The Nigerian economy this week April 22nd, 2019
Key indices stay strong as economic struggles to finding its bearing. According to the National Bureau of Statistics (NBS), headline inflation tapered for the third consecutive month, shedding 6 basis points to close at 11.25% compare with Cordros analysts’ estimate of 11.22%.
Dissecting the breakdown, the analysts at Cordros capital noted that the deceleration stemmed from both the core and food baskets. However, month on month headline inflation, surged by +6 basis points registered its first increase since November 2018, on account of price pressures in the food basket, which masked the decline in the core segment.
“Looking ahead, whilst the still elevated diesel price should have ordinarily driven month on month food inflation higher in April, we expect a ramp up of output in April off-season harvest by Nigerian farmers to cap higher transport cost pass-through to food prices. On balance, we look for m/m headline inflation reading of 0.81% in April, which translates to y/y figure of 11.23%”, Cordros Capital stated.
Further to that, the NBS also released its Federation Account Allocation Committee (FAAC) report for March 2019. This showed that revenue disbursements to the three tiers of the government moderated by 6.54% month on month to N619.86 billion. Amidst higher crude price, which has expanded 6.7% from the previous month.
Analysts say they believe that the moderation stemmed largely from lower oil production which went down by 10% month on month, thus served to reduce oil inflows in the period.
Dissecting the breakdown, we note that only NGN169.95 billion of the total was distributed among the state governments as against combined prorated budget of about N762.5 billion.
“For us, amidst the significantly low internally generated revenue (IGR), we believe the federating units will continue to face fiscal constraints, and thus, rack up borrowings to, at best, cover their recurrent expenditure”, Cordros Capital stated.
In the equities market
As with the U.S market, earnings season kicked off on a strong footing in Nigeria, with most Tier-1 banks reporting strong numbers across lines. The impact of the foregoing drove renewed sentiment for naira risk assets.
Evidently, the benchmark index gained 1.78%, week to date, WtD, to 30,086.31 points. Thus, the month to date (MtD) and year to date (YtD) losses dipped significantly to 3.07% and 4.27%, respectively. On sectoral breakdown, gains across the Consumer Goods (+5.70%), Insurance (+2.44%), Banking (+2.07%), and Industrial Goods (+0.46%) indices masked the loss in the Oil & Gas (-2.12%) index.
“We reiterate our view that the blend of a compelling valuation story, together with positive macroeconomic picture leaves scope for a market recovery in the medium term. However, we guide investors to tread the cautious trading path in the short term”, Cordros capital said.
Fixed income and money market
In the fixed income and money market, the overnight lending rate crashed to 10.57% – a 1,100 bps contraction, WtD – as inflows from matured open market operations (OMO) bills (NGN107.42 billion) and bond coupon payments N32.67 billion outweighed outflows from the Central Bank of Nigeria’s ,CBN, weekly FX wholesale auction, $210 million.
This week, inflows from maturing OMO bills (NGN46.25 billion) and bond coupon payments (NGN8.19 billion) will bolster system liquidity. However, bond auction debits, as well as liquidity mop-up and forex intervention by the CBN are likely to exert upward pressure on the overnight lending rate.
Treasury bills
Activities in the treasury bills market were bullish, in the absence of any OMO auctions by the CBN, and increased liquidity levels at the end of the shortened trading week. Consequently, yields fell 10 bps, WtD, to close at 13.25% on average. Yields contracted at the mid (-4 bps) and long (-17 bps) segments, driven by demand for the 105DTM (-84 bps) and 350DTM (-51 bps) bills, respectively.
Conversely, a selloff of the 63DTM (+172 bps) bill led to yield expansion at the short (+10 bps) end of the curve. At this week’s primary action, the CBN fully allotted N52.64 billion – N5.84 billion of the 91DTM, N3.50 billion of the 182DTM, and N49.14 billion of the 364DTM – worth of bills at respective stop rates of 10.1499% (previously 10.29%), 12.50% (previously 12.60%), and 12.74% (previously 12.85%).
Stop rates declined by an average of 12 bps amidst stronger demand, with auction recording a bid-cover of 3.82x as against 2.06x previously. Yields are expected to rise in the coming week, amidst the still tight system liquidity and the possibility of an OMO auction by the CBN.
Bond
Bond Bullish sentiments were sustained in the bond market, as market players cherry-picked attractive yields at the short and mid segments of the curve. Consequently, average yield compressed by 6 bps, WtD, to close at 14.08%. Buy sentiment was concentrated at short (-18 bps) and mid (-5 bps) segments, with respective yields on the FEB-2020 (-44 bps) and MAR-2027 (-22 bps) bonds contracting significantly.
Conversely, a selloff of the JUL-2034 (+15 bps) bond led to yield expansion at the long (+12 bps) end of the curve.“We expect yields to take a cue from auction stop rates in the coming week. However, our theme on the bond market continues to favour modestly lower yields in the medium term, anchored on domestic monetary policy direction, near term moderation in inflation, and a resurgence in foreign portfolio investment (FPI) inflows”, Cordros Capital remarked.
At the FGN bond auction scheduled for Wednesday, 24th April 2019, the DMO plans to offer N100 billion – N40 billion of the APR-2023 (re-opening), N40 billion of the APR-2029 (new-issue), and NGN20 billion of the APR-2049 (new-issue) – in bonds to investors.
In the foreign exchange market
Amidst continued CBN interventions – wherein $210 million was distributed across its different strata of FX windows – the naira appreciated by 0.01% to NGN360.14 at the I&E window, but was flat at N360 at the parallel market.
Total turnover in the IEW increased by 84.1% to $1.85 billion. Meanwhile, the foreign reserves, according to data by CBN, recorded accretion for the seventh straight week, rising by $7.76 million to $44.74 billion.
Furthermore, trades in FX forwards market showed that the $/N appreciated across all contracts. Notably, the 3-month (+0.03% to N368.154), 6-month (+0.13% to N381.19, and 12-month (+0.49% to N401.84). The 1-month contract was flat.
“Looking ahead, we expect the naira to remain firm in the medium to short term, as the still elevated crude price continues to underpin higher oil receipts, thereby supporting the CBN’s continued intervention. In addition, the sustained deluge of portfolio inflow further supports our view of currency stability” Cordros capital remarked.
