Coronation Research weekly update:

Where is the money going?

Interest rates have been falling all year and the government is running a deficit. So, is it safe to assume that the government is issuing a lot more Treasury Bills and bonds than before? Not quite. Issuance has risen, but not much,... meanwhile customer deposits are increasing rapidly in the banking system, generating a source of public sector money through the cash reserve requirement.

FX

Last week the exchange rate in the NAFEX market (also known as the I&E Window and the

interbank market) weakened by 0.79 % to N388.54/$1. In the parallel, or street market, the Naira ceded 2.27percent to close the week at an offer rate of N495/$1. A recent communique from the Central Bank of Nigeria, reported widely in the press shows that it has weakened the Naira by 1.5percent to 390 per dollar for Bureaux de change (BDC), to ease pressure on the currency. The new rate, which takes effect from today, takes the exchange rate closer to the NAFEX rate. The World Bank has pressed Nigeria to implement currency reforms as it considers granting a $1.5 billion loan. We think that there will be continued pressure on exchange rates in the run-up to the festive season.

Bonds & T-bills

Last week, the secondary market yield for an FGN Naira bond with 10 years to maturity dropped by 2 basis points (bps) to 4.37percent from 4.39prrcent, and at 7 years dropped by 7 bps to 4.03percent from 4.10percent, while at 3 years the yield dropped by 5 bps to 1.77percent from 1.82percent. The annualized yield on 335-day T-bill dropped by 3 bps to 0.15percent from 0.18percent, while the yield on a 333-day OMO bill dropped by 5 bps to 0.14percent from 0.19percent. At last week’s Monetary Policy Council meeting, the members unanimously voted to leave all policy rates unchanged with the Monetary Policy Rate at 11.5percent. The

effect of this decision is to signal satisfaction with low market interest rates, in our view. Therefore, as a high volume of Open Market Operation (OMO) bills are due soon, which will likely raise market liquidity, we see nothing in the way of further rate tightening in December.

Oil

The price of Brent crude rose by 7.16percent last week to $48.18 per barrel (/bbl). The average price, year-to-date, is $42.54/ bbl, 33.65percent lower than the average of $64.12/bbl in 2019. Market participants are closely watching the OPEC+ members as they begin their two-day meeting to discuss next steps in production policy. The market is responding to good news on Covid-19 vaccines, a steady increase in oil demand from Asia, a weakening US dollar and easing political uncertainty in the US

as President-elect Joe Biden began his transition process.

Back in April, OPEC agreed to cut production by 9.7 million barrels per day but has scaled it back further to 7.7 million bpd since August. The original plan was to bring back another 2.0 million bpd in January 2021, but markets seem convinced that this step will be delayed, even though it could come at the cost of losing market share to US shale oil producers as American rig counts have been steadily increasing since midSeptember.

Equities

Last week, the Nigerian Stock Exchange All-share Index (NSE-ASI) rose by 2.19percent with a gain of 29.97percent year-to-date to close at 34,885.51. Mobil (+9.89percent), FCMB Group (+7.26percent) and Airtel Africa (+7percent) closed positive while Honeywell Flour

Mills (-10.83percent), Ardova Oil (-8.33%) and Oando (

7.17percent) closed negative. During the week, the outcome of the Monetary Policy Committee (MPC) meeting on Tuesday to hold interest rate at 11.5percent spurred bullish momentum in the market as investors took more interest in tier-1 banks and other bellwether stocks.

Where is the money going?

2020 has brought many things: a pandemic; a commodity price slump (now recovering); a global recession. For Nigeria, 2020 has also been the year when interest rates collapsed. In January a 10-year Federal Government of Nigeria (FGN) Naira-denominated bond yielded 10.40 percent per annum (pa): today it yields 4.37percent. How has this affected government finances and lending by privatesector banks?

One might have expected the FGN, which carries a substantial budget deficit, to have issued a lot of T-bills and bonds this year, given the opportunity to finance itself at low rates.

The strange thing is that the volume of outstanding T-bills and FGN bonds (including Sukuk bonds) has only risen by 11.8percent year-to-date, or by N1.37 trillion ($3.51billion). At the same time the size of the CBN’S open market operation ( OMO) bill market has contracted by 43.9percent year-to-date, or by N4.29 trillion ($11.02billion). So, the sum of FGN and CBN obligations in their respective securities markets has shrunk by N2.93 trillion ($7.51billion) year to date.

Where has it gone? A very obvious effect of a large amount of money leaving the OMO market, being received by pension funds and banks ( when not being received by foreign investors), is that it moves into the T-bill and FGN bond markets, causing rates to fall. The face value of FGN bonds is some N10.55 trillion ($27.06billion) but their combined market

capitalisation is N16.69 trillion ($42.80billion). This, however, does not tell where all the money has gone. Detailed financial information from Nigeria’s largest banks supplies clues. Taking five leading banks (Access Bank, Zenith

Bank, GT Bank, UBA and FBN Holdings), their total net loans rose by 11.03percent, or by N1.17trillion ($3.01billion) in the first nine months of 2020 (9M 2020) to N11.80 trillion ($30.27billion). However, their total deposits grew by 24.38percent, or by N4.61 trillion ($11.8billion) in 9M 2020 to N23.51 trillion ($60.39billion).