Nigeria’s Corporate Eurobonds Sustain Positive Sentiment
Following a largely positive 2017 for Nigerian corporates, sentiments on the corporate Eurobonds remained strong in the first trading week of the year. Consequent on the bullish sentiment, average yield on all corporates fell week-on-week.
For instance, the Fidelity Bank 2018 which was down 35 basis points week-on-week, to 3.1 per cent, witnessed the most buy interest. It was trailed by Ecobank Nigeria 2021, which was also down 27 basis points week-on-week to 9.6 per cent.
According to a report by Afrinvest Securities Limited, year-to-date return on all instruments was in the green, with Zenith Bank 2022 (+0.9 per cent ) advancing the most.
However, Sub- Saharan Africa Eurobonds opened the year on a positive note as investors continued their search for high yield emerging market instruments.
Across the Eurobonds under Afrinvest’s coverage, average yield fell 26 basis points, 38 basis points, 36 basis points, 21 basis points, 27 basis points, 25 basis points, four basis points and 23 basis points week-on-week on the Nigerian, Ghanaian, Gabonese, Ivory Coast, Kenyan, Zambian, Senegalese and South African instruments in that order.
Nonetheless, the South Africa 2041 (+3.3 per cent), Ivory Coast 2028 (+2.8 per cent) and Nigeria 2047 (+2.5 per cent) had the highest Year-to-date return.
But sentiment in the domestic bond market was mixed last week as average yield moderated in two of four trading sessions. The week started off on a negative note as average yield rose seven basis points to 14.1 per cent on Tuesday following sell-offs in short and longer tenored instruments - notably May 2018 (up 75bps) and March 2036 (up 73bps) bonds.
However, sentiment turned positive the following day, with yields falling eight basis points to 14 per cent as investors sought for buying opportunity in the March 2036 (down 27bps) and further declined 14bps on Thursday to 13.9 per cent, following increased buy interest in the July 2021 (down 55bps), JAN 2027 (down 46bps) and March 2036 (down 33bps).
Average bond yield ended the week on a positive note, settling at 13.7 per cent, which implied a 40 basis points decline week-on-week.
Interbank Naira Market
Aggregate system liquidity opened the year positive at N400.7 billion while money market rates –open buy back (OBB) and overnight (OVN) - opened in single digit at 4.7 per cent and 5.5 per cent respectively, indicating an 84 basis points and 100 basis points increase from the preceding Friday’s close.
The central bank resumed primary market sales during the first week of the year, mopping up a total of N157.6 billion (T-bills) and N161.5 billion (open market operations) from the system.
As a result, aggregate liquidity balance declined at the start of the week – albeit still positive, but inched higher on subsequent days as OMO repayments worth N193.6 billion buoyed liquidity levels to N661.7 billion by Thursday’s close.
Consequently, OBB and OVN rates remained in single digits all through the week save for Friday, trading within a band of 3.7- 5.5 percent.
By the end of the week, money market rates jumped to 18.3 per cent and 19 per cent as the CBN conducted OMO sales which mopped up N260.5 billion; hence rates closed the week 14.5 percentage points higher apiece week-on-week.
Average rate in the Treasury bills market trended lower on three of the four trading sessions, indicating a largely bullish performance.
Average rate closed the first session bearish at 14.5 per cent (a five basis points increase from previous Friday) as investors sought to free up funds in anticipation of the T-Bills PMA to be held mid-week.
Accordingly, sentiment in the secondary market picked up as average rate closed five basis points and 46 basis points lower on Wednesday and Thursday respectively before settling at 13.9 per cent on Friday, down 48 basis points week-on-week.
Following the cessation of T-Bills PMA in December 2017, activities in last week’s PMA were largely positive as all instruments were oversubscribed.
The CBN offered N11.8 billion, N33.9 billion and N115.8 billion for the 91-day, 182-day and 364-day instruments respectively which were oversubscribed by 2.1 times (N24.3 billion), 1.3 times (N44.9 billion) and 2.7 times (N319.2 billion) in that order.
Allotment levels were same as offered, issued at stop rates of 12.5 per cent, 13.9 per cent and 14.3 per cent respectively – a 40 basis points, 107 basis points and 127 basis points drop from the last PMA auction held in November.
