Inflexible Naira Pricing, FX Backlog Subdue Capital Inflow -Analysts
Capital inflows into Nigeria has remained subdued due to lack of flexibility in the pricing of the currency, and subsisting backlogs of foreign exchange (FX) demand yet to be cleared, analysts have said.
The United States dollar to Naira currency pair closed the week largely flat at N379.00, N380.69, and N386.00 at the official, secondary market intervention sales (SMIS), and Investors and Exporters windows (IEW), respectively.
Meanwhile, average daily turnover at the IEW expanded by 16.1% week on week to US$134.57 million, albeit substantially lower than US$350 million in Q1-2020.
According to data from FMDQ, analysts said the Nigeria’s central bank (CBN) ramped up intervention sales in the IEW in October (US$558 million in spot and forward sales), from US$434.5 million in September.
“Nonetheless, capital inflows into Nigeria remained subdued due to lack of flexibility in the pricing of the currency, and subsisting backlogs of FX demand yet to be cleared”, Chapel Hill Denham explained.
Analysts stated that Foreign Portfolio Investments (FPI) inflows into the IEW was subdued at US$48.1 million in October, relative to pre-pandemic 2-year average of US$1.2 billion, albeit slightly up from US$36.8 million in September.
Elsewhere, pressures increased in the parallel market as the Naira weakened by N2 or 0.4% week on week to 464.00.
“For us, the recent volatility in the oil market, with its negative impact on the CBN’s oil receipts, together with the sizeable external imbalance and seasonal year-end spike in USD demand, will continue to weigh on the Naira in the next few weeks”, Chapel Hill Denham said.
Meanwhile, sentiments were broadly mixed in the fixed income market last week despite robust liquidity in the financial system.
Although bond yields compressed by an average of 20bps week on week across the benchmark curve to 4.12%, analysts said this was mainly driven by increased positioning at the short end of the curve, while intermediate and long term bonds sold off.
In line with the duration apathy observed, front end rates traded upbeat, as the Nigerian Treasury Bill (NTB) and open market operations (OMO) benchmark curves eased by 1bp and 31bps week on week across benchmark tenors to 0.55% and 0.24% respectively.
“The renewed duration apathy was not surprising, given increased volatility in the oil market in recent weeks amid record low yields”, analysts reckoned.
However, analysts indicated that other factors contributed to this.
In their explanation, analysts stated that firstly, the Debt Management Office (DMO) published the Q4-2020 borrowing calendar on Thursday. Surprisingly, the DMO plans to increase supply to a range of N80 billion to N100 billion each in November and December, up from N50 billion sold in October.
Secondly, PENCOM (National Pension Commission) issued a directive to Pension Fund Administrators (PFAs), instructing that bonds held-for-trading should be classified as variable income instruments.
“Although the borrowing target announced by DMO surprised to the upside, we expect bonds to remain defensive in the near term, in view of the subsisting robust liquidity in the financial system, and substantial OMO maturities (N243.77bn) expected on Tuesday with no meaningful net issuance scheduled to mop-up the liquidity”, Chapel Hill Denham analysts stated.
In addition, the firm said very few PFAs are in breach of the regulatory cap on variable income instruments, even after adjusting for the new directive from PENCOM.
Analysts indicated that the CBN is perhaps the wildcard in the firm’s yield outlook.
Chapel Hill Denham explained that the apex bank has built up considerable excess bank reserves (N11.3tn in August 2020, up 2.1x year on year) via arbitrary cash reserve ratio debits, which could be freed up at any time if liquidity becomes too tight, thus representing a downside risk to yields.
On the other hand, the CBN could eventually concede the point that its dovish monetary policy bias is a risk to macroeconomic stability, at which point we are likely to see an aggressive tightening of monetary policy, thus representing an upside risk to yields.
Last week, the Sub-Saharan African Eurobond market welcomed Vice President Joe Biden’s lead at the US presidential election.
Sovereign bond yields compressed across board as spreads tightened, reflecting improved risk appetite.
A similar sentiment was observed in global markets, particularly across Emerging Markets assets which are poised to benefit from a Biden presidency.
Zambian bondholders are set to vote this week (November 13) on a 6-month debt service suspension, after failing to form a quorum in October.
Read Also: Yields to Stabilise as DMO Implements 2021 Deficit Financing Plan
Odds are in favour of a NO vote, as bondholders have expressed concerns on transparency and unequal treatment of creditors, thus setting the stage for a default once the 30-day grace period for the coupon payment elapses on the same day.
Inflexible Naira Pricing, FX Backlog Subdue Capital Inflow -Analysts
