Bonds to weaken on absence of fiscal, monetary policy clarity

The Federal Government bonds are set to weaken, as yields are likely to drift higher in the absence of clarity on fiscal and monetary policy, and ahead of tightening in the US, analysts at FBN Capital have said.

Stakeholders and analysts are concerned about lack of clarity from the new administration on key questions – such as the future exchange rate policy is discouraging, direct investment and financial inflows to Nigeria at a time when more hard currency is badly needed to maintain adequate import cover and prevent the naira from weakening more on the parallel market.

The Central Bank of Nigeria’s (CBN) Economic report for the month of April 2015 revealed that banking system’s credit (net) to the Federal Government, on month-on-month basis, fell by 3.6 percent to N2.1 trillion at end-April 2015, in contrast to the 12.5 percent increase at the end of the preceding month.

The development reflected, largely, the decline in banking system’s holdings of government securities.

However, FBN Capital observes that President Mohammadu Buhari has not yet appointed his ministers but has made some important steps on security and governance, saying the new order’s true full colours should emerge in the 2016 budget process.

In its economic outlook, FBN Capital sees no rescue from the oil price before 2017. “The FGN does not expect to be rescued by a strong pick-up in the oil price. Oversupply in the market, China worries and the Iran deal militate against a recovery before 2017. We see an average spot price for Bonny Light of $60/b this year,” according to the analysts.

The analysts see third naira devaluation coming shortly. The CBN/ Monetary Policy Committee (MPC) favours a managed rate, and may well introduce more administrative measures for this purpose. “We think however that a rate hike in the US and a reopening of the parallel market gap will force their hand, and put the rate at N215 at year-end,” they say.

They note that the two devaluations to date have eroded consumer spending. “We put growth at 4.4 percent this year, picking up gently thereafter on domestic fiscal and structural reform. Nigeria is a non-oil economy in productive terms (if not in terms of FX inflows), and will therefore avoid the contraction seen in Russia,” the analysts note in a report.