Nigeria – Fixed Income Weekly

Bulls regain control despite tight liquidity conditions, CBN Governor withdraws from presidential race and lower oil production in April.   

The week that was (May 9-13)

Despite tight liquidity trends, yields declined broadly along the Naira curve: Despite fairly tight liquidity conditions which drove a pick-up in funding costs (with overnight borrowing rates up 400bps w/w to 8.67-9.2%), strong buying was seen across the Naira curve with yields down 8bps along NT-bill yields and 5-10bps for FGN bond yields. Looking at CBN discount window data, banks seemed sufficiently liquid with net deposit positions over the week vs. net borrowing in the prior week. In terms of activity, market was remained sluggish in the lead-up to the monthly bond auction next week where the DMO would look to borrow NGN225billion evenly across the FGN 2025, FGN 2032 and FGN 2042.

Figure 1: Naira Yield Curve

Source: Bloomberg

Rates declined at the fortnightly NT-Bill sale:  At the NT-Bill auction on Wednesday where the CBN, on behalf of the DMO, had NGN127billion worth of debt to rollover, demand was strong at 2.7x which allowed for the above target sale ofNGN138billion in NT-bills. The Stop rate on the widely watched 1-yr tenor declined by 9bps to 4.7% while the CBN maintained stop rates of 1.74% and 3% for the 90-day and 181-day papers respectively.

Nigeria’s oil production declined further in April: The Nigerian Upstream Petroleum Regulatory Commission (NUPRC) updated oil output data for April 2022 which showed that average oil production (ex-condensates of 255kbpd over the month) slid further to 1.17mbpd (March: 1.24mbpd) which remains well under the OPEC+ quota for Nigeria at 1.74mbpd (excludes condensates). Looking through, disruptions along the main Bonny export terminal continued over April with output down 33% m/m to 61kbpd and this was central to overall production pressures. For context, Bonny output is still a way off its 2020 level of 316kbpd. Other pressures points of note remained are Qua Iboe (-6% to 163kbpd) and Usan (-14% m/m to 43kbpd), though on a positive note, output picked up via Forcados (+11% m/m to 262kbpd) and Bonga (+30% m/m to 96kbpd) though as with Bonny, production remains well behind the 2020 level reflecting low investment activity by the IOC and Nigerian independents on aggregate.  

Structural data points to strong post-covid recovery in spending: The National Bureau of Statistics (NBS) put out GDP data showing the decomposition along income and expenditure lines for third and fourth quarters of 2021 which allows for a more structural exposition of economic growth trends in 2021. From the data, there was a strong post-pandemic recovery in household consumption (+26% in real terms) which helped offset weakness in government spending (-3% in real terms) and a contraction in net exports (-55% in real terms). The contraction in the latter likely reflects lower oil production while the expansion in consumption provides some support to the broad based pick-up in some cyclical sectors such as construction, cement production and manufacturing over 2021. Investment spending also recovered (+5% in real terms).

Figure 2: Real GDP disaggregation by Expenditure

Source: NBS

Income breakdowns show large drawdowns on savings and higher borrowings financed aggregate spending:  So how was this spending financed? Looking at the income disaggregation, real wage growth was positive on aggregate (+14%) amid lower corporate profits (down 2% in real terms) while direct and indirect taxes expanded 4% and 26% respectively with the latter likely reflecting impact of the VAT hike. However, in terms of composition, it is important to note that wages and corporate profits account for 31% and 62% of real national income. Working through the analytics, it would appear that while aggregate incomes rose in real terms, the expansion (+14%) tracked behind the recovery in consumption spending (+25%) which would suggest that the excess spending was likely financed by a combination of drawdowns on savings (which fell 43% in real terms) and higher borrowings as net lending to the rest of the world plunged 62% in real terms (i.e what Nigeria borrowed from the world exceeded our lending to the rest of the world). This would be consistent with large fiscal borrowings over the year.

Figure 3: Real GDP Disaggregation by Income

Source: NBS

Economists like to disaggregate economic growth into income and expenditure drivers based on the idea that an economy is like an ecosystem aggregate growth is a function of the pace of aggregate spending by all agents which is itself a function of access to financing whether earned or borrowed. Overall while Nigeria’s economy recovered quickly from the pandemic, what the NBS data suggests is that this owed much to dissaving at the aggregate level and to a larger extent a ramp-up in borrowings. This means different things but also suggests that current growth is unlikely to be sustainable absent significant policy reform.

There is chart I’ve tracked for a while now which shows some co-movement between real wage growth and manufacturing output.

