Fixed Income Q4 2016 - Stumbling forward for another quarter


Monday, October 10, 2016 3:12pm / FBNQuest Research


Limits to effective monetary policy
The response of the MPC to an economy in recession and a surge in inflation has been to maintain an on-hold stance, and absolve itself of blame.

The committee appears to have abandoned its use of monetary policy to attract offshore investors, and is looking for fiscal support and structural reforms to boost the economy.

Rate cuts ahead to track inflation
We expect the committee to put on its inflation hat and ease rates slowly as the headline measure slows on positive base effects. We see the policy rate at 11.00% at end-2017.

Drifting exchange-rate regime
As long as the CBN remains the largest supplier of fx, we will have a drifting (and not a floating) exchange-rate regime.

There are several putative paths to the game changer that is a substantial autonomous inflow to create a fully functioning market (asset sales, oil price rebound, FDI, loans from the IMF etc): in our view, they are not large enough, unlikely in the forecast horizon or politically unacceptable.

We do not see the CBN taking the risk of meeting all fx demand and letting the rate “go” in the hope that the said inflow materialises before its reserves are exhausted.

More fiscal expansion, more borrowing
The FGN proposes another expansionary budget for next year, and projects a sizeable rise in its debt burden of N2.5trn over 18 months.

In our view, if revenue collection underperforms (as it will this year), the FGN will rein back its capital spending plans rather than let the budget deficit soar.

Flattish bond yields on institutional demand
Fiscal expansion, strong debt issuance and rising inflation would point to a marked pick-up in FGN bond yields.

The steady demand from the PFAs and their preference for the bonds suggest otherwise. We see FGN bond yields within a narrow range of 14.75% to 15.50% in the next quarter.

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