Finally, a Positive Story to Share

Thursday, October 19, 2017 11:48 AM /FBNCapital Research 

Over to the FGN to clear up the mess: The monetary policy committee has not shifted its stance for more than 12 months, arguing in layman’s language that it did not create the mess in the macroeconomy and is not therefore responsible for clearing it up. It is adamant that the FGN now has to step up to the plate. If its communiques and personal statements do have one common theme, it is that the committee has its eye on fighting inflation. 

Finally, some easing ahead: We see lower inflation in 2018 on the easing of supply-side constraints and positive base effects. This could bring modest rate cuts totaling 150bps from the MPC. 

Gathering momentum of MCP: The CBN’s adoption of multiple currency practices (MCP), and NAFEX in particular, has defied all expectations, including its own we suspect.  Offshore players have returned to local markets for equities and debt: manufacturers have their imported inputs; reserves are rising towards US$40bn; and the CBN has little need to supply NAFEX. The authorities are under no domestic pressure to abandon MCP. They clearly benefit from the official/interbank rate for favoured transactions. 

Job done yet more for the DMO to do: The DMO has already met its funding target for the year but may have to cover an overshoot in the FGN deficit in the naira market. Yet the planned debt refinancing, the return to the Eurobond market and the broader shift to a focus on external borrowing from 2018 together provide an attractive investment case for FGN paper in local currency. 

Room for a little more yield narrowing: These factors plus the healthy bid from the PFAs point to further gentle narrowing of FGN bond yields over the next quarter. Assuming that the CBN guides rates down cautiously, we see a range of 14.00% to 14.50%. 

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