Total Turnover of Fixed Income and Currency Market Turnover
The total turnover of the fixed income and FX market was choppy from the beginning of the year as global economic shortfalls had a severe impact on the market. The total turnover of the market started to decline in April 2020. The decline was driven by the downturn in economic activities both in the global and domestic economy caused by the COVID-19 pandemic. As economies began opening gradually, activities in the market also recorded slight increases. Despite the increase in activities recorded, the headwinds plaguing the market lingers.
The total turnover of the fixed income and currency market was N195.42trn between January-November 2020. In March 2020, it recorded the highest turnover between January - November 2020 of N25.66trn. While in May 2020, the lowest market turnover was recorded.
The OMO bill was the highest contributor to the total turnover of the market between January - November 2020, next were the foreign exchange transactions then the money market transactions which include the Repurchase Agreement (Repos) and Unsecured placements/Taking. Treasury bills transaction contributed the least to the total turnover of the market during the period under review (see Chart 69).
With fresh restrictions and lockdowns from the second wave of COVID-19 in Nigeria and around the globe, analysts believe that getting back to the pre-COVID era is still farfetched. Also, it is predicted that we may likely see a recovery and significant increase in transactions in the debt market by Q2 2021.
Chart 69: Fixed Income and Currency Market Turnover Dec 2019 - Nov 2020 (N'trn)
Source: FMDQ, Proshare Research
A Deep Dive into The Market Complexities in 2020
The currency market was hard hit in 2020, as the oil sector which is Nigeria's largest FX earner of the economy was hit by twin evils i.e., the fall in oil demand caused by the pandemic and the KSA-Russia price war. The CBN rolled out several management policies to support the downward trend of the Naira both on the I & E FX window and parallel market space, as the domestic currency almost spiralled out of control. It introduced policies such as lifting restrictions on diaspora remittances, weekly sale of FX to over 5000 BDC operators, and the devaluation of the domestic currency. The impact of the COVID-19 pandemic on the global economy led to the significant decline in Nigeria's Foreign portfolio investment in Q3 by -91.55% when compared with Q1 2020 and -86.55% when compared with Q3 2019.
The total FX turnover between January - November 2020 was $160.52bn representing a -24.24% decline from total FX turnover for the same period in 2019. Also, the total turnover of the currency market stood at $10.88bn (N4.21trn) in November 2020, the highest it recorded since April 2020. However, on a Y-o-Y basis, total turnover of the currency market declined by -47.21% (see Chart 70).
Chart 70: Total FX Turnover Dec 2019 - Nov 2020 ($bn)
Source: FMDQ, Proshare Research
FX turnover by trade recorded a general decline in all categories. Member-Client was the largest contributor to total FX turnover between January - November 2020 recording $97.12bn for the period while Member-CBN and Inter-Member recorded $43.18bn and $20.22bn, respectively.
In November 2020, Member-Client declined by -39.88% Y-o-Y. However, the segment declined more significantly by -50.0% YTD. It contributed 69.41% to the overall decline in FX turnover by trade segment in November 2020. Inter-Member activity fell by +47.85% Y-o-Y to $1.58bn from $3.03bn recorded in November 2019, while on YTD, the segment declined by -51.53%. It contributed 14.52% to the overall decline for November 2020.
Member-CBN transactions declined by -63.14% Y-o-Y to $2.02bn from $5.48bn recorded in November 2019, it also declined by -69.07% Y-o-Y. It contributed 18.57% to the overall decline of the FX turnover by trade for the period (see Table 18).
Table 18: FX Turnover by Trade July 2019 - July 2020
Fixed Income Market
Towards the end of 2019, the Federal Government of Nigeria bifurcated the bills (T. bills and OMO bills). The rates of T. bills have been on a steady decline with rates as low as 1.15% recorded in August 2020. Treasury bills fell to record lows in 2020, because of increased demand for government instruments owing to a flight to safety by both institutional and retail investors. Also, the slim investment opportunities in the domestic market pushed yields to depressing levels. Prices move inversely to yields, that is, an increase in demand for these instruments pushes the yields down. The highest average discount rates of T. bills at the primary market were recorded in January 2020, the rates started to decline in March and continued for the rest of the year.
