EUR 4.00 For Business Accounts Only

NSR H2 2019 Excerpts - Fixed Income - Will the CBN give in to liquidity pressure?

• In this cut-out of our core strategy document – The Nigeria Strategy Report, we look at the major themes that dominated the fixed income market in H1 19 as well as our outlook for same over the rest of the year.
• Coming into the first half of 2019, we painted the picture of staggered OMO sale in line with the concentration of OMO maturities over the year. Specifically, we stated that the combination of higher maturities and the risk of exodus of offshore holdings of maturity instruments will propel higher OMO sales in the first and last quarter of 2019. Furthermore, we carved out the possibility of higher domestic borrowings based on our pessimistic stance on FG’s revenue. While our view played out with the apex bank pacing up its liquidity mop-up, this was done at lower cost with OMO rates plunging 252bps to 12.48% in H1 19. However, despite our expectation for a wider fiscal deficit, FG’s borrowings remained subdued with unorthodox funding of the deficit over same period through drawdown on overdraft with the CBN. In fact, the fiscal authorities continued their apathy for naira debt at the open market, net repaying N225 billion worth of Nigerian treasury bills and keeping bond supply stunted (-15% to N342.5 billion) relative to H2 18. 
• Going forward, with Emerging market assets receiving a boost from FED’s gradual tilt towards dovishness, which has led to US treasuries losing their attractiveness (-72bps YTD to 1.96%), CBN appears to be in a position of comfort relative to the second half of 2018. Coupled with our expectation for dissipating inflationary worries in the coming months, the stage appears set for monetary policy easing by the MPC However, on the currency front, the CBN is faced with elevated maturity profile in H2 19. For context, out of the total maturing OMO and NTBs staged to mature this year (N9.9 trillion), foreign holdings of Nigeria’s NTB and OMOs stands at N3.2 trillion (32% of total maturity). Thus, despite CBN’s gradual tilt towards dovishness, we see scope for mild uptick in OMO rates, with our estimates at 12.5% -13.5%. On the fiscal side, given that FG remains committed to trimming its cost of debt service, appetite for short end borrowings appears weak – thus paving way for downtrodden NTB yields over the near term. More so, given FG’s open-endedness to part financing its fiscal deficit via CBN’s overdraft, we rule out any sizeable ramp in FGN Bond supply this year.