By Obinna Chima
The National Bureau of statisticsâ€™ (NBS) inflationÂ figuresÂ released last weekÂ revealed that the Consumer Price Index (CPI) was up 15.13Â per cent year-on-yearÂ in January 2018, 0.24Â per centÂ lower than the rate recordedÂ inDecemberÂ 2017 ofÂ 15.37Â per cent.Â Â As of JanuaryÂ 2017, inflationÂ figureÂ was 18.7Â per cent.
To analysts at Lagos-based CSL Securities Limited,Â inflation willÂ decline over the course of 2018 but only relatively slowly.
According to them, theirÂ model suggests that price growth willÂ fall to 12.9Â per centÂ by the end of this year, down from 15.4Â per centÂ in December 2017.
â€œFood prices, which make up just over half of the food price basket, had been increasing at above 20Â per centÂ in year-on-year terms in the months leading to November 2017 but we have begun to see a moderation as we saw an 18.9Â per cent year-on-yearÂ increase in January, down from 19.4Â per centÂ in December 2017.
â€œWe expect food prices will moderate further over the coming months as improved supplies come on to the market.
â€œHowever, we expect the disinflationary impact of this to be offset, to some extent, by a likely increase in utility prices,â€ they explained.
They argued that while the authoritiesÂ maybe reluctant to implement a hike in the lead up to the February 2019 election, power supplyÂ wouldÂ likely to remain intermittent until tariffs are increased to a sustainable level.
As such, households willÂ continue to rely on expensive petrol- or diesel-powered generators, saying thatÂ incessant queuesÂ observed in the economyÂ since the end of last year also suggest that consumers may be compelled to pay more for scarce petrol.
Interbank NairaÂ Market
The Money market rates trended downwards throughout the week in line with system liquidity despite the openÂ market operationsÂ (OMO) mop-up,Â wholesaleÂ foreign exchange (FX) secondaryÂ marketÂ interventionÂ sales (SMIS) and theÂ treasuryÂ bills primary market auctions by theÂ centralÂ bank.
The Central Bank of Nigeriaâ€™s (CBN) activities in the past weeks, according to analysts at Afrinvest Securities Limited,Â further showedÂ its commitment to stabilise the financial system, keep liquidity levels in check while also sustaining the recent gains in price and exchange rate stability.
To this end, the openÂ buyÂ back (OBB) andÂ overnight (OVN) rates trended lower to 18Â per centÂ and 20per centÂ lastÂ Monday, from the precedingÂ weekâ€™s close of 43.3Â per centÂ and 45.5Â per centÂ respectively,despite lower system liquidity of N35.5Â billionÂ (fromÂ the precedingFridayâ€™s level of N46.4Â billion) and FX sales of $100Â millionÂ at the SMIS window.
Also, on Tuesday, rates continued on a descent as OBB and OVN settled at 14.3Â per centÂ and 15.3Â per cent, following aÂ no-sale OMO auction conducted by the CBN, on the back of improved system liquidity which opened the day at N35.1Â billion.
TheÂ OBB and OVN continuedÂ theirsteady declineÂ onÂ WednesdayÂ as theyÂ settledÂ at 8.7Â per centÂ andÂ nine per centÂ as the totalÂ treasuryÂ bills issuance of N176Â billionÂ dwarfed the improved system liquidity which opened at N260.7Â billion.
According to an Afrinvest report, by Thursday, the CBN mopped up N50.7billionÂ from the system but the effect on system liquidity was negligible following the N90Â billionÂ OMO inflow on the same day which took system liquidity to N492.3Â billion.
As a result, OBB and OVN fell further to 6.7Â per centÂ and 6.9Â per centrespectively.
On Friday, OBB and OVN closed the week at 6.7Â per centÂ and 6.9Â per cent respectively,Â indicating a 36.6percentage pointsÂ and 38.6percentage pointsÂ decreaseÂ week-on-weekÂ respectively.
In the Treasury Bills (T-bills) market, average rates across most instruments hovered round the same levels throughout the week despite the Primary Market Auction of N176Â billionÂ by the CBN.
â€œIn the coming week, despite the level of system liquidity at N371.5billionÂ as of Friday, we expect money market rates to trend slightly higher on the back of expected OMO mop-ups and the planned Wednesday DMO bond auction of N100Â billion notwithstanding Thursdayâ€™sÂ OMO maturity of N37.9Â billion,â€ Afrinvest added.
Foreign Exchange Market
In line with trend, the CBN continued its weekly FX interventions, injecting US$100Â millionÂ on Monday via wholesale SMIS intervention.
