The week that was (November 22-26)
As expected, the CBN held the line on key policy parameters at the end of its two-day monetary policy retreat citing progress across all key macroeconomic variables as justification. However, interest rates trended higher across board as system liquidity appears under strain, while the Naira continued to hug the NGN414-415/$ handle across the official markets. That said, the CBN maintained its pattern of selling to offshore investors at a weaker rate (NGN444/$).
November 2021 MPC: Veni, vidi, vici: Unlike the prior MPC meetings, the last MPC of 2021 proved to be an uneventful one with no fireworks around the exchange rate. Given Naira appreciation at the parallel market from the last meeting and significant rise in FX reserves, the CBN moved into celebratory mode with the governor taking a roll-call of the various interventions across the last 18months and how these moves driving stronger economic growth and lower inflation. The MPC merely reiterated that the current experiment of unorthodox (heterodox) approach to monetary policy is likely to be around for a while.
Stealth liquidity tightening continues: Though the CBN wrapped up its last MPC meeting for 2021 by a unanimous vote to maintain its accommodative postures, its activity across money markets would suggest otherwise. For the third week in a row, the apex bank conducted another round of seemingly adhoc debits which worked to drive up interbank rates with OBB and Overnight borrowing rates closing the week at 15 and 15.7% respectively. The CRR debits swiftly wiped out the strong gravitational pull that FAAC inflows of NGN672billion had exerted on interbank rates. That the CBN was quick to step-in to curb liquidity hints at growing unease over a scenario of excess Naira liquidity and the implicit bid for dollars it portends. Rather than tighten via signaling through conventional OMO auctions, the CBN continues to remain comfortable with the direct quantitative approach of its ‘heterodox’ gospel which calls for a near zero cost model in liquidity management.
DMO on course for record annual ‘new’ NTB net sales: At its fortnightly auction, where the DMO was looking to refinance NGN119billion worth of NTBs, demand roughly 1.9x the offer (down from 2.9x at the last auction) showed up. Nevertheless, as these investors were desperate to get a hold on NTB paper, the DMO took advantage and up sized its sale to NGN215billion at lower stop rates. With one month left, the DMO has sold NGN4.1trillion worth of NTBs, the highest amount in since 2017. Adjusted for treasury bill maturities of NGN2.9trillion, the DMO has effectively net borrowed NGN1.1trillion in T-bills which is a record number.
Across both bonds and NTBs the DMO’s appetite for borrowing remains undiminished and in the face of no apparent pressures some investors continue to hand over their shirts to the DMO for deeply negative real yields. If these investors observe closely: the same DMO has tolerated an uptick in bond yields over 2021.
Figure 1: Annual NTB Sales and Maturities
Meanwhile CBN quietly unwinds its OMO bill book: While the DMO has dramatically raised NTB issuance, the CBN has gone about shrinking the size of its OMO bill portfolio with only NGN2trillion worth of sales thus far in 2021 (down from NGN7.1trillion in 2020) and the elevated levels of NGN15-17trillion at the height of the last FX crisis. With one month to go, we on track to record the lowest OMO bill sales since 2012. In terms of liquidity impact, the CBN’s unwinding of its OMO bill portfolio has effectively inflowed NGN10.6trillion into the financial system which would appear to explain the aggregate CRR position of NGN9-10trillion. Essentially, the CBN has switched its liquidity management instrument from the market driven OMO auctions to the more direct administrative CRR debits consistent with the abandonment of orthodox monetary policy to its present ‘heterodox’ settings.
Figure 2: Annual OMO sales and Maturities
Nonetheless, bearish undercurrents across debt markets: Despite the CBN’s stance, domestic bond markets continue to feel bearish reflecting a supply overhang after the DMO’s oversale at the bond auction. Furthermore, the CBN appears to have undertaken another CRR debit on Friday. On Monday, the CBN rolled over NGN3.46trillion of its SPEB maturities but this time via new extended tenors: 91-day (NGN876billion), 126-day (NGN827billion), 154-day (877billion) and 182-day (NGN881billion) at meagre discount rates between 0.5-0.6%. The relatively tight financial system liquidity underpinned bearish sentiments across the curve with bonds up 5-10bps higher. Thus, while the CBN officially is in an accommodative posture, its actual activity across financial markets is one of tightening.
