Of all recent government policies the recent closure of the border with the Republic of Benin to goods is having the most immediate effects on prices. These will undoubtedly hit consumers’ pockets and may come through in upcoming inflation data. At the same time there may be positive effects of local rice and poultry production. See page 2.
During September the published FX reserves (three-month moving average) of the Central Bank of Nigeria (CBN) fell at an average of US$400.0m per week, a trend which only slowed slightly in the first week of October and which would set FX reserves to reach US$37.1bn by year-end. We do not think the CBN will tolerate this and we think that it will encourage foreign portfolio investment (FPI) into Naira fixed income securities with interest rates set perhaps as much as 450 basis points (bps) above inflation, with the potential to trend down to a spread of 350bps over inflation if FPI picks up over the coming weeks.
Bonds & T-bills
The yield on a Federal Government of Nigeria (FGN) Naira bond with 10 years to maturity fell by 6bps to 14.32%, and at 3 years fell by 64bps to 13.73% last week. The yield on a 364-day T-bill fell by 48bps to 14.30%. The yield on a T-bill with 3 months to maturity fell by 122bps to 11.80%.
There was a surplus of liquidity in the Naira fixed income markets last week where approximately N1.0 trillion (US$2.8bn) was bid for the CBN’s offer of N300bn at it’s open market operation (OMO) auction. The yield achieved in the auction was 15.40% but secondary market yields fell much lower (see above). Our sense is that the CBN will not want to see primary market rates trend below 14.50% over the coming weeks, at least until it becomes comfortable with the level of foreign portfolio investment (FPI).
The price of Brent rose by 3.67% last week to US$60.51/bbl. The average price, year-to-date, is US$64.51/bbl, 10.01% lower than the average of US$71.69/bbl in 2018, but 17.84% higher than the US$54.75/bbl average seen in 2017.
The International Energy Agency (IEA) has again cut its global oil demand forecast growth by 65,000 bpd to 1.0 million barrels per day (mbpd) in 2019 and by 105,000 bpd to 1.2mbpd in 2020. September’s attack on Saudi Arabia’s oil facilities dropped global oil supply in September by 1.5mbpd to 99.3mbpd, which is less than originally feared. The downtrend in demand threatens oil prices, in our view. The demand narrative also gives room for the possibility of further cuts by the Organization of the Petroleum Exporting Countries (OPEC).
The Nigerian Stock Exchange (NSE) All-Share Index fell by 1.68% last week, pushing the year-to-date return to negative 15.58%. Last week Forte Oil (+8.11%), Mobil Nigeria (+5.64%) and CCNN (+2.70%) closed positive while Guinness Nigeria (-10.79%), PZ Cussons Nigeria (-10.00%) and Nigerian Breweries (-8.64%) fell.
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The NSE last week announced an amendment to its rules on pricing methods. The NSE has raised the number of shares that must be traded, in various classes of equity, in order to effect a change in published price. This is in addition to the 10% cap on daily price movements, all in a bid to curb price volatility.