February 8, 2021/Coronation Report

What will be the Federal Government of Nigeria’s (FGN) next move when it comes to financing its deficit? Movements in the foreign exchange and open market operation (OMO) markets last week prompted market comment that Nigeria is courting foreign portfolio investment (FPI) to participate in Naira instruments.

This may be true, but today’s market conditions suggest the Eurobond market, where conditions are good, in our view.

FX

Last week the exchange rate in the Investors and Exporters Window (I&E Window) weakened by 0.71% to N395.93/US$1. In the parallel, or street market, the Naira remained unchanged to close last week at N480.00/US$1. Gross external reserves inched up to $36.11bn as of 3 February, providing some reassurance as the Central Bank of Nigeria (CBN) has set a target of $40.0bn in external reserves. The CBN’s plans to settle non-deliverable forwards (NDF) dated 24 February at N412.14/US$1 and the recent weakness of the Naira in the I&E window (albeit very slight) is being interpreted by some market participants as preparation for an exchange rate adjustment. Against this, we recall that central banks are often in a good position to wrong-foot the market. However, there were several small-step adjustments in the exchange rate last year and it is perfectly possible for these to continue this year.

Bonds & T-bills

Last week, the secondary market yield for a Federal Government of Nigeria (FGN) Naira bond with 10 years to maturity declined by 21 basis points (bps) to 8.87% and at 7 years declined by 35bps to 8.37% while at 3 years the yield declined by 14bps to 6.11%. The annualised yield on a 356-day T-bill declined by 28bps to 1.49%, while the yield on a 263-day OMO bill remained at 2.32%. The fall in yields in the bond market went against the trend we have seen since mid-December, though we must remember that local investors are still quite liquid, so occasional rallies like this are to be expected. News was largely focused on a series open market operation (OMO) bills that were released with annualised yields just above 10.0% at 1-year, with market participants coming up with various interpretations (moving yields to a level attractive for foreign investors, signaling an adjustment in the foreign exchange rate, etc). All we can say with reasonable certainty is that, thus far, the CBN is not averse to market interest rates going up.

Oil

The price of Brent crude rose by 5.31% last week, closing at US$59.34/bbl, a 14.56% increase year-to-date. The average price to year-to-date is US$55.87/bbl, 22.64% higher than the average of US$43.22/bbl in 2020. The Saudi Arabian pledge of extra supply cuts in February and March on the back of reductions by OPEC+ (OPEC plus Russia) is another positive factor. Strong crude prices are encouraging US producers to increase output even as Covid-19 related lockdowns across parts of Europe and Asia put downward pressure on demand. Our view that Brent is likely to trade in a range of US$45.00/bbl to US$60.00/bbl this year may soon be challenged, though a rise above US$60.00/bbl could prompt some OPEC+ members to pump more oil, in our view.

Equities

The Nigerian Stock Exchange All-Share Index (NSE-ASI) fell by 1.66% last week with a gain of 3.57% year-to-date. MRS (+8.94%), Unilever Nigeria (+8.15%), and GT Bank (+4.35%) closed positive last week, while Lafarge Africa (-11.17%), Flour Mills of Nigeria (-9.37%) and Oando (-9.15%) closed negative. The equities market reversed the previous week’s bullish momentum. The reaction to the CBN policy affecting all bank accounts with affiliations to cryptocurrency trading might have had an indirect impact on the performance of the market on Friday, in our view. It is also possible that investors are reacting to the trend in market interest rates, even though bond yields remain well below inflation

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