By Chioma Obinagwam
Nigeria’s Forex (FX) liquidity issues is expected to last beyond the short term.
Confiance News gathered from the weekly report by Cordros Research (the research arm of Cordros Capital) on Friday.
According to the report, FX reserve recorded a decline this week, as gross reserves fell by USD34.19 million w/w to USD35.22 billion (10 May).
Meanwhile, the naira was flat at N462.33/USD at the I&E window (IEW), with total turnover at the window (as of 11 May 2023) increasing by 61.2% WTD to USD540.07 million, as trades were consummated within the NGN460.00 – NGN480.50/USD band. In the Forwards market, the rate depreciated across the 1-month (-0.9% to NGN474.19/USD), 3-month (-4.1% to NGN518.44/USD), 6-Month (-3.1% to NGN557.64/USD), and 1-year (-4.9% to NGN597.61/USD) contracts.
“We believe FX liquidity issues will remain over the short-to-medium term as we do not see any positive signal that denotes an improvement in FX supply relative to the pre-pandemic levels. Moreover, considering the tepid accretion to the reserves given (1) low crude oil production and (2) elevated PMS under-recovery costs, FPIs who have historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long-term,” they predicted.
Capital Markets
Equities
The Nigerian equities market could not consolidate the gains of the prior week following pressure from profit-taking activities during the week. Particularly, sell pressures on BUACEMENT (-8.0%) led the benchmark index lower. Thus, the All-Share Index dipped by 0.5% w/w to close at 52,214.72 points. Consequently, the MTD and YTD returns settled at -0.4% and +1.9%, respectively. Elsewhere, activity levels were positive as traded volume and value advanced by 21.1% w/w and 59.7% w/w, respectively. Sectoral performances were mixed, as the Oil and Gas (+5.2%), Insurance (+1.2%) and Consumer Goods (+0.9%) indices posted gains while the Industrial Goods (-2.1%) and Banking (-1.3%) indices declined.
We expect market performance to remain mixed in the week ahead as investors rebalance their portfolios based on an assessment of corporate earnings released for Q1-23. Nevertheless, increased FI yields may continue to constrain buying activities. Overall, we reiterate the need for positioning in only fundamentally sound stocks as the weak macro environment remains a significant headwind for corporate earnings.
Money market and fixed income
Money market
The overnight (OVN) rate was depressed for most of the week, as the system remained awash with liquidity, with additional inflows from OMO maturities (NGN5.00 billion). However, the late CRR debit triggered the OVN rate to expand by 125bps to 12.6% this week. We highlight that the system liquidity averaged a net long position of NGN660.01 billion this week (vs a net long position of NGN313.87 billion in the previous week).
In the coming week, we expect the OVN rate to trend upwards as the debits for the FGN bond auction, primarily, and sub-national issuance will likely offset the expected sole inflow from OMO maturities (NGN10.00 billion).
Treasury bills
Activities in the Nigerian Treasury bills secondary market were bullish, as the average yield declined by 85bps to 6.7%. We attribute the lower yield in the market to the excess liquidity in the system this week, as well as participants covering for lost bids at the NTB PMA held during the week, on Wednesday. At the auction, the CBN offered instruments worth NGN143.98 billion – NGN4.52 billion of the 91-day, NGN5.44 billion of the 182-day, and NGN134.02 billion of the 364-day –, and ultimately allotted the full offer amount. The auction stop rates were 4.50% (previously 5.30%), 6.44% (previously 8.00%), and 8.99% (previously 10.17%) on the 91D, 182D, and 364D bills, respectively. The auction was oversubscribed with a subscription level of NGN820.85 billion, translating to a bid-to-cover ratio of 5.7x (previous auction: 6.2x).
“Next week, we envisage lower demand for T-bills in the secondary market following our expectations of a tighter system liquidity. Thus, we believe yields in the secondary market will head northward,” they forecasted.
Bonds
Proceedings in the FGN bonds secondary market closed on a bullish note this week, as some investors cherry-picked instruments with attractive yields across the curve, particularly at the mid and long tenor instruments. As a result, the average yield across instruments contracted by 9bps to 14.0%. Across the benchmark curve, the average yield dipped on the short end (-37bps) instruments, due to interest on the MAR-2024 (-173bps) bond, but expanded on the long end (+3bps) instruments following profit-taking on the MAR-2035 (+21bps) bond. Meanwhile, the average yield was flat at the mid segment.
“Next week, we expect the result of the May 2023 FGN bond auction (15 May) to influence the sentiments in the secondary market. At the auction, the DMO is offering instruments worth NGN360.00 billion through re-openings of the 13.98% FGN FEB 2028, 12.50% FGN APR 2032, 13.00% FGN JAN 2042 and 12.98% FGN MAR 2050 bonds. Over the medium term, we expect an uptick in bond yields as we believe investors will demand higher yields, which will be driven by significant borrowings expected from the FG for the year,” It forecasted.
Domestic Economy
According to the Nigerian Upstream Regulatory Commission (NUPRC), aggregate crude oil production (including condensates) declined by 18.0% to 1.25 mb/d in April (March: 1.52 mb/d) – the lowest level in 7 months. We believe the production shortfall in the period was driven by the shutdown of activities at the Forcados oil terminal and the declaration of force majeure on
Exxon Mobil’s operation in Nigeria due to the industrial actions by employees. Parsing through the breakdown, we note that crude oil production declined significantly across the Forcados (-9.7% m/m), Escravos (-11.4% m/m), Bonga (-2.9% m/m), and Qua Iboe (-54.2% m/m) production terminals. We maintain our 2023E crude oil production forecast expectations of 1.55 mb/d (FGN’s estimate: 1.69 mb/d) indicating a higher oil production level relative to 2022FY production volume (1.37 mb/d).
“Nonetheless, we think aggregate production is unlikely to reach its pre-pandemic high (c. 2.10mb/d) in the absence of investment in new production capacity. Consequently, we expect the government’s oil revenue performance to remain underwhelming over the short term,” the analysts reacted.
According to the Central Bank of Nigeria (CBN), Credit to the Private Sector (CPS) increased by 18.1% y/y to NGN43.07 trillion in March (March 2022: NGN36.47 trillion). For the review month, we highlight that the increase in CPS reflects the impact of improved domestic macroeconomic conditions and CBN-led interventions on the real sector. On a month-on-month basis, the CPS increased by 3.1% in March (February 2023: -0.5% m/m). In addition, the currency in circulation increased to NGN1.68 trillion in March; a 48.1% y/y decline, highlighting the effects of the CBN’s currency redesign. This policy resulted in a temporary reduction in the amount of money in circulation as people were required to exchange their old banknotes for new ones. We expect that the improvement of domestic economic activities will drive the willingness of commercial banks to create risky assets.
“Also, we expect the CBN to maintain its intervention programs at a steady pace as the economy expands. Conclusively, we predict that the Credit to Private Sector (CPS) will maintain a double-digit expansion in 2023FY,” Cordros Research stated.
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