Tight liquidity conditions pressures short-dated rates, long end comes off on renewed buying, oil production headaches

The week that was (April 26-29)

Money market rates remain subdued but bearish sentiments dominate NT-bill trading: Money market were under a liquidity strain over last week, brought about by large outflows required to settle the FGN bond/NTB auctions and Dangote Cement’s NGN116billion. As a result, interbank rates closed the week higher at the 12.25-12.5% levels, up from the 4-6% levels obtainable in the prior week. CBN data showed that Banks were on aggregate net borrowers from its discount window for the second consecutive week (NGN44billion vs NGN47billion in the prior week), a reversal from the net placement position intact for much of Q1 2022. The tight liquidity picture resulted in higher yields at the NT-bill auction, where the CBN helped the DMO clear NGN130billion worth of short term debt, just over the NGN121billion it intended to rollover. The CBN had to raise the stop-rate on the 1-yr to 4.79% (last: 4.6%). Bond yields were mixed with some light selling at the short-end in reaction to the bond auction given where the 2025s and 2032s closed while the long-end has come-off in response to renewed buying sentiment as the 2042s closed lower than the 13% anchor.

Figure 1: Naira Yield Curve

Source: Bloomberg

Money supply continues to expand, net foreign assets continue to fall: CBN updated money supply data through the end of March which showed that consistent with its expansionary position, broad monetary aggregates (using the M3 definition) expanded at an annualized pace of 16.8% which is well ahead of CBN’s usual 10% target and the 10.7% recorded over 2021. The brisk pace reflects strong growth in net domestic assets (+35.3% annualized) amid continued contraction in net foreign assets (-56.8% annualized). The contraction in the latter mirrors the declining pattern in external reserves over the period alongside continued foreign liquidations of Nigerian investment positions. On the other hand, the robust growth in net domestic assets reflects strong credit growth to the private sector (+13.4% annualized to NGN36.3trillion) and government (+90% annualized to NGN16trillion). Though the CBN stepped up CRR debits over the period with bank reserves up to NGN11trillion (from NGN10.3trillion in March) in line with its naïve base money targeting policy, this tracked behind the growth in other monetary aggregates. This simplistic M0 targeting flaw was flagged by the IMF in one of its recent article IV reviews and is among several reasons for Nigeria’s poor monetary policy transmission.  

Nigeria’s disappointing Q1 oil production suggests some weakness in Q1 GDP:  One of the big changes that occurred with President Muhammadu Buhari’s assent of the long-delayed petroleum industry law was the creation of a slate of new agencies across the oil and gas sector. Step forward the Nigeria Upstream Petroleum Regulatory Commission (NUPRC) which was essentially hived off the old Department of Petroleum Resources (DPR), the regulatory arm of NNPC. But that’s where the similarity ends as unlike the NNPC, whose reports on the sector arrived with a long lag, NUPRC seems to be very forthcoming with production numbers down to March 2022 and done in a clear manner. The data sheds light on the sources of the large declines along crude production (-30%) and condensates (-25-27%) from pre-pandemic levels to 1.49mbpd. Looking through, while some of the declines suggest impact of theft like along the Brass and Bonny export terminal where output is down 55-65% from January 2020 levels, some less impacted fields such as Agbami and Bonga, which are not onshore and this insulated from theft, are also reporting drops in production consistent with limited drilling work occasioned by a drop in investment during covid-19 and lags in ramping up output as OPEC+ quota declines.    

Figure 2: Nigeria Oil Production

Source: NUPRC

Looking ahead, the continued contraction in crude production implies that the oil sector will remain a drag on overall economic growth over the near term. Longer term, the trend raises genuine cause for concern for Nigeria’s already beleaguered fiscal and external account balances. Without concerted action to raise investment by Nigeria’s policymakers, (we only have oil and gas projects with cumulative capacity ~100kbpd coming online over the next 3-5years), Nigeria’s oil production is on track to decline to around 1.3-1.4mbpd down from the 2-2.5mbpd over the last decade. The decision by President Buhari to pick a career politician as the top decision-maker during a period of profound change in global energy markets looks disastrous with each passing day.

Sell-off in Eurobond yields likely to dampen Eurobond sale over May: Growing concern about the scale of rate hikes and tightening action from the US Federal Reserve fueled a fresh sell-off in the emerging and frontier Eurobond market especially Africa. Nigeria was not left untouched as everything from the 10-year segment of the Eurobond curve moved into double-digit yields territory, which I expect to kill-off any appetite for a planned sale of USD950million in May.

Naira games continue at the IE window, reserves resume downtrend: At the Investors & Exporters Window run by FMDQ, the closing value of the Naira fell to NGN419/$ (-0.2% w/w) reported total turnover at around USD866million (up 44% w/w). Anyway, these numbers are of no use for actual economic activity and the continued publishing by FMDQ merely serves to supply good material for CBN’s comedic stage-craft to financial market watchers. If you really needed dollars, the exchange rate leafing through media organizations is hovering between NGN590-595/$. After five weeks of increases, Nigeria’s external reserves declined last week (-0.1% w/w) to USD39.6billion which would suggest that gains from Eurobond inflows have run their course over the last 30-days.

Nigeria posts merchandise trade deficit in Q1: CBN data through March 2022 reveals that despite higher oil average prices (+28% q/q to USD103/bbl), Nigeria recorded a balance of trade deficit of USD764million vs a trade surplus of USD1.1billion in Q4 2021. The deficit emanated from a quicker rise in imports (+24% q/q to USD14.8billion) relative to exports (+8% q/q to USD14billion). The sluggish export numbers relative to what the oil price trends would have suggested is testament to the carnage from the weaker oil production numbers discussed earlier. On the import side, though no breakdowns are available, the strength likely reflects momentum across oil and non-oil as the economic activity normalizes post pandemic. Given that Nigeria runs a deficit in the services account, this data supports the weak pattern observed in external reserves in Q1 and would explain much of the renewed exchange rate pressures.    

The Week Ahead (May 4-6)

Into the first week of May which is a shortened week due to the Eid holidays, market liquidity is likely to improve with the FAAC inflows and late coupon inflows though doubts over a potential Eurobond are in the mixer. Q1 GDP are likely to be released shortly.

When will the low-rate vortex end? YTD, bond yields remain lower despite higher inflation and larger government borrowings. While a large part of this anomaly reflects the liquidity surfeit unleashed by the sizable FGN bond repayment (NGN605billion) in late January, the underlying cause remains the accommodative CBN posture across money markets. In line with its unconventional gospel, the CBN either does not appear to see raising rates as the solution to any problem or cannot fathom how to go about it without directly bearing the costs. Moreso, raising rates will imperil the large scale single digit interventions directed by the CBN over the last three years. Indeed, this view appears pervasive as many commentators only see an exit from the low-rate vortex either from a change in political leadership during the 2023 elections or the exit of the current CBN governor at the end of his tenure a year later in 2024. In the event the CBN continues to ignore the need to normalize policy as with global trends, then rates remain stuck in the zombie going-nowhere territory where the short term securities remain in low single digits while the bond curve revolves around 10-13%.

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