN sought to refinance NGN229billion, but had to pay higher rates (+150bps) following a reduction in demand.
  • FGN bond yields climbed 17bps on average driven by a sell-off in the Feb 2020 (+185bps) which is set to mature next week. Excluding this the curve was up only 5bps higher on average as banks sold bond positions ahead of CRR debits.

Figure 1: Naira Yield Curve

NGNYCFeb14

Source: FMDQ, NBS.

  • FGN blows fiscal deficit ceiling in 2019 as revenues miss target: Though the Budget office is yet to publish the official 2019 fiscal score card, the CBN offered a sneak preview via its quarterly economic reports which showed that the FGN ran a NGN4.6trillion deficit (3.3% of 2019e nominal GDP). As ever, revenue issues remained at the forefront with fiscal receipts of NGN4.7trillion (+23% y/y) well behind the NGN6.9trillion assumed in the 2019 budget. In my view, the revenue variance likely stemmed from the non-oil revenue projections which are usually inflated. On the oil side, Brent crude prices averaged USD64/bbl vs. budget estimates of USD60/bbl, while oil production likely averaged 2mbpd relative to the 2.3mbpd implied in the budget. On a more familiar note, fiscal spending was 5% ahead of target NGN9.4trillion (+25% y/y) despite no capital project implementation over the first half of 2019 due to the general election.

Figure 2: Nigeria – Fiscal Revenues, expenditure and deficit (% of GDP)

2019 fiscal deficit

Source: CBN, Budget Office

  • Drop in FX reserves continue, despite signs of recovery in FPI flows in January: Foreign portfolio flows into Nigeria’s FX market climbed in January to a ten-month high of USD2.03billion (+213% m/m). Though the strength of the inflows allowed the CBN relax its involvement in the FX market with sales of only USD390million (12% of inflows), Nigeria’s external reserves maintained a downward pattern over the month (down 1.5% to USD38billion). This downward pattern has continued over February (-0.7% to USD37.7billion) with import cover at just over 5-months. Interestingly, the CBN was silent over the spot reserve number at the January MPC and my suspicion is that between the lower oil prices, Eurobond interest payments and strong growth in import demand, we are likely to see the declining pattern continue over H1 2020.
  • Corporate debt issuance continues: In a low interest rate environment, the force is on the side of borrowers and the corporate bond market has come alive with a pick-up in issuers: FSDH Merchant bank (NGN15billion), Nigerian Breweries (NGN45billion), Flour Mills of Nigeria (NGN20billion) and many other issuers looking to lock-in attractive rates of longer duration.

The Week ahead (Feb 10-14): Enough liquidity for Valentine weekend, outlook for FX reserves.

  • In the week ahead, system maturities come in at a mammoth NGN1.4trillion split between OMO (NGN627billion), FGN 2020 bond (NGN600billion) and NTB (NGN154billion) implying an NTB auction on Wednesday and OMO sale on Thursday.
  • Oil price outlook: After a strong start to the year following the US assassination of the Iranian army general, oil prices have lost steam and slipped into correction territory (YTD: down 18% to USD54.17/bbl). The weakness stems from worries about the effect of the Corona virus pandemic on Chinese crude oil demand. China consumed around 13.5mbpd in 2019 and projections were generally for its demand to rise by 200-400kbpd over 2020. However, reports that Chinese crude consumption has slumped 20% following shutdowns on movements across its major cities as well as over 30k cancelled flights across Asia means markets have grown suspicious about oil’s fragile demand outlook. Bear in mind, that only in December, OPEC+ agreed to reduce output by another 500kbpd, bringing total output reductions to 1.7mbpd. Already there is talk of another 600kbpd to deal with the likely contraction in Chinese crude demand. In all, I think oil prices are likely to trade within the USD50-55/bbl region over the near term.

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