Nigeria Fixed Income Weekly

The week that was (May 17-21, 2021)

Inflation slowed for the first time in eighteen months with a surprise dip driven by strong declines in food prices over April. However, fixed income markets discounted this development as participants focused on the issuance front, where the DMO paid more for borrowings at the monthly bond auction and the FGN now looks to make its long awaited foray into the Eurobond market. Money supply data provided evidence to the claim of a switch in CBN’s liquidity tightening away from OMO bills to direct CRR debits.  In all, an exciting week! The NBS put out the Q1 GDP numbers on Sunday night so I had to include a review.

Q1 2021 GDP – The worst is over? The Q1 2021 GDP growth printed at 0.51% y/y vs 0.11% in Q4 2020. The key story from the report is that a lesser contraction in the oil sector (down 2.2% y/y vs 20% in Q4 and 9% over 2020) combined with improvements in manufacturing (+3% y/y) to offset a slowdown in telecoms (+7% vs 16% growth in 2020) and agriculture (2.3% vs 3.4% in Q4) amid continued contraction in trade. The story with oil is straight forward, production averaged 1.7mbpd up from the 1.56mbpd number in Q4 2020 but below the 2mbpd in Q1 2020 as Nigeria continues to comply with OPEC+ curbs. With telecoms, the deceleration was self-inflicted as the ban on sim card sales drove a net churn of 12m subscribers in Q1 2021. On the plus side, manufacturing activity likely gathered further steam driven by a 7% rise in the key food, beverage and tobacco segment. Looking ahead, real GDP growth will progressively strengthen and my guess for 2021 is number between 2-2.4%, small improvement from the 1.94% contraction in 2020. Much work remains to move Nigeria to wards at least 6% for improvements in per capita incomes!

Figure 1: GDP Growth

Source: NBA

April 2021 Inflation – Peaking price pressures or a false alarm: The NBS published April 2021 inflation numbers which surprised positively with a headline print of 18.12% y/y (March: 18.17% y/y). On a monthly basis, prices rose by only 0.97% from March, down from the 1.53% m/m average over Q1 2021 (2020: 1.23% m/m). The drop in the monthly run rate is largely accounted for by a strong deceleration in food prices to 0.99% m/m (March: +1.90% m/m) which entirely emanated from the farm produce basket. In my preview, I had noted that prices of key crops (maize, paddy rice and sorghum) had surprisingly declined over April (looking at monthly food prices via the Afex Commodities Exchange) which suggested we could see a sluggish m/m print. The NBS numbers would imply that my ‘sluggish’ description was an understatement as farm produce showed a strong moderation in prices across rural and urban Nigeria. In my view, April’s dip is more a false alarm and food price trends in early May across open market reveal a reversal is underway with increments across key crops linked to Ramadan.

Figure 2: Monthly Inflation

Source: CBN

Looking ahead, it is important to note that there are still pending decisions to be made on fuel prices (with potential increments to NGN230-300/litre from NGN166/litre), potential hikes to electricity tariffs in June and likely movements in the exchange rate. Thus, while the April 2021 print suggests inflation appears to have peaked with visible prospects for a deceleration over H2 2021 given the large carry-over base effects, inflation outlook remains anything but benign!

Money supply data provides evidence of CBN’s liquidity tightening: CBN published money supply data for March 2021. A word of note here, Nigeria switched its definition of money supply recently with the main aggregate now M3 (vs. M2 previously), defined as M2 plus CBN bills to capture the outsized liquidity impact of OMO bills. The March 2021 data provides evidence as to why this change was necessary as while M2 remained on the path of growth with an annualized 5.2% expansion, CBN bills declined (down 77% YTD to NGN432billion) as the apex bank continued to unwind its OMO bill portfolio. Accordingly, M3 showed an annualized 9.3% contraction implying tighter monetary policy. Other measures showed mixed signals, Credit to the Private Sector (CPS) was up 17% annualized (2020: +13% growth) which suggests Nigerian banks continued to grow their loan portfolios during the quarter despite a pick-up in rates. However, while the CBN unwound its OMO bill portfolio with reduced sales, it ramped up CRR debits (+26% annualized to NGN10.5trillion). Overall, the insight from money supply data suggests that while the CBN maintained its key MPR rate at 11.5% signaling a dovish monetary policy posture, it had shifted to monetary tightening since the start of 2021 after a nine month covid-19 induced hiatus. From a more structural perspective, declines were recorded across net foreign assets (-27.3% annualized) mirroring the slide in FX reserves and net domestic assets (-6.3% annualized).

