Nigeria Fixed Income Weekly

The Week that was (July 12-16)

The eagerly awaited maturity of the FGN 2021 occurred last week and the DMO redeemed the issue along with its coupon flooding the financial system with liquidity which sent short term interest rates lower. However, longer dated bonds moved in the opposite direction reflecting a multitude of sellers and buyers holding out for the bond auction.  Elsewhere base effects continued to drive inflation south while CBN data on Nigeria’s external account showed some improvements though the apex bank now estimates a much weaker REER level for the Naira than the IE window level would suggest.

2021 bond maturity lubricates money markets, short term interest rates fall: As expected, the redemption of the July 2021 bond (NGN561billion) and coupon inflows NGN41billion overwhelmed money markets with interbank rates dropping to low single digits 4.5-4.75% from 19-20% levels, a week earlier. However, in a departure from the prior week when banks were net placers at the CBN window, banks were net borrowers from the CBN window again to the tune of NGN138billion. However, this is well below the elevated levels over April-May when bank borrowings ran at weekly pace of NGN500b-1trn. The loose financial conditions had the expected effect of driving a bullish run across short term securities with average declines of 30 and 57bps across NTB and OMO bill papers. These sentiments spilled over to the T-bill auction where the CBN, on behalf of the DMO, had NGN110billion on offer. Demand was strong with NGN575billion with bid-cover of 3.8x which allowed for modest upsizing with allotments of NGN150billion at flat stop rates of 2.50% and 3.50% for the 91-day and 182-day but a lower level 8.67% (previous: 9.15%) for the 1-year tenor. Rates on the Aug 31 SPEB securities moderated to 8.37% from 9.12% last week.

Bond yields swing bearish as buyers hold out for PMA: However, FGN bond yields were generally bearish with yields rising 50bps on average, driven by sell-offs along the mid and long end. The development possibly reflects an overhang of sellers, who had positioned to sell into the maturity. However, bids drifted higher, likely holding out for the chance to try their luck at the July 2021 bond auction slated for next week.

Figure 1: Naira Yield Curve

Source: FMDQ

Base effects underpin lower headline CPI print, monthly trends are rising again: On Thursday, the NBS put out the June 2021 CPI report which showed a further drop in annualized inflation to 17.75% (previous: 17.93%) with lower readings across the two sub-components: Food (-45bps to 21.83%) and Core (-5bps to 13.09%). However, the monthly (m/m) readings showed another pick-up in headline inflation to 1.11% (previous: 1.05%) which implies that the deceleration in the y/y numbers owed much to base effects from 2020 when m/m inflation expanded 1.5%. The renewed pressures in the monthly numbers stemmed from rural farm produce (1.37% m/m) which could suggest an end to the dry season harvests which have helped calm dampen the pace of food price pressures over the last two months. Energy prices remained well contained in June with +/- 1% moves across major fuels though the risks remain to the upside for the petrol prices (NGN165/litre) given the wide discount to diesel (NGN242/litre and kerosene (NGN370/litre).

Figure 2: Inflation

Source: NBS

Over H1 2021, headline inflation averaged 1.27% m/m (H1 2020: 0.98% m/m) and 17.63% y/y (H1 2020: 12.63% y/y) and the prospects of a less disruptive planting cycle suggests that higher harvests should provide a relief to food prices in the second half of 2021. Alongside large base effects and assuming no shocks to petrol prices (which sounds unrealistic, but could well hold given political resistance), inflation could decelerate further over H2 2021 towards 14-15% levels by year-end.

Nigeria’s external accounts improved in Q1 2021 on lower imports:  CBN data reveals that Nigeria posted a smaller current account deficit (USD1.75billion) in Q1 2021, down from a USD4.8billion deficit in Q1 2020 (Q4 2020 deficit: USD5.3billion). The lower deficit stemmed from a contraction in imports of goods and services to USD16billion (31% y/y, -16% q/q). Elsewhere, while remittance flows showed signs of a recovery (+5% q/q to USD4.3billion), the Q1 2021 print remains 24 percent below the corresponding level in Q1 2020. Nigeria financed the current account deficit via FDI inflows (USD1.95billion), foreign flows into ST debt securities (USD2.7billion), FGN foreign loans of USD1.1billion (likely the World Bank loans) and FX reserve drawdowns (USD1.3billion).

Figure: Current Account Balance (USD’bn)

Souce: CBN

CBN REER suggests further downside to IE rate, FX reserves inch up:  Not much to talk about the exchange rate as within the IE window, the currency has held steady around NGN410-411/$ handle which mirrors stability across the two sub-tiers of the parallel: NGN504/$ for the cash rate and a NGN510-515/$ for the transfer rate. Fundamentally, the CBN put out its Q1 statistics bulletin which showed a new relative PPP level of NGN465/$ for the Naira which is weaker than the NGN439/$ in December 2020. This would suggests that the current spot overvaluation of around 14%. In terms of supply dynamics, after staying out for much of Q1, the CBN returned to the fold with intervention sales of USD900million over Q2 2021 aimed at clearing the backlog of trapped foreign portfolio investors. Gradually, liquidity is starting to improve in the segment as daily FX trading volumes averaged USD150million last week vs USD121million in the prior week which favourably compares with H1 data (Q2: USD115million Q1 2021: USD63million, 2020: USD143million). Admittedly foreign portfolio traffic remains outward. For reserves, a slight reversal in recent days with a 0.01% w/w rise to USD33.1billion (import cover: 4.5months) which could suggest higher oil prices are starting to get through or perhaps that the CBN has completed settlement for another raft of FX forwards.  

Legislative greenlight for FX borrowings: The National Assembly granted the much awaited approval for the finance ministry to raise USD5.6billion in foreign borrowings in tandem with the approved 2021 budget. This clears the way for Nigeria to return to Eurobond markets after a three-year hiatus in either late July or early August. Given the USD500million redemption in January, potential scope of USD debt sold could be as high as USD6.1billion which would go towards financing the record deficit. Following the route of SSA issuers, the Nigerian sale would be in multiple tranches to help maximize the outing. Luckily oil prices remain above USD70/bbl and though the Fed has motioned towards less accommodative monetary policy, it is yet to commence.

The week ahead (July 19-23)

The Sallah holidays on Tuesday and Wednesday imply a three-day trading week so the DMO has brought forward the bond auction to Monday with settlement on Friday and this should be the highlight of the week. Maturities are thin comprising NGN20billion in OMO bills and NGN25billion in NT bond maturities.

July 2021 bond auction: On Monday, the DMO will look to sell NGN150billion worth of bonds evenly split across the 2028, 2036 and 2050 papers. Given the July maturities, one expects demand at the auction to be sufficiently robust and sufficiently sensitive gauging from the sell-off in yields. In the secondary market these papers are trading at 12.35%, 13.17% and 13.25% respectively. From the DMO’s perspective, despite total gross debt sales of NGN1.8trillion (inclusive of the new NTB issuance) borrowing remains some distance from the implied 2.8trillion gross domestic financing target (Net: NGN2.3trillion). This excludes potential borrowings required to fund the recently approved supplementary budget In view of the liquidity surfeit and yield retracement in the secondary market from last month levels, the DMO should view robust demand on offer around current levels as a win and look to replicate the pattern of overselling before liquidity thins out. As such, we could see the auction clear around 12.4-12.6 for the 2028, 13-13.1 for the 2036 and 13.2-13.3 for the 2050s.

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