The week that was: (Feb 24-28): Interest rates grind lower on higher liquidity, In-line GDP growth numbers and FX pressures
Interest rates decline further on robust system liquidity, but late CRR debits on Friday: Though financial conditions were relatively loose this week with strong inflows from OMO maturities (NGN928billion) and FAAC disbursements (NGN356billion), CRR debits by the CBN on Friday of nearly NGN700billion alongside outflows from OMO auction (NGN480billion) induced a surge in overnight rates (+13pps) to 16.4% (OVN) and 15.5% (OBB). As the debits came late, there was little reaction from debt markets as NTB yields closed the week. At the weekly NTB auction, demand was robust at 2.5x (NGN262billion) for the NGN104billion on offer which underpinned a moderation in the average stop rate (-28bps to 4.23%). Elsewhere, trends in FGN bond market were bullish, as market players looked to re-invest maturities from short-term instruments at relatively attractive yields. Consequently, the average yield across instruments contracted by 69bps w/w with strong declines across most segments of the curve: short (-92bps w/w), mid (-58bps w/w), and long (-28bps w/w).
Figure 1: Naira Yield Curve
Source: FMDQ, NBS
OMO yield divergence suggests foreigners arbitrage on Nigerian banks: At the OMO auction on Thursday, the CBN sold the NGN480billion across the three tenors 3M (discount: 11.45%, effective: 11.77% ), 6M (discount: 11.59%, effective: 12.27% ) and 1-yr (discount: 13.02%, effective: 14.93%). However, at the secondary market, OMO yields for the three tenors are priced as follows 3M (discount: 8.45%, effective: 8.63%), 6M (discount: 10.64%, effective: 11.23%) and 1-yr (discount: 11.25%, effective: 12.63%). This would imply that the same OMO bill instrument sold by the CBN at the primary market trades at a discount of 216bps on average in the secondary market which now appears reserved exclusively for banks. (Though banks are legally allowed to go to primary auctions, the CBN has tacitly bullied them from going to bid at auctions for their books). The natural result is the massive temptation for offshore investors to access the primary market on Thursday and bank instant profits by selling at the secondary market on the following day. This situation clearly is unlikely to inspire confidence for fresh inflows though it might help keep some offshore capital sticky. At this point, we need to start asking whether this scenario is the price to pay for NGN stability.
Q4 GDP comes in-line: The National Bureau of Statistics (NBS) put out the Q4 2019 GDP report which showed that the economy expanded by 2.55% y/y in the last quarter which brings 2019 average to 2.27%. The Q4 print was closer to the lower end of my expected range. Oil GDP growth remained strong at 6.4% y/y as oil production averaged 2mbpd over the period, which implies Nigeria’s oil production came in at its highest level (2.02mbpd) in four years helped by the Egina oil field. due to improved compliance by Nigeria to the OPEC+ oil production cut. On the other hand, non-oil GDP quickened driven by faster growth in the Services sector (+4% y/y) driven by Telecoms and the financial services sector. Manufacturing (+1.2% y/y) and agriculture remained positive (+2.3% y/y) while trade GDP remained in recession.
Figure 2: Nigeria Real GDP – Oil and Non-oil decomposition
DMO brings forward plans to tap Eurobond markets: During the week, the DMO put out an RFP for advisers regarding a USD3.3billion Eurobond tap offering. Despite a reluctant posture (in my view) by the DMO in early January to committing towards a Eurobond sale, it would appear that its hand is being forced by the fiscal side (given the confident swagger the finance ministry spoke-person) and CBN (given comments by CBN governor to foreign investors). This appears to be an attempt to stem increased concerns over FX reserve levels which have declined to USD36billion. The RFP request suggest a Eurobond sale is now imminent – with one likely to be issued over the next 1-2months.
NGN comes under pressure, CBN tolerates modest weakening in the IE window: Nigeria’s FX reserves declined 0.84% w/w to USD36.3billion (5months of import cover). YTD, FX reserves are down about 6%. CBN maintained its interventions across the market. The Naira remained under pressure for most of the week (down 0.3% w/w to NGN365.25/$) at the I&E window including bouts of NGN366/$. The CBN appears to have signaled a willingness to sell at weaker levels by moving its range towards NGN365/$. However, the interventions to the parallel market via the BDC operators continued to ensure that the Naira remained unchanged at NGN360/USD in the segment. In the forward/futures market, the Naira weakened NGN1 as the CBN raised the price on the 5-year fixing to NGN380/$ from NGN379/$ previously.
The Week ahead (March 2-6): Less loose market conditions and tighter monetary policy suggest greater prospects for rates to track higher
In the week ahead, system maturities are at NGN232billion made up of OMO bill maturities. The outsized nature of the CBN debits is likely to drive modest sell-off until maturities inflow on Thursday but markets still have to grapple with a large liquidity deluge. The COVID-19 induced global sell-off suggest some near term pressures on the Naira over March as risk-off dominates sentiment towards emerging/frontier market assets.