Reviews & Outlooks | |
Reviews & Outlooks | |
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Wednesday, January
23, 2019 11:56 AM / ARM
Research / Image Credit: etftrends
Executive Summary
Coming into second half of
2018, our expectation for a tighter monetary policy by the CBN came to bear.
The drivers, much in line with our thoughts, were the elevated liquidity profile,
currency concerns due to capital flight, and ramp up in FG borrowings, which
overall drove an expansion in naira yield curve over the period (+166bps to
15.13%). To buttress, the apex bank heightened its liquidity sterilization and
raised OMO rates to their highest level in one year. Aside monetary influences,
the uptrend in yields was in part fed by fiscal borrowings as FG borrowed
N339.5 billion in the local market, with a large chunk of the borrowings coming
from the bond segment of the market. Lastly, Nigeria’s FI market buckled under
pressures from the external front as interest rate hike by the US Fed drove
wild sell off across Nigeria’s FI market. For context, dollar treasury yields
expanded by 14bps over H2 2018 to 2.98% and our estimated FPI outflows from the
fixed income market stands at $6.8 billion in H2 18 (vs $3.8 billion in H1
18).
In charting the path
for the naira yield curve over 2019, we take a cue from recent activities in
the fixed income market. On the monetary front, akin to 2018, the apex bank is
faced with a greater liquidity pressure this year with total maturities of
N14.3 trillion. Thus, we hold the view that CBN will keep OMO rates at current
elevated levels and sustain the current pace of liquidity squeeze over in 2019,
albeit staggered in line with concentration of maturities over the year. As a
result, we expect higher OMO sale in the first and last quarter of the year
where maturities are the highest (Q1 19: N5.4 trillion, Q4 19: N5.9 trillion).
On the fiscal side, although FG’s proposed fiscal outlay for 2019 points to a
lower fiscal deficit (N1.88 trillion) our pessimistic stance on the FG’s
revenue picture points to higher fiscal deficit (ARM Estimate: N2.8 trillion).
Base on the foregoing we pen down N850 billion in external borrowings and
domestic borrowings of N1.5 trillion in 2019 (vs Actual borrowings of N290
billion in 2018) whilst the balance would be funded via CBN’s ways and means
(N698 billion). Tying it all together, we see upward thrust in the naira yield
curve over 2019.
Yields trend
higher in second half of 2018
Coming into second half of
2018, our expectation for a tighter monetary policy by the CBN came to bear.
The drivers, much in line with our thoughts, were the elevated liquidity
profile, currency concerns due to capital flight, and ramp up in FG borrowings,
which overall drove an expansion in naira yield curve over the period (+166bps
to 15.13%). To buttress, the apex bank heightened its liquidity sterilization
and raised OMO rates to their highest level in one year. Aside monetary
influences, the uptrend in yields was in part fed by fiscal borrowings as FG
borrowed N339.5 billion in the local market, with a large chunk of the
borrowings coming from the bond segment of the market. Lastly, Nigeria’s FI
market buckled under pressures from the external front as interest rate hike by
the US Fed drove wild sell off across Nigeria’s FI market. For context, dollar
treasury yields expanded by 14bps over H2 2018 to 2.98% and our estimated FPI
outflows from the fixed income market stands at $6.8 billion in H2 18 (vs $3.8
billion in H1 18).
Monetary
influences drive short end yields higher
In a bid to curb the
mounting liquidity pressure in the system and intervene on the growing currency
concern, the central bank raised the OMO1 rates five-times over the period with
the one-year tenor closing at 15.0%. Consequently, yields at the short end of
the curve expanded by 174bps to 15.0% in H2 2018. Putting things in
perspective, liquidity pressure, over the second half, emanated from maturity
profile of N10.6 trillion (OMO: N8.8 trillion, NTB: N1.8 trillion) as well as
higher FAAC inflows (avg. monthly: +15% to N753.1 billion). Also, with higher
rates in the US as well as political risk in Nigeria, offshore outflows
almost doubled to $6.8 billion, from our estimate, relative to $3.8 billion in
H1 18, which drove the interbank FX market (IEW) to a net-outflow in the period
of $6.2 billion (H1 18: net-inflow of $763 million) and led to a depletion in
the external reserves by 9% to $43.1 billion. In fact, largely reflecting
mounting pressures from the currency leg, CBN resumed its special OMO auction where
it sold Stabilization securities (STAB) worth N1.3 trillion in December 2018.
Consequently, the pass through of the foregoing tighter monetary policy by the
apex bank, FPI repatriation and currency pressures resulted into higher yields
at the short end of the curve (+174bps to 15% in H2 18).