A total of US$55Â millionÂ was auctioned at theÂ small andÂ mediumscale enterprises (SMEs) segment while US$55Â millionÂ was sold to satisfy retail invisible demand (Tuition fee, medical payments and BTA).
Thus, FX rates traded within a tight band at all segments of the market with the CBN official spot rate trading flat all week after an initial fiveÂ kobo depreciation on Monday (to N305.90/US$1.00).
Similarly, at the parallel market, rate opened at similar levels from the prior Friday (N363.00/US$1.00) and traded flat all week.
At the Investorsâ€™Â & Exportersâ€™ (I&E) window, the NAFEX rate shed 49Â kobo in the first two trading sessions to close at N360.58/US$1 on Tuesday from N360.09/US$1 the previous Friday. The losses were fully recouped in Wednesdayâ€™s trading session as thenaira strengthened 54Â kobo to settle at N360.03/US$1 but slightly pared gains on Thursday, sheddingÂ sevenkobo before settling at N360/US$1 on Friday, translating to aÂ oneÂ koboweek-on-weekÂ depreciation.
Similarly, cumulative weekly turnoverÂ on the I & E windowÂ as ofFriday, wasÂ US$789.91 million.
At the FMDQ OTC futures market, the total value of open contracts of the Naira settled OTC futures closed the week at US$3.3Â billion, US$10.5millionÂ higher than US$3.3Â billionÂ the prior week. The DEC-2018 instrument (contract price: N362.84) received the most buying interest in the week with additional subscription of US$10Â million,Â which took total value to US$189.63.Â TheÂ NG-US APR-2018 (contract price: 360.92) however remainedÂ the most subscribed with a total value of US$657.9Â million,Â while the NG-US JAN-2019 instrument (contract price: N362.27)Â was the least subscribed with total value of US$10Â million.
Following a successful Eurobond issuance by theÂ federalÂ government lastÂ week in which US$2.5Â billionÂ was raised to refinance maturing short term local debt securities,Â â€œwe expect further accretion to external reserves with positive feedback on the CBNâ€™s ability to sustain FX intervention sales.
â€œHence, despite downside risks of volatility in the oil market and political uncertainty, we retain our near term positive outlook on FX market stability and liquidity,â€ Afrinvest added.
Bond Market Review
Contrary to the sell-offs recorded in the local bond market the precedingweek, sentiment was bullishÂ lastweek as yields trended 12Â basis pointsÂ lowerÂ week-on-week,Â to an average of 13.8Â per centÂ across tenors at market close on Friday on the back of improved investor appetite following stability in global financial markets on one hand and the supply of new FGN Eurobond debt securities on the other hand.
The week started off on a quiet note with yields falling a marginal 1bpÂ on average as momentum was sustained on Tuesday with average yield moderating 8Â basis pointsÂ to 13.8Â per centÂ due to buying interests in MAR-2027 (-3bps) and APR-2037 (-8bps) benchmark bonds.
Â Sentiment further improved in subsequent trading sessions as yields fellÂ threeÂ bpsÂ (basis points)Â on Wednesday,Â oneÂ bps on Thursday and staying flat on Friday against the backdrop of expectations of lower volume of primary market issuances.
LastÂ Thursday, theÂ federal government announced the pricing of its US$2.5Â billion dual tranche Eurobond offering to complete the US$5.5Â billionÂ external debt programme approved by the National Assembly in 2017.
The pricing was largely successful as both instruments offered (12-year and 20-year series) garnered impressive buying interest from leading global institutional investors with a peak order book of over US$11.5Â billion.
Both instruments have offerings of US$1.25Â billionÂ apiece, with the 12-year series priced at a yield of 7.1% while the 20-year series was issued at 7.7%. The proceeds from the Eurobond issuance would be used to refinance relatively expensive short term domestic borrowings as the FGN plans to achieve an optimal mix of domestic and foreign debt and reduce overall debt servicing cost. The impact of the debt refinancing, coupled with declining inflation rate and stability in FX rate, is anticipated to continue to anchor yield expectation lower in the near term and reduce crowding out of private sector borrowers.
Across the sub-Saharan Africa Eurobonds, performance remained bearish as yields trended higherÂ week-on-weekÂ on all instruments under our coverage save the GHANA 2026 (-10bps) and KENYA 2019 (-10bps) bonds.
The extended bearish sentimentÂ was on the back of ongoing global bond market rout as investors continue to price-in impact of reflation threat in advanced economies â€“ and consequent normalisation of monetary policy â€“ in the valuation of fixed income assets.