Cost of borrowing may dip as inflation reaches 11-year 16.5%

…as Nigeria sovereign yields near 20% for offshore investors to bite

Economic challenges confronting Nigeria may assume more disturbing dimensions as the Consumer Price Index (CPI) increased to its highest point of 16.5 per cent since 2005, according to the report released by the National Bureau of Statistics (NBS).

Consequently, Nigerian sovereign bond and Treasury Bill (T-bills) yields will probably need to rise near 20 percent in coming weeks to attract offshore funds buying interest, National Daily analysis of historical data show.

The implication is that Nigeria’s cost of borrowing through fixed income instruments such as Treasury Bills and Bonds is expected to ease, based on the outlook.

In early 2012, foreign portfolio flows resumed when yields reached the 19-20 percent level, although the pressure on the naira (NGN) at the time was less significant.

“Although it is difficult to estimate what the inflection point could be, a short-term concession in terms of yield upside could help boost the incentive to hold NGN assets,” Samir Gadio, Standard Chartered bank’s head of Africa strategy and FICC research, said.

The Central Bank of Nigeria (CBN) auctioned N50 billion worth of 364 day T-bills on July 06, in the primary market at a yield of 17.64 percent.

The Debt Management Office (DMO), last week sold N120 billion in local currency-denominated sovereign bonds with mixed yields ranging from 14.5 percent to 14.98 percent.

Bond yields in Nigeria are currently below inflation, which printed at 16.5 percent in June, according to National Bureau of Statistics (NBS) data.

The most liquid 5-year government bond traded at a yield of 15.17 percent on Tuesday in the secondary market.

With yields seen as unattractive, compared to currency and inflation risks, offshore investors will be watching decisions from the CBNs policy meetings this week to gauge whether to add to their holdings.

Some see the CBN directing efforts towards combating recession and returning the economy to a positive growth trajectory, rather than tightening policy or hiking rates.

“We do not expect the Monetary Policy Committee of the CBN to tighten rates when it meets next week ,in response to the latest CPI data. Having left rates unchanged in her last policy meeting in May and following up with the introduction of a flexible exchange rate regime on June 23rd, we think the Committee will likely see through short term inflationary pressures and focus more on growth,” analysts at Time Economics, a consulting firm said in a July 18 note to investors.

Africa’s largest economy will probably contract by 1.8 percent this year and curb growth in the entire region, according to the International Monetary Fund.

The Washington-based lender cut its 2016 growth forecast for Nigeria from 2.3 percent projected in April, according to its World Economic Outlook update released on Tuesday.

The projection for next year was reduced to 1.1 percent from 3.5 percent.

The Nigerian economy will contract for the first time in more than two decades, as it “adjusts to foreign-currency shortages as a result of lower oil receipts, lower power generation and weaker investor confidence,” the IMF said.

Gross domestic product shrunk by 0.4 percent in the three months through March, as oil output and prices slumped and the approval of spending plans for 2016 were delayed.

A currency peg and foreign-exchange trading restrictions led to shortages of goods from gasoline to milk and contributed to the contraction of the economy in the first quarter.

The peg was removed last month after being in place for more than a year, but has yet to attract significant offshore flows.

At the moment,  investors who may want to be long NGN have more incentive to do it in the offshore NDF market than in onshore T-bills.

Last month NDF implied yields in the 1-month and 12-month tenors were 29.7 percent and 19.6 percent.

For Gadio at Standard Chartered, any uptick in yields is a welcome development, with the 364-day T-Bill still nominally at positive CPI-adjusted levels.

“This is a step in the right direction in terms of interest rate normalisation. We could see yields react to auction results in the secondary market, but the re-pricing will need to be broader based and consistent to boost the incentive to hold NGN assets,” Gadio said.