March 2021 MPC: A pause before tightening? At the second MPC meeting of the year, the CBN by a 6-3 vote held all policy parameters constant with the benchmark policy rate left at 11.5% and the asymmetric corridor at +100/-700 basis points. The dissenters’ vote was for rate increases of 50-75 basis points, which in the context of Nigeria’s historic double-digit inflation rates implies these were merely for symbolism as rate moves in Nigeria have to be in units of 100bps to matter.
As I noted last week, Nigeria’s exit from recession appears on a tender footing and the MPC shared this view with the Communique citing sub-50 PMI readings over January and February which would suggest that manufacturing GDP remains in contraction. (Curiously the CBN has stopped publishing the monthly PMI). Indeed as the Governor suggested in the press conference afterward, the Q1 2021 GDP number would be the predictor of policy direction.
Should the economy remain in growth, the CBN would likely embark on rate hikes of 200-300bps accompanied by strident liquidity tightening, an outcome that debt markets appear to be aggressively pricing (YTD: +410bps). On the other hand, a return to contraction would likely dissipate any hawkish intentions as the CBN would now need to rely on its supply-side interventions to deal with runaway food inflation as against tightening interest rates.
Figure 1: Monetary Policy Rate and Market Interest Rates
March 2021 Bond Auction – ‘Gbogbo wa la ma je breakfast’: At the monthly bond auction where the Debt Management Office (DMO) had NGN150billion worth of bonds to sell, I had expected a repeat of the pattern over the first two auctions as my thinking was that the DMO would rely on non-competitive bids. That did not play out and with an eye on the large coupons over March, the DMO took advantage of relatively strong effective (not speculative) demand with a bid-cover of 2.2x to take up more than its original plan (NGN261billion).
Hence as the popular phrase goes “Gbogbo wa la ma je breakfast” (We are all going to eat breakfast), everybody who needed a bond got fully served. This sale allowed the DMO to achieve over 30% (face value: NGN637billion) of its target domestic borrowings for 2021 (NGN2.1trillion) as at the end of Q1 2021 – All going according to plan.
Inversion in full swing? Continuing from last week, the Naira yield curve climbed on average 31bps (YTD: +410bps) with drivers remaining intact: an aggressive sell-off on the front-end (+107bps w/w) driven by repricing on the 1yr (+249bps w/w) relative to an average 9bps w/w increase in bonds yields.
The rise in short-term interest rates reflects a liquidity squeeze on banks as institutional investors re-price their money market exposures higher. To cover these liquidity positions, banks are being forced to liquidate their holdings of the 90-day CBN Special Bills (SPEBs) with discounts quoted at 6.19% (yield: 6.26%) relative to the 0.5% on the issue in early March.
For bonds, an interesting dynamic is worth noting: secondary market activity appears to have dried up with institutional investors preferring to go for the auction. Indeed with the over-allotment at the auction, many of these players had no reason to hit the secondary market. As a result of there was little activity in the secondary market as only auction papers re-priced with scant activity on the long end.
Figure 2: NGN Yield Curve
IMF loans drive total debt higher: The DMO released official data on Nigeria’s debt position for 2020 which showed that total debt (FG & States) rose 20% y/y to NGN32.9trillion (21.6% of GDP) driven by a faster increase in external borrowings (+21% to USD33billion) relative to only 10% increase in domestic debt to NGN20.2trillion.
The pick-up in external borrowings largely reflects the addition of the USD3.5billion rapid financing instrument loan which Nigeria tapped from the IMF in April 2020 at the height of the COVID-19 pandemic. In terms of character, Nigeria’s debt remains dominated by concessionary loans to multilateral agencies: World Bank (USD11.4billion), IMF (USD3.5billion), and AfDB (USD2.7billion) while China remains our largest bilateral creditor (USD3.3billion) and Eurobonds (USD11billion) make up the most of the remainder.
Figure 3: Nigeria: Debt metrics
FX reserves climb, Eurobond talk in the air: FX reserves notched the first weekly gain in two months (+0.5% to USD34.6billion) likely reflecting the impact on the up move in oil prices over February (+30%). The outlook appears to be headed in a positive direction with news that the long-awaited Eurobond tap is about to get underway.
The Week ahead (March 29-April 2, 2021)
In the week ahead, system inflows are as follows: OMO bills (NGN181billion), NTB maturities (NGN96billion), and FGN bond coupons (NGN41billion). As such there will be an NTB auction on Wednesday wherein keeping with the trend in recent auctions, the 1yr could close 50bps higher at 8%. The annual deposit insurance payments loom over the near term which could put more liquidity pressure on money markets. Debt markets could also see a bout of portfolio trades as participants close their position for quarter-end reporting.
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