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, BusinessDay analysis of historical data shows.
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.
Fixed income yields approaching 20 percent for Nigeria would compare favourably to Kenyan government 10 y bonds at 14.10 percent and South African Government 10y bonds trading near 8.82 percent in the emerging markets.
In developed markets, negative yields in Japan and Germany and a U.S 10 year Treasury Bond yield of 1.58 percent could also sway offshore bond investors to look more closely at Nigeria.
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 five-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 CBN’s policy meetings next 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 followed 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, and said the economy would 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.”
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 and pushed the naira to near N293 per dollar, but has yet to attract significant offshore flows.
Higher fixed income yields will likely push borrowing costs higher for Nigeria whose budget deficits will more than double to 2.16 percent of GDP in 2016.
The government expects to plug the deficit with N1.84 trillion of borrowing, half of which will come from domestic debt markets.
The Federal Government is already expected to spend N1.48 trillion on interest payments on its debts in 2016.
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.
Patrick Atuanya
