Nigeria – Fixed Income Weekly

Trade balance improves, capital flows remain weak, another smooth NT-bill auction and bond market bearish remain in charge

The Week that Was (August 8-12)

Merchandise trade account moves into green in H1 2022: Updated CBN trade data through June 2022 showed that Nigeria’s external goods account moved into positive territory (USD5.6billion) vs a deficit of USD7.3billion over H1 2021. The improvement reflects a surge in exports (+73% to USD35billion) consistent with higher oil prices over the period vs a more muted growth across imports (+8% to USD30billion) which likely reflects import suppression as the CBN curbed dollar access. That said, the improvements on the trade accounts did not filter through to Nigeria’s external reserves (which are down from year start levels) due to the subsidy system in operation wherein the CBN pays for the subsidy on domestic petrol prices from its crude oil sales.

Figure 1: Nigeria Trade Data

Source: CBN

Capital flows flat over Q2 2022:  CBN data on capital flows to Nigeria shows muted trends over Q2 2022 (-2% to USD1.54billion) driven by declines in portfolio flows (-21% to USD757million) and direct investments (-5% to USD147million). The pressure in portfolio flows largely stemmed from weakness in the money market related flows (down 31% to USD423million) amid a surprising pick-up in bond-market flows (USD322million). Equity related inflows remained in disaster territory (-60% to USD12.7million) as FX repatriation woes and the threat of MSCI exclusion combined to keep foreign investors out of Nigeria’s equity markets. Foreign lending activity remained on the rise (+37% to USD596million).  Overall, given the pseudo-capital controls over the currency market, foreign capital flows to Nigeria continue to tail the heady days of USD4-8billion a quarter. Restoring confidence will require a combination of improved USD liquidity either via improved external reserves or foreign borrowings and/or a return to credible policies by Nigeria’s economic managers. Near term outlook suggests limited change until after the 2023 elections.

Another ‘smooth’ NTB auction, another slip-up: It was another ‘smooth’ NT-bill auction, which saw the CBN precisely sell the amount on offer (NGN151billion) at slightly higher rates:  3.50% for 3M bill (previously 2.80%), 4.50% for the 6M bill (previously 4.10%), and 7.45% for the 1-yr bill (previously 7.00%). In the lead-up to the auction, many traders had wondered as to the identities of the irrational bidders at the T-bill auctions. This is as the same instruments (or similar assets) are trading at higher levels in the secondary market with 6M NT-bills trading at 10% yield (the NT-bill curve is inverted) and the more widely available Special Bill (SPEB) papers trading at 12% levels. Furthermore, tight financial market liquidity conditions had pushed interbank rates and placement rates to elevated levels (14-16%). So why would any rational investor go to bid for lower rates at the NT-bill auction?

In the initial NT-bill result notification published, the subscription on the 1yr bill stood at NGN80billion vs the amount on offer of NGN148billion yet the CBN had surprisingly allotted NGN148billion. As you cannot sell more T-bills than the demand from available buyers, the results were swiftly recalled, and another auction result published which showed total subscriptions at NGN184billion 🙂 Following on from the earlier ‘Bridge Finance’ debacle, I wrote about in this post, and readthrough from Ways & Means (W&M) data published last week, it appears the mystery investor is none other than the CBN. Will this treatment extend to bonds? My sense is W&M financing within a budget cycle are like an overdraft and is excusable for short-term financing like T-bills but more complicated for bonds and thus unlikely. The August 2022 bond sale will likely provide a test case for this thesis.

Liquidity conditions remained broadly tight, bond markets remain bearish:  Money markets remained on edge with interbank rates closing the week lower at 13% though the aggregate lending exposure of Nigerian banks from CBN discount window remained flat at NGN47billion per day over the week, unchanged from the prior week. That said, sell-offs continued in the T-bill secondary market with front-end yields now pushing over 10%. The bond market remains bearish with prices losing nearly 1% driven by bear flattening with selloffs across the front-end (+80bps w/w), belly (+60bps), and long (+10bps) segments.

Figure 2: Naira Yield Curve

Source: Bloomberg

In response to the deceleration in US Inflation, there has been a risk-on sentiment which has lifted most risk assets and this, alongside some rebound in oil prices, broadly supported sentiment regarding Nigerian Eurobonds which some further compression over the week.

Figure 3: Nigeria – Eurobond Curve

Source: DMO

The Week Ahead (Aug 15-19)

August 2022 Bond Auction: This week sees the monthly bond auction where the DMO will look to sell NGN225billion worth of bonds evenly offered across three bonds: FGN 2025, FGN 2032 and FGN 2042. Bond markets, as with the wider fixed income market, has been feverishly bearish and this sentiment is likely to reflect in the auction outcome. Demand is likely to be weak given higher yields on short-dated instruments and bidding will likely on the high side. Assuming no CBN hand at the auction, my sense is that markets will likely push the FGN 2025 towards 12.5% (July: 11%), FGN 2032 towards 13.5% (last 13%) and FGN 2042 towards 14% (last 13.75%).

Inflation likely cleared 19% in July: The NBS should put out the July CPI numbers this week, so I have repeated my views from last week. Price pressures across non-regulated fuels (diesel and kerosene) and food prices likely continued to combine to push consumer prices higher. Though subsisting subsidies continue to contain petrol prices, currency weakness at the parallel market over July likely applied upward pressure on diesel prices – the key fuel for heavy-duty trucks involved in inter-city transport of goods and services. That said, food prices are likely to slacken as the lean season winds down and early grain harvests help alleviate supply pressures. My estimate for the July 2022 NBS release is for a print within the 19.5-19.6% region.

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3 comments

  1. Damilola Jaji · · Reply

    Hello,

    Thank you for the in-depth analysis and your non-biased view.

    Please, I have not received the fixed income weekly for 15-19.

    I hope I have not been omitted from your mailing list.

    Regards

    1. Not at all. Regular programming will resume next week.

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