The Nigeria Fixed Income Weekly

The week that was (January 10-21)

DMO Q1 Calendar surprises on tenors, but monthly offer size remains unchanged: The DMO released its Q1 2022 offer calendar which placed the target monthly offer at NGN140-160billion with the mid-point at the NGN150billion level that markets were accustomed to seeing over 2021. However, the DMO surprised in terms of target bond tenors as rather than the 2037s and new 30-year that markets were expecting, a new 20-year instrument (FGN 2042) was unveiled. The withdrawal of the 2037s promptly sent yields on the paper south as investors scrambled to cover as the bond has been effectively benched.

January bond auction: Who blinks first? Fast forward to the monthly bond auction where the DMO put NGN150billion on offer across the two tenors (2026s and 2042s) per the bond calendar. Though demand was strong with the bid-offer ratio at a three-month high of 2.2x, the DMO only sold NGN171billion not waiting to pay the market bid. On the newly issued 2042s, where the weighted average bid was at 13.23%, the DMO cut the auction at 13% electing to leave some NGN125billion in unmet bids. However, on the 2026s, where the weighted average bid stood at 11.47%, the DMO elected to stop the auction at 11.5%. The trend across the two tenors suggests the DMO was essentially trying to contain market perceptions as only in December in a bid to meet borrowing targets the 15-year (2037) and 10-year (2031) sukuk were sold at relatively higher yields. Overall, the DMO appears to be betting that the looming January 2022 maturities will likely re-set yields lower in time for the next bond auction, so why push markets higher so early in the year. In terms of character, my suspicion is that the 2026s bid was likely dominated by banks while the 2042s bid was largely driven by pension funds.

FGN bond yields rally: FGN bond yields have continued to rally with bond prices up 0.4% w/w (YTD: +1.1%) as investors continued to position ahead of the liquidity deluge in the last week of January. Demand accelerated after the DMO did not over-sell aggressively at the bond auction electing to contain yield upside.

Figure 1: Naira Yield Curve

Source: FMDQ

Inflation surprised to the upside in December 2021:  The National Bureau of Statistics (NBS) released the final 2021 CPI report which showed that headline inflation bucked the eight-month declining trend, with an acceleration to 15.63% y/y in December – up from 15.4% in November. Looking across the sub-components of inflation to identify the drivers, food inflation (which accounts for just over half of Nigeria’s CPI basket) was central to renewed uptick as it came in at 17.37% vs. 17.21% in November. On the other hand, core inflation (defined in Nigeria as all prices excluding food prices) was largely flattish rising to 13.87% vs 13.85% in November. In terms of food, the farm produce basket was pressured over December while the utilities basket (aka HWEGF) and clothing showed strong price increases for the core basket. The reading brings a close to 2021 CPI wherein inflation averaged 17% (2020: 13.2%) reflecting shocks to the food prices (average: +20%) relative to the core segment.

However, there is a sense to which the NBS numbers appear puzzling with the rise in food when looking at the monthly trends as and published food prices. The core m/m reading was lower (down 13bps to 1.12%) despite increases across all the non-food components. My suspicion for this discrepancy is a contraction in the processed foods basket which is included in the Nigerian definition of core inflation (all items ex-farm) as well as food inflation. Anyway its not out of place to signpost the December print as one-off.

Figure 2: CPI Inflation: Headline, Food and Core

Source: NBS

Looking over 2022, shocks to key prices will continue to drive inflationary pressures. Though the Buhari Government continues to hold the line on petrol prices which were flat over 2021 despite an over 75% rise in global crude oil prices, there was no resistance to market determined prices in other key fuels (diesel: +29%, kerosene: +84%, LPG: +33%) which remain crucial for the CPI basket. On likely subsidy removal, political considerations mean this prospect is much diminished over 2022 though some tax driven price increases via VAT will provided further layer of price pressures. Continuing Naira weakness and its associated passthrough to these will continue underpin some price pressures over 2022. Though food production should have stabilized from the covid-19 disruptions, ongoing insecurity issues in the north will continue to distort food price trends across the country. My guesstimate using several scenarios suggest inflation could range between a low of 14-16% over 2022.

Figure 3: 2022 Inflation Scenarios

Source: Authors Calculation.

FX markets remain fragmented, reserves lower: Despite higher oil prices, Nigeria’s external reserves have maintained the downtrend since the start of 2022 with 0.3% w/w decline to USD40.3billion. On the FX front, the CBN continued to run its multi-tier system within the official market with IEFX rate being held at NGN416.5/$ while sales to offshore investors continued to occur at weaker levels (spot: NGN443/$ and forward: NGN452/$). There is also the reported SMIS intervention rate of NGN430/$. Overall, the CBN’s approach to FX management amounts to a return to the 2015-17 era of a hard official peg with limited USD supply and a wide parallel market premium. Media reports continue place the parallel market rate at NGN570-575/$ which implies a premium of 37-38% over the official rate.

The Week Ahead (January 24-28)

All eyes on the MPC and sizable liquidity inflows are over NGN700billion driven by the maturing FGN 2022 bond (NGN605billion), bond coupons (NGN50billion), OMO maturities (NGN110billion) and NTB maturities (129billion). In addition, the week is likely to see FAAC inflows.  

At the first MPC meeting of 2022, the rise in inflation over December suggests some room for the CBN to re-assess its monetary policy stance after a long hiatus. My sense is either this induces an insignificant rate hike or the CBN holds off any action for now till March to see if the uptick in inflation is one-off or persistent. The CBN can afford to hold-off the increase and deploy its administrative methods of managing Naira liquidity.

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