Nigeria Fixed Income Weekly

The Week that was (January 4-8, 2021)

A pretty uneventful week as investors slowly get out of the holiday blues into a new year. Low trading volumes characterized the first week of 2021 across debt and currency markets, though robust system liquidity in the former triggered another CRR debit by the CBN. On the currency side, the CBN reversed the NGN devaluation at the end of 2020 with the IE window rate back to NGN394/$ (from NGN410.25/$) amid slow liquidity. A pick-up in oil prices continues to underpin improvements in FX reserves.   

Outsized system liquidity drives compression in short-dated interest rates, but CRR debits at the end:  The year opened to large liquidity positions which crossed NGN1trillion and depressed interbank rates to sub 1% levels over the first four days. However, the CBN came in on Friday with a large CRR debit of NGN601billion which pushed interbank rates higher with Open buy-back/overnight closing the week at 8/9.33%. CBN’s displeasure at excess liquidity likely stemmed from a well bid OMO bill auction on Thursday where demand was 10x the amount on offer (NGN60billion). At the OMO billl auction, stop rates closed lower across: Short (-5bps to 1.51%), mid (-5bps to 4.34%) and long (-6bps to 5.74%) suggesting CBN remains largely dovish. NTB yields closed lower down between 0.3-0.7% levels.

Bonds remain bearish, but pockets of demand re-surfacing: FGN bonds opened the year on a bearish note, driven by sell-offs across the curve (on average +58bps). However, trading was thin and by the close of the week, buyers could be seen across the belly and long end given the robust level of system liquidity. In all, the curve appears to be steepening gently with the front-end largely depressed while the belly and long end are moving higher.

Figure 1: Naira Yield Curve

Source: FMDQ, NBS

Higher fiscal borrowings, but lower borrowing costs thanks to CBN: The DMO put out debt data at the end of Q3 2020 which expectedly showed a pick-up in FGN borrowings to NGN27.9trillion (USD73.8billion) or 19.3% of GDP. Increases were across both components: domestic (+14% to NGN15.8trillion)  and external (+16% to USD31.9billion). The expansion in domestic debt reflects higher bond issuances (16% to NGN11.6trillion) as the FGN looked to plug the shortfall in oil receipts over the year. Notable mentions are promissory notes of NGN971billion (introduced in 2019 to sort out contingent liabilities). On the USD leg, the big increase is the IMF facility Nigeria accessed in April 2020 which pushed borrowings higher. Despite the higher borrowings, debt service costs declined on the NGN leg thanks to a drop in T-bill costs and on FGN bonds in the aftermath of CBN’s dovish pivot in November 2019.

Figure 2: Nigeria’s debt and interest costs

Source: DMO * September 2020.

Higher reserves and stronger Naira but lower FX volumes: Nigeria’s FX reserves extended the strengthening pattern seen in December, with a 1.3% w/w gain to USD35.8billion possibly reflecting the BOI loan and higher oil receipts. Oil prices received a boost from the OPEC+ meeting to not reduce curbs, with prices now at USD55/bbl. My base case for oil in 2021 is an average between USD55-60/bbl. Per FX,  the Naira reversed losses at the IE window (+4.3% to NGN393.5) which implies the year-end close was likely a mistake (on someone’s part within the CBN officialdom) and not the start of gradual NGN devaluation as I thought. Turnover at the IE window was soft averaging USD41million down from over USD100million average in December. Elsewhere the currency weakened slightly at the parallel market (losing NGN2 to NGN472/$ while it remained flat at the official at NGN379/$.  

The Week ahead (January 11-15, 2021)

In the coming week, system inflows remain strong: NTB maturities (NGN232billion), OMO maturities (NGN211 billion) and FGN bond coupon payments (NGN41billion) which broadly suggests downward pressure interest rates. There will be a PMA on Wednesday where the CBN, on behalf of the FGN, will look to rollover NTB maturities. The robust system liquidity held by non-banks and bearish rate trajectory suggests more money will be staying short which points to a well bid auction.  

Borrowing calendar to show higher borrowings of longer tenors: The DMO (which turned 20-years last week) will likely put out the Q1 2021 bond issuance calendar. In 2021, the FGN plans to sell NGN2.1trillion worth of Naira debt as part of the deficit financing for record NGN13.6trillion budget. Accordingly, the monthly mid-point should climb towards NGN150billion from the NGN60-80billion over Q4 2020. Given the unusually low rate environment and DMO’s target of at least 10-year duration on its borrowing portfolio, the calendar will likely feature the resumption of sales at the long end (2050s) along with the 2035s and 2045s that have been the recent staple. Over 2021, I expect the DMO to introduce a new 20-year 2040s (if rates stay subdued) or reintroduce the 10-year (2031s) if rates move back to double digit levels. Historically, the DMO appears to target a limit on annual bond maturities of around NGN600-700billion.

Figure 3: FGN Bond Annual Maturity Profile (NGN’ billion)

Source: FMDQ

3 comments

  1. Aghogho onoro · · Reply

    With the outcome of the OPec plus meeting not to reduce curb, that is supposed to have a negative impact on oil prices right?

    1. ‘reducing the curbs on OPEC production’ implies allowing OPEC members pump more ie supply which is negative for prices. Thus by not reducing the curbs OPEC maintains lower output less supply which is positive for prices.

      1. Aghogho onoro · ·

        Thanks

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