Domestic and
External influences melds into higher long end yields
After net-repayment of
N49.7 billion in the first half of 2018 due to the refinancing of maturing
treasury bills with Eurobond, the federal government (FG) net borrowed the sum
of N239 billion in the second half of 2018. Most of the borrowings were at the
long end of the curve (H2 18: N401 billion vs N209.6 billion in H1 18) which drove
higher stop rate at bond auctions to 14.96% in the period relative to 13.47% in
H1 2018. Also, bond investors, particularly offshore investors, were
net-sellers in the market. Consequently, the confluence of higher borrowings
and foreign investors sell off drove a 157bps jump in yields to 15.26% at the
long end of the curve.
It all
pointed North for Nigeria’s Eurobonds
In H2 18, FG tested the
Eurobond waters, raising $2.86 billion (N856.8 billion) to part finance its
fiscal deficit of N1.96 trillion for the 2018 fiscal year. The switch to
external sources sits well with FG’s plan to trim its debt service cost. The
Eurobond issuance was split between 7-year ($1.18 billion), 12-year ($1
billion) and 30-year ($750 million).
However, unlike February 20182,
the issuance which attracted coupon 7.625%, 8.75% and 9.25% for the 7-year,
12-year and 30-year respectively appears expensive. Despite favorable domestic
clime in the wake of higher crude oil prices, the higher Eurobond pricing
reflected higher rates in the US with 10-year US govt bond touching a year high
of 3.2% in October. Also, reflecting higher rates in the US, concerns over
crude oil prices and political uncertainty, Nigeria’s Eurobond Z-spreads
expanded by ~16.8bps over H2 2018, with average yields expanding across all
instruments - (2021: +18bps to 6.03%), (2023: +77bps to 7.36%) and (2032: +
97bps to 9.03%).
Will yields
hump or shift?
In charting the path for
the naira yield curve over 2019, we take a cue from recent activities in the
fixed income market. On the monetary front, akin to 2018, the apex bank is
faced with a greater liquidity pressure this year. Specifically, the maturity
profile over 2019 which stands at N14.3 trillion (NTB: N2.6 trillion, OMO:
N11.1 trillion, Bonds: N585 billion) could become a thorn in the flesh for the
apex bank in 2019. Thus, we hold the view that CBN will keep OMO rates at
current elevated levels and sustain the current pace of liquidity squeeze over
in 2019, albeit staggered in line with concentration of maturities over the
year. As a result, we expect higher OMO sale in the first and last quarter of
the year where maturities are the highest (Q1 19: N5.4 trillion, Q4 19: N5.9
trillion). In like manner, our expectation for tamer OMO sale in Q2 and Q3 sits
well with subdued headline inflation over the same period and further pick up
in headline inflation as the year draws to a close.
On the fiscal side, although FG’s proposed fiscal outlay for 2019 points to a lower fiscal deficit (N1.88 trillion) our pessimistic stance on the FG’s revenue picture points to higher fiscal deficit (ARM Estimate: N2.8 trillion). Base on the foregoing we pen down N850 billion in external borrowings and domestic borrowings of N1.5 trillion in 2019 (vs Actual borrowings of N290 billion in 2018) whilst the balance would be funded via CBN’s ways and means (N698 billion). Tying it all together, we see upward thrust in the naira yield curve over 2019. Our expectation is largely hinged on CBN’s monetary tightening as well as higher FG paper supply over the year.
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H1 2019 (8) - Nigerian Fiscal - More Strain On FG Finances
2.
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3.
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8.
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Research 234 (1) 2701653 research@armsecurities.com.ng
Related News from ARM’s H2 2018 Nigeria
Strategy Report
1.
NSR H2 2018 (15) - Equities: The Divergence… Fundamentals
or Sentiment?
2.
NSR H2 2018 (14) - Fixed Income: Have Yields hit the
bottom?
3. NSR H2 2018 (13) - Monetary Policy: A
Classic Catch-22, Where will the Balance Tilt?
4. NSR H2 2018 (12)- Nigerian Inflation:
Approaching an Inflection Point
5. NSR H2 2018 (11)- Currency: The
Battle for Naira Stability
6. NSR H2 2018 (10)- Balance of Payment:
CA Surplus Recycled Through Record Portfolio Outflows
7. NSR H2 2018 (9)- Growth to Run Above
2%, But Nearing a Cyclical Peak
8. NSR H2 2018 (8)
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9. NSR H2 2018 (7) - Pension: Multi-fund
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10. NSR H2 2018 (6)
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11. NSR H2 2018 (5)
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12. NSR H2 2018 (4)
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13. NSR H2 2018 (3) - Crude Oil:
Stability Gains Ground in Titans' Tug of War
14.
NSR H2 2018 (2)
– A Tale of Resolve and Recovery Across MEA
15.
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