Nigeria Fixed Income Weekly
The Week that was (January 25-29, 2021)
The main highlights of last week were the first monetary policy meeting of 2021, the NTB auction and continued bearish trends across bond markets.
An ultra-dovish MPC : Despite the sell-off across debt markets, the dovish signals from Nigeria’s economic managers were re-echoed at the first monetary policy retreat by the Central Bank of Nigeria (CBN). In line with market expectations, the CBN retained all policy parameters but in the post-mortem press conference, the CBN governor sounded strongly dovish. More intriguingly, the CBN governor repeatedly made mention of the pervasive use of unconventional monetary policies by developed and emerging market central banks to deal with the COVID-19 crisis. Relative to much larger programs of between 7-67% of GDP, the CBN noted that Nigeria only received stimulus packages of around 4% of GDP. Accordingly, the communique includes a reference for the CBN to expand on its stimulus packages of a form as yet unknown but one cannot rule out higher CBN financing to the FGN over 2021.
Uptick in stop rates but DMO redeems again: At this week’s NTB auction, the CBN, on behalf of the FGN, sold NGN182billion of NTB instruments, some NGN5billion less than the N187billion of maturing paper, implying another redemption for the second consecutive auction. Average stop rate rose 28bps to 1.28% with the 1yr bill at 2%. Given the large borrowing requirement over 2021, the redemptions on the 1-yr amid steady increases in stop rates suggests an attempt to reduce the amount of outstanding T-bills (NGN2.2trillion, 2020 year end: NGN2.4trillion) for a yet unknown purpose. These redemptions come alongside the CBN’s gradual reduction of OMO stock outstanding to NGN2.5trillion vs NGN3.2trillion at tend of 2020) though it has taken up more via CRR debits. Given the under borrowing at the January bond auction amid coupon inflows, the financial system has been a net recipient of cash relative to securities supply. In the secondary market, average NTB yields tracked higher in response to the auction (+63bps w/w).
Bearish sentiments push bond yields over 10%: Despite the dovish CBN comments at the January MPC, bond markets remained strongly bearish reflecting a mix of large supply of offers (underpinned by pension funds striving to meet the PENCOM deadline of Feb 4), some asset managers and short-selling. Accordingly, average yields rose 99bps w/w as the bears suceeded in pushing the long-end over 10% which induced demand from pension funds. However, the re-emergence of strong buying activity on Friday looks to have calmed things down though one suspects we are yet to see the last of the genuine sellers.
Figure 1: Naira yield curve.
Lockdowns helped contain oil price shocks on Q3 20 current account balances: CBN released BOP data for Q3 2020 which showed a current account deficit of USD3.3billion (3.3% of GDP) down from the USD3.6billion (4.1% of GDP) in Q2 2020 but higher than the USD2.7billion (2.6% of GDP) reported in Q3 2019 reflecting subdued service deficits (down 79% y/y to USD1.8billion) and tamer imports (down 12% y/y to USD12.9billion). The drop in the historically burdensome service deficits reflects lower travel related costs while declines were observed across non-oil and oil imports. In all, the moderation in service and oil imports reflecting the lockdown continues to help contain the impact of lower oil exports (-47% to USD7.4billion).
Figure 2: Nigeria: Quarterly Current Account
Over 2021, the recovery in crude oil prices presents scope for improvements in the CA balance which likely explains CBN’s confidence on the exchange rate. Amid plans to tap international markets for USD borrowings either via Eurobonds or concessional loans, the CBN is in a less precarious position relative to 2020. However, as the economy exits recessions and as lockdowns ease, FX demand from travel could stage a resurgence putting pressure on the exchange rate over H2 2021. Will oil market provide enough confidence to allow CBN improve FX liquidity while ensuring NGN stability? In my view, assuming the fiscal side is able to execute its borrowing strategy which could net some USD6billion, the support from oil markets is likely to improve CBN’s confidence about both objectives. However, the need to push FX reserve growth could likely induce CBN to see the need for tightening at some point in the latter part of 2021.
The Week ahead (February 1-5, 2021)
Into the new week and month, there is not much in terms of liquidity. Market focus will remain on the sell-off in bonds but events are likely to be much calmer given a return of traditional buy-side investors to pick-up double digit yields.
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