March 22, 2021/Coronation Research

The Monetary Policy Committee (MPC) of the CBN meets today and tomorrow to decide upon its Monetary Policy Rate (MPR). We estimate that it will keep the MPR on hold at 11.50%, but amplify its commentary on inflation, singling it out as the next economic threat to be dealt with. This would leave the way open for rate rises later in the year.

FX

Last week the exchange rate in the Investors and Exporters Window (I&E Window) closed at N410.00/US$1 with no changes from the previous week. In the parallel, or street market, the Naira also closed flat at N485.00/US$1. Although the reported level of CBN gross foreign exchange reserves has fallen from US$35.4bn at the beginning of the year to US$34.4bn recently, having reached a peak (for the year) of US$35.5bn in late January, we think that the current level remains comfortable. Indeed, reserves may well improve over the coming months as elevated oil prices improve receipts. However, we think that it will be difficult to restore FX liquidity to the levels achieved before the crisis (i.e. prior to March 2020) and therefore believe that exchange rates will continue to come under pressure.

Bonds & T-bills

Last week, the secondary market yield for an FGN Naira bond with 10 years to maturity increased by 25bps to 10.59%, the 7-year bond yield increased by 3bps to 10.13%, and the 3-year bond yield increased by 62bps to 8.00%. The annualised yield on a 342-day T-bill remained unchanged at 4.16% in the secondary market while the yield on a 347-day OMO bill fell by 20bps to 8.57%. The Primary Market Auction held on Wednesday closed with a 1-year T-bill stop-rate of 7.00%, up from 6.50% the week before, and well above the rates found for equivalent durations in the secondary market. The result of a 1-year OMO-bill sale was a stop-rate of 10.10%. We continue to think that T-bill rates are on an upward trend, with1-year T-bill auction rates heading towards 10.00% by mid-year. We await the results of this week’s bond auctions to see how this trend continues.

Oil

The price of Brent crude fell by 6.78% last week, closing at US$64.53/bbl, a 24.58% increase year to-date. The average price to year-to-date is US$60.98/bbl, 41.11% higher than the average of US$43.22/bblin 2020. The market is becoming increasingly nervous about some European countries imposing Covid-19 related restrictions again, as well as the suspended use of a major coronavirus vaccine, raising concerns for the demand outlook. This medium-term bad news was coupled with short-term news concerning increasing US crude inventories. In addition, the rise in US 10-year US interest rates was seen as unfavourablefor risk assets generally. On the bullish side, OPEC plus Russia (OPEC+) agreed to hold oil production steady in April, as opposed to increasing production as the market earlier had anticipated. We think that Brent crude prices will likely be supported above US$60.00/bblover the coming weeks.

Last week, Nigeria’s Federal Executive Council approved $1.5bn for the rehabilitation of the Port Harcourt refinery which is said to have a crude processing capacity of 210,000 barrels per day (bpd). If completed, it is expected to increase the availability of crude by-products and help reduce domestic petrol and diesel prices.

Equities

The Nigerian Stock Exchange All-Share Index (NSE-ASI) fell by 0.69% last week with a loss of 4.69% year-to-date. Guinness Nigeria (+7.66%), Zenith Bank (+5.39%), and Oando(+3.39%) closed positive last week, while BUA Cement (-6.42%), Nigerian Breweries (-5.34%), and Dangote Sugar (-5.29%) closed negative. Despite the bullish performance of the Banking sub-index (+2.80%), there was still a plunge in the overall performance of the NSE-ASI driven largely by BUA Cement and Dangote Cement (-3.42%). Our view is that overall investor sentiment continues to be weak amid improvements in T-bill and bond yields. See Pages 3 & 4 for our Model Equity Portfolio for last week (15-19 March) and the week prior to that (8-12 March).

The MPC of the CBN is due to decide the Monetary Policy Rate (MPR) on Tuesday afternoon. As we consider what its decision will be, it is as well to look at what is happening to rates in other emerging economies.

The current trend in emerging markets is for policy rates to move up towards the level of inflation. In other words, is it broadly understood that sub-inflation interest rates were necessary to soften the impact of recession last year, but that an orthodox relationship between rates and inflation needs to be restored now. Last week the Bank of Russia raised its official rate by 25 basis points to 4.50%, thereby approaching the rate of inflation at 5.80% year-on-year. The Brazilian Central Bank raised its overnight rate (the Selicrate) by 75bps to 2.75% last week and indicated that it would raise it again to 3.50% in May. Inflation in Brazil runs at 5.20% y/y.

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