Figure 3: Naira Yield Curve
Naira weakens at the IE, CBN continues weaker spot interventions: At the IE window the Naira weakened 0.2% w/w to NGN415.07/$ though turnover was up to USD200million vs the USD131million in the prior week. Notably, the CBN maintained its recent pattern of interventions to offshore investors at a weaker rate – NGN444/$. Reading through comments from the governor, one gets the sense the CBN is trying to convince FX markets about its preference for an orderly devaluation vs. the one-step move in prior episodes.
The Week Ahead (December 1-3)
Into the last month of 2021, and liquidity is likely to remain thin with no major maturities which means interbank rates are likely to remain pressured.
December 2021 Outlook: Over the last month of 2021, investors are likely to focus on positioning their portfolios for 2022 — a year that opens up to sizable liquidity in January with the maturity of the NGN605billion FGN 2022 bond as well as a heavy domestic fiscal borrowing program with potentially NGN3trillion worth of debt issuances. Though monetary policy has remained accommodative, whether the CBN will be able to withstand sustained declines in FX reserves without moving to aggressively mop-up Naira liquidity will remain a concern. Over the month the DMO plans to sell NGN100-120billion across the 2026 and 2027 bonds while OMO and NTB maturities stand at NGN195billion and NGN73billion respectively which would suggests muted supply trends over the month. The size of NTB issuance on offer relative to the demand frequently on offer means the rally on the segment is increasingly out of sync with wider money market trends. If there is one segment of the Naira curve likely to see a correction, it’s the NTB space where yields are being pushed lower by investors chasing the prospect of minute trading gains. My suspicion is that sizable pressure on funding and the realisation in market expectations that the DMO is not going to halt issuances could trigger sell-offs along the segment. he month might be anything but calm or the calm before the storm.
DMO sukuk sale delayed?: In November, the DMO put out feelers in the market that it was looking to sell NGN200-250billion via the issuance of another sukuk bond. But the month ended without any sale. It is likely the DMO will now come out with the sale in December which might have some bearing on the size of sales at the monthly FGN bond auction. Though this suggests that any undersale at the auction will likely drive a retracement on the Naira curve given the recent sell-off on the long-end, the market still feels over-supplied and the bears appear to be short-money with no real desire to hold this paper beyond for the prospect of a gain.
Introspecting about the current economic policy paradigm: As the year runs to a close, debt markets have a lot to grapple about. In 2022, the global easy money cycle is nearing an end as persistent inflation is likely to push central banks to withdraw call time on the decade of liquidity stimulus. This will have dramatic implications for emerging/frontier markets as capital flows are likely to become more discerning/discriminatory towards unpredictable risk. Though oil prices are likely to remain supported in the near-to-medium term as the transition to carbon neutral economies drives under-investment in oil production, Nigeria is unlikely to be flavour of the month for offshore investors given the indeterminate FX pricing system currently in place. Furthermore, profound changes in import demand are likely to keep the external account under pressure.
But the CBN is unlikely to care about these tectonic shifts in Nigeria’s current account or the shifting tides in global monetary policy as the apex bank is on a giant experiment to re-make the Nigerian economy by providing cheap credit via a direct quantitative approach. Given the lack of more wide-reaching structural reforms to boost the private sector and enshrine a market economy, this approach essentially amounts to throwing money at a problem. To fund these loans, the CBN is extracting liquidity from the banking system via the quantitative CRR debit, a tool it also deploys to manage excess naira liquidity.
On the fiscal side, the expansionary posture imposed by the oil price drop and under-recovery in petrol prices will continue to underpin unhinged borrowings. The DMO appears to be taking advantage of naïve short-term investors dying to get negative real yield to issue record amounts of short-term paper. Across board, Nigeria’s fiscal and monetary policy managers are putting a knife to the idea that private initiative and functioning financial markets can help in delivering solid gains to growth as they did in the 2000s. Time will tell but its tough to optimistic about the current policy settings until after 2023 at least.