Nigeria – Fixed Income Weekly

Improved liquidity conditions from FAAC inflows drives money market rates lower, Naira woes continue in the real world.

The week that was (May 4-6)

Money market rates buckle under the weight of FAAC inflows, modest declines across the curve: Money markets were liquid during the week due to inflows from FAAC credits (NGN449billion) and OMO maturities (NGN20billion) with the latter drawing a reaction from the CBN reacted in the form of a small OMO sale on Thursday. As a result, aggregate banking sector net borrowing from CBN’s discount window reduced from a daily average of NGN44billion the prior week to NGN2.8billion and money market rates declined to 4.8-4.9% from 12.5% levels in the prior week. The much improved liquidity profile saw a pick-up in buying across NT-bills which pushed average yields lower (-3bps w/w). Bond yields were mixed with continued selling along the belly of the curve, as markets reset to the 12.5% level on the 2032s per April 2022’s bond auction. However, the long end was flat with modest buying pressure working to keep segment hovering around 12.9%.

Figure 1: Naira Yield Curve

Source: Bloomberg

FX reserves decline further, Naira woes continue in the real market: At the supposedly market-driven Investors & Exporters (I&E) window run by FMDQ, the Naira appreciated (+0.5% to NGN417/$) as the CBN continued its now boring game of self-deception. Trading activity over the week softened (down 57%) given the short 3-day trading week. But if you really wanted to access dollars, the going rate (and I have to insert this phrase) per media organizations is hovering around NGN590-595/$. With the inflows from the Eurobond sale now largely dissipated, external reserves continued to decline (down 0.2% w/w to USD39.4billion).

#Meffy2023 – CBN governor finally comes clean on his political aspiration: Since the start of the year, when I first encountered credible information that the CBN governor, Godwin Emefiele was planning to run for president, I had held off commenting on the topic. Indeed, as is the norm with Nigeria’s political class, there is no smoke without fire when it comes to political office aspirations and unless an explicit denial about any intention emerges, all rumours should be taken as valid declarations. Indeed, the CBN Governor never denied any plan to run, rather he frequently maintained that he was focused on his job of fighting inflation. The Nigerian constitution guarantees the right of every citizen to run for office and Mr. Emefiele is perfectly within his legal rights to aspire to be elected president. To consummate this desire, he however cannot remain in the position of CBN governor and the right thing to do is to resign his appointment and delve fully into the political arena to actualize his ambition. This resignation will allow him focus not on fighting inflation but on convincing the ruling party to anoint him as its presidential flagbearer. Given the scale and widespread impact of his much touted economic policy achievements, this should be a walk in the park 😉 

The week ahead (May 9-13)

With no major inflows, system liquidity is likely to be tight which should push up short-term interest rates. There will be an NTB auction on Wednesday where the CBN, on behalf of the DMO, will look to sell NGN127billion. The 1-yr should continue its slow-walk towards 5%.

It’s likely going to be a slow news week with no major scheduled data releases, though depending on how things go, we might see the resignation of the current CBN governor to pursue his political aspirations. If this plays out, then markets are likely to spend time guessing the identity of his successor, though a holding pattern might see one of his deputies; possibly Ms. Aisha Ahmad (who oversees banking supervision) or Dr. Kingsley Obiora (who is in charge of economic policy) assume the reins. On who is likely to exit the current failed heterodox monetary policy experiment in the event that President Buhari decides to make one of them substantive Governor? My suspicion is that Ms. Ahmad (who will be the first female CBN Governor if it happens) is more likely to depart from the current set-up given Dr. Obiora’s strong linkages to the current unorthodox monetary policy posture. That said there is also the equal chance that President Buhari could also decide to bring in an entirely new person to the CBN which would be not be inconsistent with his style. Whatever happens we could be stepping into the realm of the ‘unknown unknowns’ in terms of interest rate trajectory.

Donald Rumsfeld – “Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tends to be the difficult ones”.

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