The Nigerian treasury bills market contributed 54.13% to the total turnover of the fixed income and currency market. Average discount rates at the primary market for the 91-day T-bill for 2020 was 1.63%, while the 182-day and 364-day notes were 2.15% and 3.45% respectively.
Oversubscription of the Nigerian treasury bills was the norm in the fixed income market for the year 2020 due to increased demand for the instrument. However, the oversubscription trend gradually declined towards the end of the year. Despite the reduction in oversubscription, the instruments oversubscription persisted in the year. In January 2020, 91-day was oversubscribed by 792.48% while the 182-day and 364-day T. bills were oversubscribed by 230.56%, and 43.79% respectively. In August 2020, the same tenors were oversubscribed by 53.07%, 77.54%, and 7.64% respectively, while the 364-day bill was undersubscribed. The decline in the oversubscription trend could be attributed to depressed yields and a move to the Nigerian equity market by investors (see Chart 71).
Chart 71: Average Discount Rate for T. Bills at the Primary Market 2020 (%)
Source: FMDQ, Proshare Research
The FGN Bond also recorded declines in marginal rates at the primary auction market, average rates across all tenors for 2020 was 9.38%, which is lower than the 14.05% recorded in 2019 (see Table 19).
Table 19: FGN Bond Coupon Rates in 2020
The oversubscription trend was also seen in the bonds market; however, long-term instruments were oversubscribed more than the short-term and mid-term instruments.
At the secondary market, bond yields fell below 1% in Q4 2020. Also, bonds issued in December were revised downward before their issue, and the amount allotted was lower than what was offered.
For the FGN savings bond, the offer for subscription was suspended during the peak periods of the pandemic. This could be attributed to efforts by the government to encourage people to spend in a pandemic rather than save. Offering savings bond auction during the peak of the pandemic would have been counterproductive as the government was also involved with quantitative easing during the period.
Inflation-adjusted yields across all tenors of Treasury bills and government bonds were negative in 2020.
Total Money Market Turnover
The total turnover of the money market for the year 2020 (January - November) was N40.64trn, which represents 20.8% of the total turnover of the fixed income and currency market. The total turnover in the money market declined Y-o-Y by -6.40% from N43.42trn recorded in the same period in 2019 to N40.64trn in 2020. This was majorly driven by a -44.29% Y-o-Y decline in unsecured placements/takings while repos/buy-Backs declined Y-o-Y by -6.95% to N38.82trn recorded for the period (see Chart 72).
Chart 72: Total Turnover in the Money Market Jan - Nov 2020 (N'trn)
Source: FMDQ, Proshare Research
Money market instruments have little or no risk as they are backed by the full faith of the Federal Government. Therefore, rates react to the risk appetite of investors amid a tumultuous economy. For the Nigerian fixed income market, the rates responded to the pandemic-induced economy and the slim investment opportunities available. Rates were highest during the peak of the pandemic and declined towards the end of the year which indicated robust liquidity in the system.
Furthermore, money market rates were volatile for most of the trading session in 2020. Overnight (O/N) and Open Buyback (OBB) moved in the same direction in 2020, although, O/N rates recorded higher rates than the OBB. O/N and OBB recorded their highest rate of 2020 in March and June respectively, while rates started to decline at the tail end of the year (see Chart 73).
Chart 73: Average O/N and OBB Rates Dec 2019 - Nov 2020
Source: FMDQ, Proshare Research
The price and yield movement of a eurobond instrument is largely impacted by the health of the issuing country. In Nigeria's case, the FGN eurobond instrument is considered a risky instrument as the economy is highly dependent on foreign earnings from oil which is exogenously determined. Therefore, the movement in price and yield of the FGN Eurobond was majorly driven by movement in oil price and most recently the COVID-19 pandemic. Also, news of the US stimulus package and the vaccine for the coronavirus boosted investor confidence in the instrument as yields declined and the price rose towards the end of the year (Prices move inversely with yields).
The price index movement of the FGN Eurobond had a bullish flag for 2020, at the peak of the pandemic, the price index fell as low as 77.61. However, with the gradual reopening of economies and hope for economic recoveries across major economies, the price index picked up at the tail end of the year i.e., the price index was higher than the pre-COVID era. It rose YTD by +4.79% as of 30th December 2020 (see Chart 74).
