Due to the budgetary disbursements of the Federal Government of Nigeria (FGN) and its parastatals in the last week of December the money market opened in January 2012 on a liquid note. This led to the liquidity mopup by the Central Bank of Nigeria (CBN) through its Open Market Operation (OMO) programme. About N500 billion has been issued in new OMO bills to mop of liquidity.
About N274 billion was paid into the market after the Federation Account Allocation Committee (FAAC) meeting in January. Budgetary allocations are expected to remain at current high levels with crude receivable expected to remain buoyant (supported by bullish oil prices).
Interest rates have remained moderately bullish in the market, on the back of liquidity mop-up by the CBN. Average overnight rate stood at 14.3% year to date (YTD).
Other factors that affect the demand and supply dynamics in the market include withdrawals by the NNPC, funding for Wholesale Dutch Auction System (WDAS) purchases and securities purchases.
The Monetary Policy Committee (MPC) maintained all monetary indices at their meeting in January with Monetary Policy Rate (MPR) at 12%, with a band of +/-200 basis points, Liquidity ratio was left at 30% and Cash reserve ratio at 8%. Inflation figure released recently by the National Bureau of Statistics
(NBS) for the month of January reflected a sharp spike in inflation rate from 10.3% to 12.6%. This was driven largely by the partial removal of subsidies which had a contagious effect on prices of other goods and services. It is worthy of note that urban inflation was actually at 16%, while rural inflation was at 9%.
In spite of the hike in inflation, Real rate remains positive as yields on government securities currently outpace inflation. This however might be short lived as the threat of inflation still remains.
In our opinion, the inflation in January was tempered downwards by the unproductive strike days and the delay in Government spending (FAAC did not pay on time).
The expected increase (88%) in electricity tariff is also expected to increase inflation.
Treasury Bills Market
The T-Bills market opened the year on a very buoyant note, witnessing continued patronage not just from banks and professional investors, but by the general public. This is as a result of the superlative yields in the T-Bills market, greater than obtainable Bank Deposit Rates.
As a result of the extensive government borrowings, the market is currently witnessing the crowding-out effect, with the most unlikely victims: Banks. The increase in interest rates (from increased Government borrowing, high interest rates, and continuous liquidity mop-up) is stubbornly cannibalizing Banks balance sheet, with investor preference for T-Bills, as against Bank deposits. Total amount of T-Bills in issue is now at N3.5 trillion, while there are N3.3trillion Bonds outstanding. The total government securities in issue is therefore N6.8trillion (ex AMCON, Sub nationals and other debt issuances guaranteed by the FG).
The Bonds Market
The Bond market still remains largely a professional investor market, with the marked absence of individual investors; Banks, Pensions, and portfolio investors are the biggest investors.
Investors traded very cautiously in the Bond market, as Bonds are relatively more risky to hold (due to interest rate risk).The Q1 calendar of the Debt Management Office (DMO) was only to issue about N90billion, all in 10 year securities. The Q1 calendar also showed that only 10 years will be issued.
The DMO is concerned about its concentration of Maturities in 2012 and 2013 (about N500billion) and will therefore try to spread out its obligation. About N125billion worth of Bonds matured in January, as against the N90billion issued.
Yields have dropped significantly from January. Reluctance to hold Bonds, in view of possible inflationary pressure is most possibly responsible. The DMO is considering replacing short term Bonds with longer term instruments and buying back of rump, non-trading Bonds from the market.
Liquidity has improved in the market, with about 7 securities actively trading in the market, an improvement from about 4 that traded actively during the last quarter of last year.
The Foreign Exchange Market
The naira has witnessed a sustained appreciation against the US dollars (USD). Some of the reasons include:
- A sustained buoyant level of FX receivables from crude export, with oil prices remaining bullish and production remaining healthy at an average of 2.3mm barrels per day
- High positive real interest rate, encouraging the inflow of FX by portfolio investors
- Intervention by the CBN
- Huge sales by the oil majors (about $2.5 billion)
- Relative economic, fiscal and political instability in America, Europe and the Middle East has given Nigeria a comparative advantage in FDIs, portfolio inflows and export revenues, all denominated in USD.
- The market favors the continuation of the fortunes of the naira in the short term.
Eurobond
The Nigerian Eurobond (6.75% Jan 2021) has also witnessed increased demand in the international markets, obviously as a result of the very sound economic prospects of the country and the need of European investors to diversify away from their home countries.
The Bond currently trades around 108% of par value, a significant uptick from October when it traded around 98% of par value.
The Equity Market
The stock market witnessed a month-on-month upbeat momentum as the benchmark All-Share Index (ASI) rose by 0.70% up in January 2012. Meanwhile, the growth of the benchmark index was not general market based as much of the gains was from the Building materials sector alone, influenced by a 7.4% rise in the value of Dangote Cement shares, which accounts for about 91% and 28% of the total capitalization of the Building materials sector and the Nigerian Stock Exchange (NSE), respectively.
To a large extent, rise in bargain-hunting by institutional investors at the end of the year 2011 was curtailed due to the political unrest and civil protests after the removal of subsidy on petrol by the federal government. This made investors to re-evaluate investment themes despite expectations of impressive earnings announcements and corporate benefits.
Sources: CBN, DMO, BLOOMBERG, FDHL, FDMA
