The Nigerian money market will be awash with excess liquidity this month, as a total inflow of about N2.33 trillion is expected to hit the money market from the various maturing government securities and Federation Accounts Allocation Committee (FAAC).
The Central Bank of Nigeria (CBN) continued with its tight monetary policy stance throughout January 2019 as it continued to mop up excess liquidity through the use of Open Market Operations. The goal is to curb inflation and maintain stability in the foreign exchange market.
This approach led to an increase in the yields on Nigerian Treasury Bills (NTBs) in January 2019 compared with December.
“We estimate a total outflow of approximately N644 billion from the various sources, leading to a net inflow of about N1.68 trillion,” Ayodele Akinwunmi, head of research, FSDH Merchant Bank Limited, said.
FSDH Research expects the market to remain relatively liquid in February 2019. This may continue to necessitate the issuance of OMO to mop-up the liquidity in the system.
Akinwunmi believes the yields on the NTBs may increase further, particularly on the long end from the current levels. NTB yields are likely to be influenced largely by the level of liquidity in the banking system, the short-term borrowing needs of the government, the need to maintain price stability and election considerations.
In the fixed income market, FSDH Research expects yields in the bond market to increase above the current level.
Consequently, investors with large bond portfolios may take profit and buy back later when yields increase, while those with small portfolios should take advantage of the current yields and buy gradually.
Traders in the Treasury Bill market may adopt a strategy that will allow them to shift from one tenor to another in order to take advantage of movements in yields as investors are expected stay in short-tenured fixed deposits. This will enable them to switch as market opportunities arise.
Investors in FGN Eurobond may take profit on some of their investments and buy back later when the yields increase. FSDH Research notes that the current yields on some of the Eurobonds are higher than the coupon rate.
In its Monthly Economic and Financial Markets Outlook for the month of February 2019 titled: ‘Global Developments in January Positive for Nigeria. How Sustainable?’ FSDH Research observed downward movement in the external reserves in early February. This may be a pointer to demand pressure at the foreign exchange market and may lead to depreciation in the value of the Naira.
The current position of external reserves continues to provide short-term stability for the value of the Naira. However, the medium-term stability in the foreign exchange market will depend on the country’s foreign exchange receipts from both crude oil and non-oil products.
The country’s external reserves increased by 0.13 percent from US$43.12 billion at end-December to US$43.17 billion at end-January 2019.
There was a significant increase in capital importation via Foreign Portfolio Investors (FPI) in the Investors’ and Exporters’ Foreign Exchange Window (I&E window) in January 2019. FPI contribution in January stood at US$1.32 billion in January, accounting for 51.34 percent of total inflows, the highest contribution since April 2018. This is based on data obtained as at Monday, 4 January 2019 from the FMDQ OTC Securities Exchange. This may be a reflection of foreign investors taking advantage of higher yields on fixed income securities.
The increase in the external reserves, supported by the increase in Foreign Portfolio Investors, led to an appreciation in the foreign exchange rate in January. The premium between the inter-bank and parallel markets narrowed in January 2019 compared with December 2018.
However, FSDH Research expects the CBN to maintain the current tight monetary policy stance to ensure continued stability in the foreign exchange market. “We maintain our foreign exchange rate forecast of N390/US$ for 2019”, Akinwunmi said.
Crude oil price recovered in January 2019 compared with the position as at close of December 2018. This provides some temporary fiscal relief in Nigeria. Despite the increase, FSDH Research believes Nigeria needs to adjust the Budget benchmark. It also needs to build a strong structure for non-oil exports. Crude oil price is forecasted to be lower in 2019 compared with 2018, mostly as a result of expected oversupply in the face of a weak demand occasioned by fragile global economic growth. According to secondary data available from OPEC’s report for the month of January 2019, the daily crude oil production in Nigeria increased by 0.63% to 1.75mb/d in December 2018, from 1.74mb/d in November. This is above the production quota from OPEC of 1.685mb/d but below the benchmark in the 2019 budget of 2.30 mb/d.
Week Ahead (11th – 15h February, 2019)
Commodities
Corn prices to be bullish in the near term due to expectations of a tighter global supply.
Fixed Income
Sub-national Bond with description 15.50 Ondo 14-Feb 2019, issued by Ondo State Government on February 14, 2012 will mature on Thursday February 14, 2019.
T-bills worth N783.33 billion will mature via the primary and secondary markets which will more than offset T-bills worth N153.38 billion to be auctioned by CBN.
Currency
Naira to remain relatively stable this week at the Investors and Exporters Windows, following the commitment of the CBN to sustain exchange rate stability.
Data Release
The National Bureau of Statistics will release the Nigerian Gross Domestic Product by Output Report for Q4 2018 and Full Year 2018 on Tuesday February 12, 2019.
Event
The Board and Management of Eterna Oil Plc will visit the Nigerian Stock Exchange on Tuesday February 12, 2019 to commemorate the company’s 30th Anniversary.
