…FX reserves remained under pressure
… Overnight (OVN) rate expanded by 14.23 ppts
… Excess liquidity influenced the increased demand for OMO bills
FRI, APRIL 10 2020-theG&BJournal- Bargain hunting across MTNN (+3.3%), WAPCO (+41.3%) and Tier 1 banking tickers drove the market to its first weekly gain for four weeks. The All-Share Index gained 1.4% w/w, to settle at 21,384.03 points. Thus, the MTD return turned positive to +1.34%, while the YTD loss moderated to -20.3%. Analysing performances by sectors, the Banking (+12.4%), Consumer Goods (+6.5%) and Insurance (+0.2%) indices gained, while the Industrial Goods (-6.6%) and Oil & Gas (-4.8%) indices closed in the red.
Despite the market closing positive this week, risks remain on the horizon, given the rising cases of COVID-19 in Nigeria. More so, our base case is for the FGN to extend the presently instituted lockdown in Lagos, Abuja, and Ogun, by another one week.
Fixed income and money market
Money market
In line with expectations, the overnight (OVN) rate expanded by 14.23 ppts, w/w, to 16.8%. During the week, outflows from CBN’s weekly FX auctions and LDR debits outweighed this week’s sole inflow from OMO maturities (NGN106.75 billion), causing the OVN rate to spike to its current level. However, system liquidity was healthy throughout the week.
OVN rate is expected to contract in the coming week, as inflows from OMO maturities (NGN194.95 billion) come into the system.
Treasury bills
Trading in the Treasury bills secondary market continued bullish, as the average yield across all instruments contracted by 100bps to 9.5%. The OMO segment buoyed the market, as excess liquidity influenced the increased demand for OMO bills, causing the average yield to contract by 150bps to 12.3%. On the other hand, the average yield expanded by 9bps to 3.3%, as the demand witnessed was not significant enough to influence yield in the segment. At this week’s OMO auction, the CBN offered instruments worth NGN50.00 billion, however, only NGN39.35 billion worth of instruments on the long-dated maturity (341-days) was sold, at a stop rate of 12.8% (previously 12.8%).
In the coming week, we still expect the OMO segment to continue influencing the Treasury bills secondary market, as local participants continue to be active in this space. In the NTB segment, we expect the focus to be shifted to this week’s PMA, where the CBN will be rolling over NGN58.49 billion worth of maturities.
Bond
Trading in the Treasury bonds secondary market remained bullish this week, as investors cherry-picked short and mid tenured instruments, on the back of the improving global outlook, and the FG’s plan to increase the size of domestic borrowings to fund its budget.
Thus, the average yield contracted by 71bps to 11.3%. Across the curve, yields contracted at the short (-80bps), mid (-69bps) and long (-59bps) segments following demand for the MAR-2024 (-176bps), JUL-2030 (-76bps) and JUL-2034 (-93bps) bonds, respectively.
Treasury bond secondary market is projected to remain bullish in the coming week, as investors continue to seek to re-invest maturities.
Foreign Exchange
This week, Nigeria’s FX reserves remained under pressure, declining by USD578.06 million WTD to USD34.59 billion (8th April 2020), as offshore outflows intensify in the face of weak inflows. Consequently, the naira remained under pressure, weakening by 0.5% w/w to NGN384.83/USD at the I&E window, but closed flat in the parallel market.
In the Forwards market, the exchange rate declined from prior levels across all contracts, save for the 1-year (+0.2% to NGN434.41/USD) contract. Specifically, the 1-month (-0.5% to NGN388.25/USD), 3-month (-0.5% to NGN395.05/USD), 6-month (-0.1% to NGN406.29/USD), and 1-year (-1.8% to NGN441.01/USD) contracts appreciated.
Cordros Research said: ‘’While we acknowledge that the currency remains under pressure, we believe the CBN’s FX rate alignment and convergence is a laudable move, which should ease pressures on the balance of payment and curtail speculative attacks on the naira. Notwithstanding, the size of the recent adjustment might not be substantial enough to buy the CBN enough time before an official devaluation.’’
Meanwhile, against the COVID-19 induced collapse in crude oil prices, Nigeria’s monthly FAAC disbursements to the FGN and its federating units have consistently declined since Jan-20. Precisely, the total FAAC disbursement fell by NGN64.40 billion to NGN582.00 billion in March (February disbursements). Compared to the monthly FAAC projections at the start of the year (NGN888.5 billion), the amount shared was 40.2% lower.
To put in proper context, FAAC disbursements must average, at least, NGN650.00 billion for both the federal and states governments to meet their obligations. With c.NGN400.00 billion projected for the next few months, we foresee another round of FGN and/or CBN bailouts to states to lessen the burden of fiscal shortfalls.
Already, the FGN has approved the withdrawal of USD150.00 million from the Sovereign Wealth Fund to support the June FAAC disbursement. Beyond that, the CBN is now mandated to give interest payment moratorium for government-funded loans to the states, to further enable the states to meet recurrent expenditures.
Nigeria’s total debt stock rose by another 4.5% q/q to NGN27.40 trillion. The increase stemmed from both the domestic (+2.4% q/q) and external (+9.1% q/q) debt portions. In terms of debt composition, domestic to foreign debt ratio stood at 68:32, above the 60:40 ratio targeted by the DMO.
Meanwhile, compared to the prior quarter, external debt service moderated significantly by 47.2% q/q, supported by multilateral (-63.1% q/q), bilateral (-70.4% q/q), and commercial (-40.3%) debt services. Similarly, domestic debt service moderated by 58.1% q/q, driven by bonds (-67.0% q/q) and NTBs (-22.4% q/q).
With the FGN planning to borrow another round of external debt of USD6.90 billion to support public finances in a period of lower FAAC disbursements, national debt stock is expected to rise further if the plan materializes. With Cordros Research.
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