March 2021 MPC: A pause earlier than tightening? On the second MPC assembly of the 12 months, the CBN by a 6-3 vote held all coverage parameters fixed with the benchmark coverage fee left at 11.5% and the uneven hall at +100/-700 foundation factors. The dissenters’ vote was for fee will increase of 50-75 foundation factors, which within the context of Nigeria’s historic double-digit inflation charges implies these have been merely for symbolism as fee strikes in Nigeria should be in items of 100bps to matter.
As I famous final week, Nigeria’s exit from recession seems on a young footing and the MPC shared this view with the Communique citing sub-50 PMI readings over January and February which might counsel that manufacturing GDP stays in contraction. (Curiously the CBN has stopped publishing the month-to-month PMI). Certainly because the Governor steered within the press convention afterward, the Q1 2021 GDP quantity can be the predictor of coverage path.
Ought to the economic system stay in development, the CBN would doubtless embark on fee hikes of 200-300bps accompanied by strident liquidity tightening, an final result that debt markets seem like aggressively pricing (YTD: +410bps). However, a return to contraction would doubtless dissipate any hawkish intentions because the CBN would now must depend on its supply-side interventions to cope with runaway meals inflation as in opposition to tightening rates of interest.
Determine 1: Financial Coverage Fee and Market Curiosity Charges
March 2021 Bond Public sale – ‘Gbogbo wa la ma je breakfast’: On the month-to-month bond public sale the place the Debt Administration Workplace (DMO) had NGN150billion value of bonds to promote, I had anticipated a repeat of the sample over the primary two auctions as my considering was that the DMO would depend on non-competitive bids. That didn’t play out and with a watch on the big coupons over March, the DMO took benefit of comparatively robust efficient (not speculative) demand with a bid-cover of two.2x to take up greater than its unique plan (NGN261billion).
Therefore as the favored phrase goes “Gbogbo wa la ma je breakfast” (We’re all going to eat breakfast), all people who wanted a bond obtained totally served. This sale allowed the DMO to attain over 30% (face worth: NGN637billion) of its goal home borrowings for 2021 (NGN2.1trillion) as on the finish of Q1 2021 – All going in response to plan.
Inversion in full swing? Persevering with from final week, the Naira yield curve climbed on common 31bps (YTD: +410bps) with drivers remaining intact: an aggressive sell-off on the front-end (+107bps w/w) pushed by repricing on the 1yr (+249bps w/w) relative to a median 9bps w/w enhance in bonds yields.
The rise in short-term rates of interest displays a liquidity squeeze on banks as institutional traders re-price their cash market exposures larger. To cowl these liquidity positions, banks are being compelled to liquidate their holdings of the 90-day CBN Particular Payments (SPEBs) with reductions quoted at 6.19% (yield: 6.26%) relative to the 0.5% on the difficulty in early March.
For bonds, an attention-grabbing dynamic is value noting: secondary market exercise seems to have dried up with institutional traders preferring to go for the public sale. Certainly with the over-allotment on the public sale, many of those gamers had no cause to hit the secondary market. On account of there was little exercise within the secondary market as solely public sale papers re-priced with scant exercise on the lengthy finish.
Determine 2: NGN Yield Curve
IMF loans drive complete debt larger: The DMO launched official knowledge on Nigeria’s debt place for 2020 which confirmed that complete debt (FG & States) rose 20% y/y to NGN32.9trillion (21.6% of GDP) pushed by a quicker enhance in exterior borrowings (+21% to USD33billion) relative to solely 10% enhance in home debt to NGN20.2trillion.
The pick-up in exterior borrowings largely displays the addition of the USD3.5billion fast financing instrument mortgage which Nigeria tapped from the IMF in April 2020 on the peak of the COVID-19 pandemic. When it comes to character, Nigeria’s debt stays dominated by concessionary loans to multilateral companies: World Financial institution (USD11.4billion), IMF (USD3.5billion), and AfDB (USD2.7billion) whereas China stays our largest bilateral creditor (USD3.3billion) and Eurobonds (USD11billion) make up the many of the the rest.
The rise in home debt displays FGN bond gross sales over 2020 to finance the deficit. When it comes to borrowing prices, these moderated reflecting the decline in home borrowing prices introduced concerning the drop in NGN yields over 2020.
Determine 3: Nigeria: Debt metrics
Wanting forward, plans to transform NGN10trillion value of CBN loans to the FGN into official debt alongside deliberate borrowings over 2021 (NGN5.2trillion or will drive the most important enhance in debt metric because the historic pay down in 2005. Nonetheless, it is very important be aware that the CBN loans successfully signify the complete weight of the 2014-17 oil value shock on fiscal accounts (as these loans helped bridge the shortfall) whereas the 2020-21 bounce captures the influence of the COVID-19 on fiscal revenues.
FX reserves climb, Eurobond discuss within the air: FX reserves notched the primary weekly acquire in two months (+0.5% to USD34.6billion) doubtless reflecting the influence on the up transfer in oil costs over February (+30%). The outlook seems to be headed in a constructive path with information that the long-awaited Eurobond faucet is about to get underway. Within the occasion, that Nigeria is ready to abdomen the braveness to shoot for a report USD5billion Eurobond sale and oil costs stay between USD60-70/bbl, the ensuing increase to FX reserves outlook ought to assist anchor Naira outlook. When it comes to the path of convergence, my suspicion is that it’s extra doubtless that parallel market charges transfer decrease. For the Naira itself, it held regular at NGN410.00/$ and NGN485.00/$ on the I&E window and parallel market respectively.
The Week forward (March 29-April 2, 2021)
Within the week forward, system inflows are as follows: OMO payments (NGN181billion), NTB maturities (NGN96billion), and FGN bond coupons (NGN41billion). As such there will likely be an NTB public sale on Wednesday whereby holding with the pattern in current auctions, the 1yr may shut 50bps larger at 8%. The annual deposit insurance coverage funds loom over the close to time period which may put extra liquidity stress on cash markets. Debt markets may additionally see a bout of portfolio trades as individuals shut their place for quarter-end reporting.
Q2 2021 Outlook: Going into the second quarter, fundamentals seem to level in direction of fee will increase. Inflation will doubtless speed up in direction of 18-19% because the lean season drives meals costs larger with further help from a mixture of larger power prices (following hikes in gas and electrical energy costs) and pass-through from Naira weak point.
Granted, financial development stays on shaky floor within the gentle of hostile regulatory actions to telecoms operators whilst OPEC+ compliance will doubtless lead to a pointy drop in oil GDP, the bottom case is for GDP to scrape by way of with one other constructive print. Although enhancing oil costs and potential progress on exterior borrowings by way of the sale of Eurobond will strengthen CBN’s capability to drive convergence in FX markets, the apex financial institution’s near-term focus could possibly be on FX reserve accretion which is able to help tightening.
Inside debt markets, provide stays key and markets ought to count on a reprisal of the Q1 bond issuance pattern the place the DMO cleared effectively in extra of NGN637billion to place it in a robust place forward of H2 2021. Given skinny system maturities over Q2 2021 and sure liquidity tightening by the CBN, focus will likely be on staying liquid for banks (who will bear the brunt) which is able to doubtless underpin sell-offs in NTBs previous the ten% on the 1yr.
For lengthy finish, it seems the important thing actors (pension funds) behind the Q1 sell-off have cleared out a good portion of length exposures within the buying and selling portfolios in keeping with regulatory steerage. This growth limits their need to commerce bonds and they’re prone to be much less lively within the secondary market going ahead with a give attention to month-to-month auctions the place charges may strategy 13%.