Tight liquidity conditions continued to propel high interbank rates, DMO inches higher at PMA: No change in liquidity conditions from the prior week as bank reliance on CBN lending facilities remained. Average daily net bank exposure to the CBN window stood at NGN218billion (prior: NGN185billion) which remains above the NGN115billion average observed in April and at variance with the net deposit positions over Q1 2021. The drop in system liquidity continues to reflect the seismic drop in system inflows after the CBN largely unwound its OMO bill book. Interbank rates remained elevated and fixed placements for large institutions moved towards 13-14%.  

Figure 3: Naira Yield Curve

Source: FMDQ, NBS

At the PMA, where NGN150billion was on offer, the DMO took advantage of robust demand (1.88x) to sell NGN175billion at average marginal rates of 13.77% (April: 13.15%). In response, bonds inched higher (+8bps on average) to a range of 10.45-14.2%.    

Naira steady across markets, Eurobond noise getting louder: Across currency markets not much occurred with the Naira hovering at NGN411/$ at the IEFX window, NGN483/$ at the parallel market (Cash) and near NGN500/$ for wired transfers. FX reserves declined 0.7% w/w to USD34.4billion reflecting a pick-up in USD sales by the CBN. Over the week, President Buhari sent a request for the Senate to approve USD6.1billion in foreign borrowings. These loans are as approved in the 2021 budget which would suggest that a Eurobond sale is now imminent. A quirk in the DMO act requires that the FG notify the Senate for FX borrowings even though these borrowings have been pre-approved in the budget. After a flurry of activity, it now appears Nigeria is set to return to Eurobond markets after a 3-year break for a possible record sale in 2-3 tranches.    

The week ahead (May 24-28, 2021)

Market focus will shift to the two-day monetary policy retreat with consensus views suggesting a possible uptick in interest rates.  In terms of liquidity, system maturities remain thin heading into the new week with only NGN63billion in OMO maturities, NGN65billion in NTB maturities and FGN bond coupon payments (NGN18billion). There will be an NTB auction where the CBN, on behalf of the DMO, will look to rollover maturing paper and in keeping with the trend, net issue on the 1-year.

May 2021 MPC: The CBN governor set himself up at the last MPC with the comment that the ‘hold’ over March was to observe Q1 2021 GDP numbers to prevent a pre-emptive tightening strike. With the Q1 numbers which shows that growth has strengthened from Q4 2020 level, the CBN will likely view lesser need for an accommodative stance as the economy now appears to have recovered from the covid-19 induced slump. Accordingly, I expect focus to shift towards dealing with the pressing issue of the Naira and USD illiquidity. Inflation remains driven by structural issues which the CBN is ‘addressing’ with its interventions but persisting negative real yields present problems towards managing the exchange rate. Firstly they drive increased demand for USD assets to store value and crucially the phenomenon limits potential capital inflows required to dealing the FX liquidity issues. As such normalizing interest rates (and possible adjusting the spot rate) would be a key step towards dealing with this issue. From the money supply data, one can infer that the CBN is already in tightening mode and my suspicion is that we either get a symbolic hike of 50-100bps (to be followed by further hikes in July) or a hawkish hold to defray concerns about growth with continued liquidity tightening across debt markets.  

Abbreviations

  • BDC – Bureau De-Change
  • CBN – Central Bank of Nigeria
  • DMO – Debt Management Office
  • FGN – Federal Government of Nigeria
  • FX – Foreign Exchange
  • IEFX – Investors and Exporters Foreign Exchange
  • GDP – Gross Domestic Product
  • MPC – Monetary Policy Committee
  • NBS – Nigerian Bureau of Statistics
  • NGN – Nigerian Naira
  • NTB – Nigerian Treasury Bills
  • OBB – Open Buy Back
  • OMO – Open Market Operations
  • OPEC – Organization of Petroleum Exporting Countries
  • O/N – Overnight
  • PMA – Primary Market Auction
  • REER – Real Effective Exchange Rate
  • SPEB –  Special Bills
  • USD – US Dollar
  • WDAS – Wholesale Dutch Auction System

Edit: This post was edited to reflect the release of the Q1 2021 GDP report by the NBS on Sunday evening.

2 comments

  1. Tumi Worldchanger · · Reply

    Dear Wale,

    Thank you so much!

    Regards, ‘Tumi Atayero, CFA @tumiwrldchanger

  2. Well done Wale and thank you.

    Regarding FX liquidity, we may need to go back to the topic of whether to really float the currency or not. Irrespective of which side of the argument one falls, I believe a path that allows a gradual evolution of the currency finding its fair value will serve us better.
    The current approach that causes significant shocks every 3-5 years is an unsustainable practice. The CBN needs to show more courage and avoid the political and social rhetoric around keeping rates flat as a measure of economic success.

    And of course, we must deal with the issue of security and port congestion impacting the need for high inventories and pressure on forward pressure on FX demand.

    Thank you once again.

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