September 24, 2020 / 01:42 PM / By FBNQuest Research / Header Image Credit: FBNQuest
A tricky global landscape
The global landscape has improved a little in the past quarter as the oil price has picked up, US stock markets have surged, the Chinese economy has largely recovered and lockdowns have been lifted (at least for now). These are positives for EM generally yet Nigeria is unable to capitalize on them.
Few other shows in town
Against this backdrop, most foreign portfolio investors (FPIs) have exited or want out of naira debt securities. The last straw was the end to the CBN's supply of NAFEX in late March. Its recent resumption of sales on a small scale is unlikely to convince market players. Local debt markets are now dominated by domestic investors, who are drawn to FGN bonds for the returns. The absence of attractive investment alternatives to the bonds helps to compensate for record issuance by the DMO this year.
No blowout on FX
The role of exiting FPIs in underpinning reserves will be adopted by multilateral lenders. Unification is no longer a major issue for the CBN, which is more concerned about being able to guide/manage the rate. We think that the feared large devaluation is avoidable and that the authorities will get by with a few smaller adjustments.
The MPC in a shocking mood
The MPC gave the market another surprise this month although we question the impact of the easing.
The CBN's skills in strategy and liquidity management
The huge supply of new bonds by the DMO at auction would normally push out yields. However, the strong domestic institutional bid and the CBN's engineering skills suggest otherwise. FGN bond yields at the long end of the curve should settle in a 9.00% to 9.50% range this quarter.
FGN bond yields and the MPR
Source: FMDQ, FBNQuest Capital Research