Chart 74: FGN Eurobond YTD Price Index for 6.75% US$500m Jan 2020
Source: Cbonds, Proshare Research
Outlook for The Fixed Income and Currency Market
COVID-19 has been an economic and human disaster. However, with the roll-out of various vaccines and subsequent approvals from major economies, there is cautious optimism that the next new normal will emerge sooner than expected. The year 2021 will be a year of transition and gradual recovery for the Nigerian economy, despite concerns that the low yields in the fixed income environment will unlikely change.
The scale of fiscal/quantitative easing in response to the COVID-19 crisis was unprecedented both for global economies and the domestic economy in 2020. G-20 countries' fiscal packages are estimated at more than $10trn, while for the Nigerian economy debt stock as of Q3 2020 was $84.57bn with total external debt accounting for 37.82% of the total debt stock and domestic debt 62.18% of the total debt.
Maintaining fiscal deficits and the elevated levels of public indebtedness may pose serious challenges down the line for the FGN bonds market. However, for the corporate bonds and commercial papers (CPs), there is headroom for improvement in 2021. In the pre-COVID years, the yields from fixed income instruments were in double digits, however, going forward, that may not be the case for the fixed income market. To enhance yield for the FGN bonds and treasuries, investors may consider investing in longer-term instruments and slightly extend the duration of these instruments. Also, risk-tolerant investors may consider focusing on assets that will do well during periods of rising inflation such as real estate, commodities, and equities i.e., equities recorded a performance of +50.03% in 2020.
Investing in fixed income products is subject to certain risks including the interest rate and inflation. Analysts believe the equity market is likely to outperform the fixed income and currency market in 2021, although the market is very volatile. To navigate volatility, government bonds, and CPs of companies with good fundamentals and brand reputation may provide the most efficient buffer against equity volatility.
As mentioned earlier, there is headroom for improvement in raising CPs and corporate bonds by corporate institutions as it is cheaper to raise debt in the debt market than loans from commercial banks. In 2020, the likes of Dangote Cement, MTN Nigeria, and several others were able to issue over N300bn in CPs at different series which were mostly oversubscribed (see Table 20).
Table 20: Commercial Papers Issued in 2020
The trend of oversubscription is also expected to continue in 2021 as there are tight investment opportunities and institutional investors such as the Pension Fund Administrators (PFAs) of the National Pension Commission (PenCom) are mandated to invest a large percentage of Pension Funds in instruments backed by the full faith of the Federal Government. While in investing in corporate bonds or commercial papers such instruments must have a minimum credit rating of 'BBB' issued by at least two rating agencies. Going forward, investors may consider looking at the fundamentals of corporate institutions and not just sentiments before investing.
Currencies: Navigating Grey Skies
On the currency front, the dollar in the global market will most likely continue its bearish trend which started at the tail end of 2020. It is forecasted that there will be a positive appetite for risky currencies especially currencies of emerging markets, which will likely trend upwards if the current momentum of recovery is sustained. However, a lockdown will reverse this trajectory if there is further spread of the new strain of the coronavirus.
In 2020, the CBN adjusted/devalued the naira on three occasions to ease the pressure on the domestic currency and to reduce the gap between official rates and parallel rates as this was one of the conditions needed to be met by the Federal Government to access some multilateral loan instrument. Despite CBN's efforts, Nigeria's lower FX earnings widened the gap between the two markets. The decline in FX inflows also put pressure on the foreign reserves, as of 30 December 2020 foreign reserves had declined by -8.25% YTD.
Although the inflow of foreign loans and a slight uptick in oil prices managed to ensure some level of stability of the foreign reserves, this approach is not sustainable in the long term in ensuring a stable exchange rate. A longer-term solution could be improving non-oil export competitiveness significantly to diversify FX earnings for the economy.
According to the CBN, it injected $4.37bn in Q3 into the foreign exchange market as part of its efforts to ensure the stability of the Naira. These efforts by the CBN are expected to continue going forward in 2021. Although the Naira is expected to marginally depreciate, however, this depends on various factors and uncertainties such as the price and volume sold of crude oil which is largely beyond the control of the Nigerian government (see Illustration 45).
Illustration 45: Currency Matrix: Solving A Jigsaw Puzzle
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