Nigeria Fixed Income Weekly

The week that was (April 12-April 16, 2021)

The bears continued to push bond yields higher with the long end crossing 14% even as NTB yields hit 9% at the primary market auction on Wednesday. On the data front, March 2021 inflation printed at 18% while rising FX reserves appeared to have spurred the CBN back into selling USD to foreign portfolio investors. 

Liquidity pressures continue to push yields higher: Money markets remained tight with average interbank rates jumping to near 30% over the week reflecting thin liquidity levels which pushed banks to aggressively tap the CBN’s standing lending facility on a net basis (NGN330billion) for the second consecutive week.  Placement rates for large institutions have now breached the 10% resistance level. At the NTB auction, as I suspected the DMO continued the slow drive towards NTB-OMO parity as the 1-year paper cleared at 9% discount which leaves only 100bps left for convergence. Not to be left out of the party, FGN Bond yields, specifically the 2045s, hit 14% over the week as the sell-offs (possibly supported by fresh shorts) worked to drive rates higher. Though that 14% level induced fresh buying activity which helped curb selling activity.

Figure 1: Naira Yield Curve

Source: FMDQ, NBS

March inflation crossed 18% driven by food price pressures: The National Bureau of Statistics (NBS) released the March 2021 CPI report which showed that inflation accelerated to 18.17% driven by food inflation (+116bps to 22.95% y/y) relative to core inflation (+29bps to 12.67% y/y). The monthly print showed headline slightly higher (1.56% vs. 1.54% in Feb) with flattish trends in food (1.9% vs. 1.89%) while core inflation slowed (1.03% down from 1.21% in Feb). Looking at food, pressures stemmed from the rural farm produce basket which have raced ahead of the April start of the lean season. Away from food, the energy basket also bore signs of pressures with over 3% m/m price increments in fuel (NGN172/litre) and diesel (NGN235/litre). Looking ahead, my suspicion is that headline will likely peak at 19% before receding in H2 2021 on base effects and as a much better harvest drives a retracement in food prices. 

Figure 2: Headline, food and core inflation

Source: NBS

Money supply contracted in February: CBN published data on monetary aggregates which showed a 12.5% annualized contraction in M3 (broad money) largely driven by a contraction in CBN bills (-73% to NGN511billion) which offset increases in M2 (+8.4% annualized) and M1 (+21.6% annualized). Though base money (M0) expanded (+13.4% annualized), currency outside banks declined leaving CRR debits (+45% annualized to NGN10.6trillion) as the source of the expansion. In all, though the CBN continued to unwind its OMO bill portfolio, it found a way to tighten banking system liquidity via CRR debits. However, non-bank liquidity continued to slosh around driving increases in demand and time deposits.

Net exports and corporate profitability declined in real terms in 2020: The NBS put out GDP data by income and expenditure for 2020 which provides a more structural explanation for economic growth patterns in 2020. On the income side, declines in corporate profitability (-3.1% y/y) were central to contraction in overall income. Real wage growth was positive (+1% y/y) despite higher inflation which underpinned flattish trends in consumption expenditure.

Figure 3: GDP Decomposition by Income

Source: NBS

On the expenditure side of things, the key drag came from a contraction in net exports (-29.6% y/y) in real terms driven by a larger drop in real exports (-27% y/y) relative to real imports (-23.3% y/y). The export declines reflect the drop in Nigeria’s oil export volumes to 1.77mbpd (2019: 2.02mbpd) in a bid to drive compliance. Investment spending contracted (-7.6% y/y) as businesses cutback on capital projects to conserve cash under the uncertain conditions. Consumption growth was flat (+0.8% y/y) in real terms.

Figure 4: Decomposition of Economic growth by Spending

Source: NBS

FX reserves continue to track higher, CBN resumes FX sales: Foreign reserves maintained the uptrend, up 0.5% w/w to USD35.3billion. It appears a raft of FX forward contract maturities also appeared to have held reserves down over March and with these out of the way, the impact of the improved oil price picture is now feeding through. The improvement in reserves induced CBN to resume FX sales to foreign portfolio investors after a four-month hiatus. These sales were carried out at a spot rate of NGN410/$ along with a requirement to enter forward contracts priced at NGN434/$. At the Investors & Exporters (IE) window, the currency continued to dance around NGN410/$ handle (Friday: NGN411/$). The parallel has held at NGN482/$ for the cash market though the transfer market witnessed some appreciation to under NGN500/$.

The week ahead (April 19 – April 23, 2021)

In the week ahead, system inflows are thin comprising OMO bills (NGN10billion). All eyes will be on the FGN bond auction on Wednesday where the DMO has NGN150billion on offer across the 2027s, 2035s and 2045s. With most of the enforced sales likely completed on the long-end, we could see a bit of lull ahead of the auction but funding pressures are likely to remain intact with more pressure on front-end rates.

DMO will likely over-allot the 2027s and 2035s and possibly undersell the 2045s:  At the April 2021 bond auction where the DMO looks to sell NGN150billion split evenly across three tenors: 2027s, 2035s and 2045s, chances are high that March 2021 outcome will not be repeated. MTD, the DMO has raised NGN67billion from net issuance of NTB 1-year securities which I suspect could underpin some scope to avoid overselling bonds to meet borrowing targets. On face value, the DMO has sold NGN637billion worth of bonds, but as the 2027s and 2035s are premium bonds, actual cash received is usually higher while the 2045 discount condition means actual cash received is less. My guess is that the DMO could afford to oversell the 2027s and 2035s which means it could tolerate higher yields on both papers with the marginal stop rate for the 2027s (12-12.5), early 13s for the 2035s (13-13.3%) and well under 14% levels for the 2045s (13.5-13.85%). In terms of thinking, the DMO appeared to target large coupons inflows in March 2021 which led to an aggressive auction but with two large corporate transactions currently ongoing and traction on its Eurobond plans, it can afford to be less aggressive with borrowing in April.

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