Nigeria – Fixed Income Weekly

Inflation marches ahead, record VAT collections and oil production slumps, bearish trends across fixed income

The week that was (June 14-17)

Inflation continues to rise on galloping diesel and food prices: The National Bureau of Statistics reported that headline inflation jumped in May to 17.71% (April: 16.82%) just below the lower end of my call (17.75%-17.85%). Looking at the sub-parts, while food inflation remained high 19.5% due to adverse base effects as the m/m reading was flat from the prior month at 2%, the real concern is the run-up in the two NBS measures of core-inflation which showed pressures in the monthly indices (1.8-1.9%). Assuming this run-rate continues, headline inflation could easily blow past 20% in the coming months. Diesel prices continued to track higher (+2.5% m/m to NGN671/litre)

Record VAT numbers in Q1 2022 driven by local and imported VAT: The NBS published value added tax (VAT) collection numbers for Q1 2022 which in line with CIT numbers reported last week showed 18% y/y (+4.4% q/q) increase in VAT collections to a record high of NGN589billion. As a share of the economy, VAT numbers inched up to 1.3% of GDP (2021: 1.2% of GDP). Looking across, higher local VAT receipts (+53% y/y to NGN344billion) was central to the overall growth as non-import foreign VAT declined (-31% y/y to NGN118billion) while import VAT was up 27% y/y to NGN127billion. The decline in foreign VAT is puzzling as many technology firms introduced VAT collections on Nigerian services over the period following Nigeria’s decision to hold out on the global OECD deal. Interestingly foreign CIT (which reflects the component of profits by global firms attributable to a presence in Nigeria) jumped in the Q1 2022.

Figure 1: VAT collections

Source: NBS, FIRS

Nigeria’s oil production declined further in May 2022, pressures along main export terminals: Data from the Nigeria Upstream Petroleum Regulatory Commission (NUPRC) showed that oil production (including condensates) slumped further in May 2022 (-14% m/m to 1.28mbpd). Looking at the data pressures remained along the main onshore export terminals in particular Qua Iboe (-46% m/m to 89kbpd), Forcados (-36% to 167kbpd) and Bonny (-34% m/m to 41kbpd). These declines suggest no let-up in the disruptions/break-ins along the pipelines linked to theft. To put in context, in January 2020, output along Qua Iboe, Forcados and Bonny stood at 229kbpd, 268kbpd and 262kbpd respectively when Nigeria was averaging 2.1mbpd. Offshore platforms steadied over the period posting mild increases (+1-3% m/m) though output from Erha fell 39% to 42kbpd. Nigeria’s main benchmark BonnyLight averaged USD117/bbl in May implying lost value of USD782million.          

Figure 2: Nigeria – Oil Production by Field

Source: NUPRC

Bear curve flattening continues as front-end yields continue to rise vs sluggish trends along bonds: Following FX debits and relative thin maturities, system liquidity was relative tight with interbank rates at at 10-11%. Bearish sentiments continued to dominate the NTB space with yields up between 45-50bps even though the CBN, on behalf of the DMO, broke with trend by ignoring strong demand at the auction to exactly sell the NGN35billion on offer at lower stop rates of 2.49% (previously 2.50%), 3.79% (previously 3.84%), and 6.07% (previously 6.44%). Bonds closed the week on a bearish note as investors positioned ahead of the auction with yields up by around 5bps on average.

The week ahead (June 20-24)

Market focus shifts to the June 2022 FGN auction where the DMO will look to sell NGN225billion worth of bonds evenly across the FGN 2025, FGN 2032 and FGN 2042 which closed Friday in secondary market trading at 10.10%, 12.63% and 13.15% respectively. Debt markets are smelling blood in the light of progressively higher inflation readings and the front-end sell-off, I expect the auction to close higher than last: 2025 (10.0-10.2), 2032 (12.65-12.75) and 2042 (13.15-13.25).

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