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Nigeria Strategy Report H1 2019 Excerpt - Fixed Income - Will yields hump or shift?

• In this session, we continue discussion with the domestic section of our core strategy document – the Nigeria Strategy Report. In this section, we focus on developments in Nigeria’s fixed income space over 2018. We also limn the impact of monetary, fiscal and external influences on Nigeria’s fixed income market over 2019.
• Coming into second half of 2018, our expectation for a tighter monetary policy by the CBN came to bear. The drivers, much in line with our thoughts, were the elevated liquidity profile, currency concerns due to capital flight, and ramp up in FG borrowings, which overall drove an expansion in naira yield curve over the period (+166bps to 15.13%). To buttress, the apex bank heightened its liquidity sterilization and raised OMO rates to their highest level in one year. Aside monetary influences, the uptrend in yields was in part fed by fiscal borrowings as FG borrowed N339.5 billion in the local market, with a large chunk of the borrowings coming from the bond segment of the market. Lastly, Nigeria’s FI market buckled under pressures from the external front as interest rate hike by the US Fed drove wild sell off across Nigeria’s FI market. For context, dollar treasury yields expanded by 14bps over H2 2018 to 2.98% and our estimated FPI outflows from the fixed income market stands at $6.8 billion in H2 18 (vs $3.8 billion in H1 18).
• In charting the path for the naira yield curve over 2019, we take a cue from recent activities in the fixed income market. On the monetary front, akin to 2018, the apex bank is faced with a greater liquidity pressure this year with total maturities of N14.3 trillion. Thus, we hold the view that CBN will keep OMO rates at current elevated levels and sustain the current pace of liquidity squeeze over in 2019, albeit staggered in line with concentration of maturities over the year. As a result, we expect higher OMO sale in the first and last quarter of the year where maturities are the highest (Q1 19: N5.4 trillion, Q4 19: N5.9 trillion). On the fiscal side, although FG’s proposed fiscal outlay for 2019 points to a lower fiscal deficit (N1.88 trillion) our pessimistic stance on the FG’s revenue picture points to higher fiscal deficit (ARM Estimate: N2.8 trillion). Base on the foregoing we pen down N850 billion in external borrowings and domestic borrowings of N1.5 trillion in 2019 (vs Actual borrowings of N290 billion in 2018) whilst the balance would be funded via CBN’s ways and means (N698 billion). Tying it all together, we see upward thrust in the naira yield curve over 2019.