Figure 4: Manufacturing GDP growth and Real Wage Growth

Source: NBS

CBN governor pulls the plug on presidential aspiration: Despite winning his court case at the Federal High Court (FHC Abuja), CBN Governor, Godwin Emefiele appears to have withdrawn from the race to succeed President Muhammadu Buhari. Following tweets wherein he admitted a desire to run, Monday saw the commencement of a court case wherein the CBN Governor’s lawyer prayed for the court to allow him to proceed with desire to run for the position of president while remaining in office. The date of the filing of the motion, two days prior to the Saturday tweets, removes any doubt that the CBN governor wanted to run all along. Though initial media reports naively suggested that the court had dismissed his request, a more introspective look at the way the case was structured would have suggested otherwise. Specifically, in seeking a ruling to prevent parties (the electoral commission and the Attorney General) with no involvement in the APC primaries from blocking the CBN Governor’s participation, there was unlikely going to be any grounds for the judge not to accede the request. Accordingly, as these parties had no powers over the APC primaries, the Judge duly delivered with a ruling that he saw no reason why the CBN governor could not contest for these primaries while remaining in office. But by then events elsewhere had rendered the ruling inconsequential as following a meeting on Thursday with President Buhari, it would appear that the CBN Governor saw no future path for a presidential run and simply dialed back on his aspiration.

March 2022 MPC personal statements reveal a surprising divergence in interest rate views: At the March 2022 monetary policy retreat where the MPC voted by a 6-4 vote to hold interest rates, the sense was that the dissenting votes were cast by independent MPC members in the face of rising inflation while there was unison across the six CBN members. However with the release of the personal statements last week the source of dissenting votes include two CBN Deputy Governors: Ms Aisha Ahmad (who oversees financial sector stability) and Folashodun Shonubi (who oversees operations) joined two independents: Professors Adeola Adenikiju and Aliyu Sanusi in calling for rate hikes of between 25-50basis points. These are more signaling hikes given the sizing factor for Nigeria as interest rates are high but the willingness to break from the mold particularly with Ms. Ahmad suggests an independent mindset and in my view positions her as a strong candidate to succeed Godwin Emefiele when his tenure runs out in 2024.

As for the CBN Governor, events this week suggests he is now in a weakened position and faces a limited time within which to shape his legacy at the CBN as whichever candidate wins the general election next year will likely apply a microscope to CBN activities. Having been harshly treated by the politicians he long sought to curry favour from with dovish interest rate policies, there is (in my view) a non-trivial probability that the CBN Governor will now look to dial back on his unorthodox monetary policy posture under an atmosphere of rising inflation? Monetary policy normalization could begin as quickly as this month’s MPC meeting.

The week ahead (May 16-20)

In the week ahead, system liquidity inflows will remain soft with only NGN43billion in OMO inflows and bond coupon payments which alongside outflows for the bond auction could likely result in further funding pressures. In terms of events, there is the monthly bond sale on Monday and likely economic data releases with April 2022 inflation and Q1 2022 GDP numbers.

May 2022 Bond auction: At the monthly bond auction, the DMO will look to sell NGN75billion apiece on the 2025, 2032 and 2042 bonds which closed Friday at 9.89%, 12.45% and 12.9% respectively. Though the DMO contained upside at the last auction with large non-competitive bids, the underlying demand conditions and market expectations were understandably higher in the light of the large outlay of government borrowings. Market expectations are likely to remain unchanged as the prospects of a Eurobond sale now appear to have diminished followed the sell-off in US treasuries. Though the DMO will continue to deploy its non-competitive bids to contain upside, it will still pay slightly higher. As such my sense is for stop rates to close slightly higher across board: 2025 (10-10.1%), 2032 (12.5-12.6%) and 2042 (12.95-13.05%).

Inflation likely quickened above 16% in April 2022: The NBS looks set to release the April inflation numbers which I expect to show some acceleration reflecting a combination of factors:   persisting diesel price elevation and its knock-on effect on transport costs, higher food prices during the lean season and a low base from 2021 relative to the currently high run-rate. I’m looking for m/m print in the 1.5-1.6% region which spits out headline in the 16.5-16.6% range.

Nigeria’s economy likely expanded anywhere between 2.5-3% over Q1 2022, oil sector deadweight: The NBS is likely to publish Q1 2022 economic growth numbers which are likely to show that the economic expanded between 2.5-3% over the first three months of 2022. The oil sector likely contracted between 11-15% looking at read-through from the NUPRC data which put production at 1.49mbpd for Q1 2022 vs 1.75mbpd in Q1 2021. Non-oil output likely quickened supported by a pick-up in manufacturing, construction, and trade.

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