One year stop rate for all tenor has declined to 12.85 percent, the lowest since August 2018, as sustained oversubscription of Nigerian money market persists on the back of a sudden flow of foreign portfolio investment immediately following the presidential election.
Analysts say the oversubscription of the Nigerian money market instrument is happening on the back of healthy foreign exchange inflow via the Importers & Exporters (I and E) Window.
BusinessDay learnt that foreign currency inflow, especially into I&E window, increased by 93.7 percent to $3.1 billion in the months 0f January and February, from US$1.6bn in the fourth quarter of 2018, and the trend appears to have continued.
According to data of flows tracked by analysts at FMDQ, a total of $4.28 billion was traded on the I&E window for the week-ended March 1, 2019, an increase of $2.34 billion (120.62 percent) when compared to the $1.94 billion reported in the previous week.
This has been attributed to the relatively peaceful conclusion of the presidential elections. Prior to the elections, investors adopted a wait-and-see approach due to the heightened uncertainty surrounding the Nigerian economy and financial markets.
However, the election results signalled continuity in economic policies adopted by the incumbent party with respect to the current foreign exchange regime, and has instilled renewed investors’ confidence in the Nigerian markets. This trend was further corroborated by the significant increase in foreign portfolio inflows into the I&E FX Window, to $1.98 billion, a 262.64 percent increase when compared to the $546.00 million reported in the preceding week.
The total value of trades for the week-ended March 8, 2019, came in at a hefty $2.67 billion bringing the year-to-date (YTD) value of trades at the window to $15.63 billion.
“We believe foreign investors are now interested in Nigerian fixed income instruments with majority of the FPI dollar inflows directed at Nigerian money market instruments as well as sovereign bonds,” said analysts at CSL Stock Broker Limited.
The bond market has also seen significant investors’ interest with all auctions conducted in 2019 recording significant oversubscriptions.
However, activities at equities market have been bearish as the year-to-date All Share Index (ASI) shed 0.90 percent despite stellar numbers by companies that have released full-year results.
Analysts say the drop in yields isn’t surprising because the central bank had removed the one-year Open Market Operations (OMO) rates while there are ample demands for short-term papers.
“Federal Government has been reducing its supply of Treasury Bills and that is why you see oversubscription,” said Wale Okunrinboye, head of research at Lagos-based fund manager, Sigma Pension Limited.
“Over the next two quarters, yields are expected to remain subdued because the demand is still quite high,” said Okunrinboye.
At the PMA, the CBN offered and sold N89.5bn worth of T-bills as against subscription of N604.1bn, representing oversubscription of 575.0 percent. Stop rates across all tenors offered declined from the last auction (91-day – 10.75 percent vs 10.90 percent; 182-day – 12.50 percent vs 13.00 percent; 364-day – 12.85 percent vs 14.37 percent).
Ayodeji Ebo, managing director and CEO of Afrinvest Securities Limited, sees long-term rate going below 12 percent while yields could settle around 13 percent and 14 percent.
“Relative to other emerging and frontier markets, Nigerian yields remains more attractive. Also, the assurances by the central bank that foreign exchange remains stable coupled with the ability of investors to hedge makes naira assets attractive,” said Ebo.
A breakdown of issuance showed N150.0 billion in January against N197.10 billion in February. Marginal rate on the five-year, seven-year and 10-year offerings have declined 73bps, 70bps and 56bps, respectively, to 14.52 percent, 14.80 percent, and 14.94 percent.
The allure of Nigerian money market instrument and fixed income instrument is because of the dovish United States Reserve (US Fed) on interest rates which has seen yields on developed market instruments trend lower.
Additionally, a benign political environment on the back of the successful conduct of the elections and a gradual economic recovery has boosted investor confidence in the Nigerian economy.
For instance, Brent crude oil price has increased by 50 percent to $67.47 a barrel as at Monday, from an all-time low of $50.47 a barrel as at December 2018, thanks to an aggressive output cut by Organisation of Petroleum Exporting Countries members known as OPEC+, in order to regulate a market beset by supply glut caused by American shale oil producers.
Nigerian GDP growth is picking up momentum as economy expanded by 2.38 percent in the last quarter of 2018 compared with 2.11 percent in the same quarter a year before, according to the latest data from the National Bureau of Statistics (NBS).
There was a significant improvement in the country’s balance of payment as the total value of goods, services and capital exported over the period outweighed total imports with a surplus of $2.8 million, compared to the $4.5 billion deficit recorded in the preceding quarter.
Compartmentalising the BOP data, the results indicated that the country’s current account balance improved from a deficit of $1.5 billion in the third quarter of 2018 to a surplus of $1.1 billion in the fourth quarter of 2018, largely attributable to an increase in exports, as well as a decrease in imports and net income payments.
BALA AUGIE
