Nigeria Strategy Report H1 2018 Excerpts - Fixed Income: The unstoppable force of liquidity
- In the last 24 months, more than in any other period in recent memory, inflationary pressure provided a ready cover for monetary tightening in defense of the key policy anchor: the naira. In our inflation outlook, we highlighted that the absence of supply shocks and base effects, guides to benign inflationary pressure in 2018, as removing the positive real yields justification of contractionary monetary policy. Furthermore, following expected boost in reserve inflows, we expect the monetary policy to loosen its grip, over 2018, with an expected cut in MPR to 12% in H2 2018. In addition to the foregoing, monetary policy also looks set to grapple with an elevated liquidity profile for NTBs, OMOs and bonds over 2018.
- This view would sit well with a fiscal side, now inclined to reduce its borrowing cost and should result in more forceful fiscal pressures on the apex bank to adopt an accommodative stance given its renewed attempts at economic stimulation. More so, given FG’s appetite for external borrowings to fund the budget and refinance maturing treasury bills, the combination of lower bond issuance and net NTB maturity, is expected to drive a gravitational force in rates. To estimate the quantum of domestic FG’s debt over 2018, we use our base case budget deficit estimate of N2.9 trillion (vs. N2.0 trillion stipulated in the budget)—see our fiscal review for more details. Our base case assumes successful asset sale of N306 billion and Eurobond issuance of $4 billion ($2.5 billion - maturing treasury bills, $1.5 billion budget support). Consequently, the FG would need to raise N1.3 trillion (Gross: N1.6 trillion, maturity: N302 billion) in 2018 from the bond market. This scenario assumes N200 billion of CBN funding to the government. Tying it all together, we see downward slope in the naira yield curve over 2018 with dovish monetary policy and elevated repayment cycle creating a gravitational pull on yields.
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