August 10, 2021/United Capital Research

In the past week, the Federal Executive Council (FEC) approved transaction advisers for the proposed $6.2bn (N2.3tn) worth of Eurobond issuance which is expected to be concluded by early Q4-2021, in a bid to cover part of the 2021 budget deficit of N6.8tn. In addition, the Boards of Governors of the International Monetary Fund (IMF) approved issuance of the Special Drawing Rights (SDRs) totaling SDR456.0bn worth $650.0bn to boost global liquidity. Nigeria is expected to get an estimated $3.4bn from the new allocation of which disbursement will begin on August 23.

Given these events, we expect external inflows worth almost $10.0bn (although we do not expect the apex bank to drawdown the SDR allocation immediately) would provide a significant boost to the reserves. Consequently, this would strengthen the ability of the Central Bank of Nigeria (CBN) to sustain interventions in the FX market. Ultimately, this will help the CBN achieve its goal of lowering pressure on the exchange rate as improved FX liquidity drain demand at the parallel market, forcing a possible convergence with the official exchange rate. Given this expectation, we project inflationary pressures will subside (barring major shocks like removal of fuel subsidy), considering a decent chunk of inflationary pressure is FX-linked.

Furthermore, we expect rates to slide in the debt market, as the government will no longer be overly reliant on the domestic debt market. Also, we believe the CBN will reduce the frequency of liquidity mop-ups as inflationary pressures and FX speculations become less of a worry. This could reintroduce a decent level of liquidity, pushing deposit rates lower. Lastly, as yields are expected to slump, domestic equity investors will be on the hunt for high-dividend yield stocks, sparking a possible late rally.