Nigeria – Fixed Income Weekly

Apologies for the delay, I was on the road over the weekend so did not get some time to scribble my thoughts on the week.

Improved liquidity from FAAC inflows drives moderation in funding rates, bond markets discount MPR hike

The week that was (May 30-June 2)

Divergent trends across the Naira yield curve: Interest rates moved in different directions as the front-end continues to react to the jump in standing deposit rates (which is synced with the MPR hike) while bonds turned mildly bullish. Average NTB yields climbed 29bps w/w despite improved liquidity conditions from FAAC inflows which had pushed down interbank rates to 7% from the 13-14% handle. Thus, one can read that the bearish trends in the NTB segment is a rotation out of low yielding positions and not a sell-off induced by a desire to get liquidity. Indeed, bank borrowing from the CBN discount window moderated to NGN56billion vs. N240billion in the prior week which is consistent with improved financial system liquidity.

On the long-end, bond yields compressed (down 4bps) on account of renewed buying from long-money positions given the differential between bank placement and bond yields. Investors appear to have come around to the idea that the CBN’s rate hike is largely symbolic given the largely static position by the apex bank on SPEB securities (flat at 0.5%), OMO yields (flat) and muted CRR debits.

Figure 1: Naira Yield Curve

Source: Bloomberg

Money supply data supports easing posture by CBN in April: CBN money supply data showed further expansion in monetary aggregates over April with the main monetary aggregate (M3) up by 18.7% (annualized). Looking at the sub-parts, the increase in M3 stemmed from strong growth across demand deposits (+36% annualized) supported by expansion in quasi-money (+12% annualized) which is consistent with a tolerant CBN posture towards financial sector liquidity over April 2022. Over the month, aggregate CRR debits fell to NGN10.9trillion from NGN11.1trillion at the end of March which is consistent with accommodative monetary policy. Structurally, money supply growth remains driven by net domestic assets (+35.6% annualized) on account of strong credit growth towards government accounts (+73% annualized to NGN16.5trillion) relative to private credit (+17% annualized to NGN37trillion). On the other hand, net foreign assets (NFA) continued to contract (down 49% annualized) which is consistent with declines in Nigeria’s external reserves.

Nigeria drops Eurobond plans given global bond market turmoil: On the sidelines of an Islamic Development Bank conference in Egypt, Nigeria’s finance minister (in her usual manner of announcing major news around borrowing plans outside the country) stated that earlier plans to sell USD950million in Eurobonds had been put off. This is in response to the deterioration in the global Eurobond market following tightening action by major central banks. Nigerian Eurobonds were not spared as yields are up 300bps YTD and trade within a range of 9-11%. At some point everything above the 3year was trading above 10% tracking the sell-off in global bond markets in response to US Federal Reserve tightening.

Figure 2: Nigeria Eurobond Curve

Source: DMO

President Buhari assents to the revised 2022 budget: President Buhari signed the amended 2022 budget which incorporated a larger provision for fuel subsidy from NGN3.4trillion to NGN4trillion and raised the deficit by nearly NGN1trillion to NGN7.5trillion. Though the signed document is not yet available, the increment will likely be financed by domestic borrowings (which was previously set at NGN2.57trillion) given the narrow differential between rates on commercial USD borrowings and domestic bond yields.

Capital flows remained weak in Q1 2022, reserves decline further: The NBS published capital flow data over Q1 2022 which showed that total inflows declined 18% y/y (-28% q/q to USD1.6billion). Looking at breakdowns, weakness stemmed from other capital flows (down 41% y/y to USD60million) amid further softening in FPI flows (down 2% y/y to USD1billion). In addition, FDI flows were largely flattish (+0.1% to USD155million). As a share of the economy, Nigeria only received capital flows equivalent to 1.4% of GDP (2021: 1.5%, 2020: 3.1%). With little support from capital flows amid mounting subsidy losses to oil FX receipts, Nigeria’s external reserved slid a further 0.2% w/w to USD38.5billion which translates to 5.8months of imports on my numbers.

Figure 4: Nigeria – Capital Flows

Source: NBS

At the Investors and Exporters Window (IE), the ostrich games by the CBN continued with the Naira holding steady at the NGN419/$ handle while the dollar continued to exchange hands at the much weaker NGN600-610/$ range.  

The Weak Ahead (June 6-10)

In the week ahead, There will be an NTB auction where the CBN, on behalf of the DMO, would look to refinance NGN167billion worth of paper. There are also minute OMO maturities of NGN20billion. Nigeria’s ruling party hosts its special convention to determine its presidential candidate for the 2023 general elections. Markets are likely to be focused on the outcome of this race. The NTB auction is likely to see some consolidation in the 1-yr paper around 6-7%.

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