The Week that was (December 20-24, 2020)
A short trading week with very limited activity across debt and currency markets as investors hunkered down for the holidays.
Curve steepening continues driven by higher bond yields, but thin trading: Mixed trends along the Naira yield curve with declines across the front end and increases at the long end. Amid relatively robust system liquidity, short term interest rates remained subdued with overnight and OBB rates down to 0.6% (down nearly 400bps) while NTB yields slid on average 2bps to 0.38%. At the long end, duration apathy as FGN bond yields climbed 59bps on average with sell-offs across the mid and long end: FGN 2026s (+159bps w/w), FGN 2024s (+135bps w/w), FGN 2028s (+127bps w/w) and FGN 2050s (+122bps w/w). Admittedly trading remains thin, one gets the sense that there is greater sentiment towards selling in view of the near term uncertain monetary policy posture.
Figure 1: Naira Yield Curve
National Assembly passes 2021 budget: For the second year in a row, the National Assembly got over the line and passed the proposed 2021 budget before Christmas, in line with the goal of keeping Nigeria with a January-December fiscal cycle, which was restored in 2020. On the budget itself, the spending envelope was raised by NGN500billion from the initial executive proposal to NGN13.6trillion with the extra devoted to social spending. Budget assumptions are largely unchanged: oil price (USD40/bbl), oil production (1.86mbpd) and, exchange rate of NGN379/$ and a 3% growth rate for the economy. Relative to revised 2020 budget, the proposed budget is up 25% flattered by consolidation of some large self-funded government owned enterprises (GOEs). This consolidation is keeping with a desire to drive efficiency initiatives across these GOEs which have pretty much been run outside of tight fiscal supervision. In terms of movement across components: debt service ( +14% to NGN3.3trillion), statutory transfers (+16% to NGN496billion), capital expenditure (+41% to NGN4.1trillion) and recurrent expenditure (+14% to NGN5.6trillion). Though no details were provided for revenues my suspicion is that the legislature did not alter the projected fiscal deficit of NGN5.6trillion (2020: NGN4.9trillion) given revenues assumptions of NGN8trillion.
Figure 2: Fiscal accounts (% of GDP)
Source: Budget Office, NBS, Authors calculation
Assuming President Buhari assents over the week, the 2021 budget will be Nigeria’s largest nominal budget ever, but as a share of the economy not so. In my assessment the revenue assumptions appear largely credible: I am now more bullish on oil prices (USD60-65/bbl.) as the gradual approach to OPEC+ easing of supply curbs (vs a steep upward adjustment previously) will likely ensure more tighter markets with greater impetus for a recovery in crude demand as vaccination rates climb globally in 2021. The production assumptions appear reasonable given compliance with OPEC+ curbs and while the growth numbers appear optimistic (I’m guessing 2-2.5%) the underlying numbers have baked in more reasonable non-oil growth estimates in 2021. That said, I’m less confident in the desire to push capital spending to NGN4.1trillion, peak capex in a budget year over the last decade is NGN1.6trillion in 2018. Even if you assume a bull case for oil prices and production, the odds are likely that the budgeted number is the usual balancing item to make the recurrent-capex split a more digestible 73:27 ratio than any credible moves to boost actual spending. Given the implied savings on capex, I expect that the 2021 deficit should fall around NGN6.1trillion (3.7% of GDP) slightly lower than my projected deficit for 2020 of NGN6.2trillion (4.4% of GDP).
To finance the deficit, the earlier budget proposal looks for around NGN4.9trillion of borrowings split evenly between foreign and domestic borrowings with the latter implying another year of record bond issuance while the former will likely include a Eurobond sale.
Manufacturing PMI slips back into recession: After clearing the 50-threshold (50.2) which signals an expansion in November, the manufacturing PMI dropped back below 50 in December (49.6). Looking acros the main pressure points where in employment and raw material inventories which dipped below 50, while new orders, supply delivery times and production levels remained above 50. The crucial new orders print declined for the second month in a row suggesting lack of confidence about the recovery in demand which is weighing on inventory levels. One gets the sense that Nigerian manufacturers are experiencing a lukewarm recovery from the declines during the lockdowns. Non-manufacturing PMI remained in the contraction region: 45.7 (November: 47.6). In terms of impact, expectations are for the economy to remain in recession over Q4 2020 and this PMI reading implies that theory will likely hold leaving limited room for reaction by the CBN. My guess is that PMI readings should pick up over Q1 2021 and the economy will exit recession over Q2 2021 which is in sync with the CBN position and that of the Finance Ministry though of a different magnitude.
Figure 3: Manufacturing and Non-manufacturing PMI
BOI raises USD1billion from the international loan market: Amid concerns over USD sourcing, the Bank of Industry (BOI) announced that it had raised USD1billion in a syndicated guaranteed loan on Christmas eve. This the third syndicated loan transaction in three years by the B2-rated subsidiary of the CBN who provided a currency swap to guarantee the loan. The issue was strongly subscribed that the BOI had to upsize the transaction to USD1billion from an initial plan of USD750million. Alongside the recent rebound in oil prices, the spate of borrowings (the World Bank Loan + the BOI raise) suggests growing ammunition for the CBN to better manage the FX market over Q1 2021.
FX reserves up, Naira gains across: Activity at the IE window slowed over the week with daily turnover of USD134million (down from prior week of USD158million). Over December, the CBN has worked to improve liquidity with sales of USD770m over the month (November: USD450million) which accounted for 67% of activity vs 39% in the prior month. Over 2020, the decision to pause activities in the FX market and re-impose a hard peg has weighed on FPI flows (down 76% y/y to USD3.8billion) leading to a drop in IE flows (-48% to USD17.8billion). In 2021, the CBN will need to re-engage with portfolio investors as a means of improving supply to the IE window with a credible interest rate policy offering.
Figure 4: FX market turnover
Nigeria’s FX reserves bucked the declining trend with a 0.2% rise w/w to USD34.9billion. Across the windows, the naira remained flat the official window (NGN379/$), gained at the IE window (+0.5% to NGN392/$, YTD: -7%) and parallel market (+2.6% w/w to NGN465/$, YTD: -22.2%).
Week ahead (December 29-31, 2020)
In the short week ahead, market focus is on the last NTB sale for 2020. In terms of liquidity, maturities are around NGN556billion dominated by OMO bills as there are only NGN75billion worth of NTB maturities. Largely uneventful week, but the NTB sale will likely be well bid given the maturities over the last few weeks and market appetite for short duration given the uncertain rate outlook. Bonds likely to remain bearish as traders close out their positions for year end.