This week, an OMO maturity of N309.1 billion is expected to hit the system; hence, analysts at Afrinvest anticipated that money market rates would remain in the single-digit band, barring the resumption of aggressive OMO mop ups by the CBN.
“More so, we expect a largely positive performance in the secondary T-Bills market as investors with unsuccessful bids at the PMA held this week mull over opportunities in the secondary market,” they added.
Forex Market Review
At the start of the week, the CBN sustained its intervention in the FX Market via Secondary Market Intervention Sales (SMIS), offering US$100 million to market participants last Tuesday, in a bid to maintain stability in the foreign exchange market.
Hence, rates opened the week at similar levels from the previous Friday.
On Tuesday, the CBN spot rate stood at N306/ US$1 (same as previous Friday); however, a five kobo appreciation was recorded on the following day and rates remained at this level till the end of the week, closing at N305.95/$1.
Likewise, at the parallel market, rates opened the week at N365/$1 and stayed flat on all trading days.
However, at the NAFEX market, rates on the first trading day closed flat at N360.28/$1 before depreciating 88 kobo to N361.16/$1 by mid-week. The naira however closed the week on the NAFEX at N361.31/$1, which implied a N1.03 kobo depreciation.
Relatedly, activity level in the I&E window softened relative to the previous week as total value of transactions recorded during the week stood at $499.47 million.
Trading activity in the FMDQ OTC futures market was minimal last week as none of the 12 OTC futures contracts received new subscriptions.
As a result, total value of open contracts of the naira- settled OTC futures instruments stood flat at US$3.3 billion on Friday, same value in the prior week. Nonetheless, the NG/ US APR 2018 instrument remains the most subscribed with total value of US$656.9 million at a rate of N361.64/$1 while the recently issued NG/US DEC 2018 is the least at US$10 million at a rate of N362.00/US$1.
“In the coming week, we expect the naira to trade at similar levels as the CBN sustains its weekly interventions in the Foreign Exchange market,” they added.
This view was further supported by rising crude oil prices which have increased to US$68/b last week and external reserves currently at US$39.1 billion
Slowdown in Treasury Bills Issuance
Fitch Ratings last week stated that Nigerian banks may find it more difficult to sustain their profitability this year, given the decline in net treasury bill issuance by the federal government this year. The rating agency said in a statement that the slowdown in NTBs’ issuance marked a change of strategy, as the government looks to increase its financing from external sources and longer-dated domestic issuances.
In addition, Fitch stated that its 2018 rating outlook for the Nigerian banking sector was negative, forecasting that some Tier-2 banks would struggle to remain profitable this year.
The federal government had announced plans to refinance some maturing domestic debts with external borrowings as part of its overall debt management strategy of reducing debt service.
Other objectives of this strategy are to free up space in the domestic market for other borrowers and achieve a more sustainable debt portfolio mix of 60 per cent domestic and 40 per cent external.
But Fitch pointed out that record treasury bills issuance in 2017 helped in supporting the Central Bank of Nigeria’s (CBN) strategy to maintain a stable exchange rate.
December 2017 PMI
The Manufacturing Purchasing Managers’ Index (PMI) stood at 59.3 points in December 2017, indicating expansion in the manufacturing sector for the ninth consecutive months. According to the latest PMI report, 15 of the 16 sub-sectors reported growth in the review month in the following order: petroleum and coal products; textile, apparel, leather and footwear; cement; transportation equipment and paper products. Others were food, beverage and tobacco products; furniture and related products; plastics and rubber products; non-metallic mineral products; printing and related support activities; appliances and components; chemical and pharmaceutical products; fabricated metal products; primary metal and electrical equipment.
However, the computer and electronic product sector contracted in the review month.
On the other hand, at 63.2 points, the production level index for the manufacturing sector grew for the tenth consecutive month in December 2017. The index indicated an increase in production in the current month, when compared to its level in the preceding month.
Eleven of the 16 manufacturing sub-sectors recorded increase in production level, three remained unchanged, while the remaining two recorded decline in production level during the review month.