Nigeria to Make Eurobond Call as FX Scarcity Deepens
Deepening foreign currencies scarcity to meet productive demand has impacted all the facets of the Nigerian economic sectors and analysts have started to projecting possible Eurobond call in 2021.
Some pundits have noted that Nigeria Eurobond call may attract higher rates than the local market, but the fixed income market has also commence yields repricing as investors demand for positive returns amidst rising inflation rate.
The nation’s external reserve has remained low, covering about five months of imports bill while foreign investors remain aloof due to multi-tiered local currency pricing.
However, as some investment analysts have noted, that comes with some sorts of capital control by the CBN curtailing repatriation of foreign currencies abroad amidst demand backlog.
At the investors and exporters window, foreign currencies supply has been limited, trending below pre-pandemic level, according to currencies trader.
In a report, Vetiva Capital Management said while price and exchange rate stability are being addressed at the recently concluded Monetary Policy Committee meeting, Godwin Emefiele, the CBN Chief, said the Bank has not intervened in the IEW in 2020.
Analysts attributed this to possible reason for price discovery process seen at the Nigerian Autonomous Foreign Exchange (NAFEX) rate deprecated beyond N400 to a dollar. .
Recall that disagreement between the International Monetary Fund and Nigerian Government over multi-tiered exchange rates has stalked $1.5 billion loans, as World Bank group cited overvalued currency.
It appears the Godwin Emefiele’s led Central Bank remains unwilling to buck, though series of unorthodox foreign exchange management approaches have been implement, yet Naira continues to struggling to find true value.
MarketForces Africa gathered that devaluation will have strong negative impacts on Nigerians amidst rising twin evil of unemployment and galloping inflation rate.
But then, key industries with demand for raw materials import are finding it difficult getting foreign currencies, thus reduce productivity capabilities.
Exchange rate-disadvantaged Naira has impacted fast moving consumers goods and other key industries production cost, leading to unending price increments.
All facets of the Nigerian economy have recorded a strong price uptick despite meagre minimum wage of less than $70 per month.
The foreign exchange scarcity stress was exacerbated by the pandemic, lowering government revenue amidst excess oil supply.
But the trend in the oil sector has reversed as Brent Crude price trades more than $20 per barrel above $40 assumption to prepare budget 2021.
“While possible accretion in reserves could emanate from vaccine-induced recovery in oil demand, the need to shore external reserves remains essential.
“Nonetheless, we expect continued supply-side measures to address inflationary concerns and support output growth in the near to medium term”, Vetiva posited.
Budget 2021 document revealed that government plans to finance N5.6 trillion deficit via local and international market.
A new development in the United States 10-year Treasury instrument has seen rates at 7.5% which some analysts believe would drive rate across the Eurobond.
Also, Nigerian political and economic risk appears to be worsen with rising insecurities could mean foreign investors would demand higher rate.
In a statement, Finance Minister told media that government has adopted the Nigerian Autonomous Foreign Exchange (NAFEX) rate for government transactions.
Insecurity a major cause of rising inflation — Emefiele
This signaled a tacit devaluation as analysts hoped the CBN is moving towards a more flexible foreign exchange framework.
Meanwhile, in his speech, Godwin Emefiele, the CBN Governor made a disclaimer, saying the apex bank operates a managed float regime and has no plan to embrace a free float.
In a report, Chapel Hill Denham said while the CBN’s claims to be operating a managed float regime, the exchange rate arrangement is increasingly tending towards a crawling/hard peg.
Analysts hold the view given the lack of flexibility in the pricing of the currency, weak liquidity and unmet pent-up demand.
“Liquidity conditions have worsened in the foreign exchange market since the start of the year, due to lower intervention sale by the CBN and weak foreign portfolio inflows”.
Chapel Hill Denham noted that FX intervention in the I&E Window in February 2021 was the lowest since the CBN resumed intervention sale in September 2020.
“Year-to-date, daily transaction volume in the I&E Window has halved to US$63.4 million per day from US$124.3 million per day in Q4-2020”, analysts said.
Notwithstanding, analysts added that FX reserves have continued to decline, falling by 2.3% year-to-date to US$34.6bn (4.8 months of goods and services import cover).
To aid external reserves accretion, the CBN has doubled down on alternative sources of FX, including remittance inflows.
Also, Chapel Hill Denham said it appears the FGN will be making a return to the Eurobond market this year to finance its deficit and improve FCY liquidity locally.
“We expect both factors, as well as better-than-expected oil prices, to help support FX liquidity. Nonetheless, we believe the balance of payment adjustment is incomplete, and further currency adjustment (7% – 15%) is inevitable”, it added.
The Debt Management Office (DMO) recently said the Nigeria’s indebtedness has increased to N32.915 trillion at the end of 2020.
The new borrowing plan which is currently implemented seeks to balance ratio of local and foreign borrowings at 70:30.
Policymakers said this is to further strengthen the domestic debt market and optimize access to both Concessional and Commercial sources of funding.
Nigerian government paid total sum of N2.5 trillion to service total public debts in 2020 amidst pandemic-induced global disruption.
This sum was however split between local and foreign debt service payments at N1.556 trillion and N590 billion respectively, as the foreign portion is converted at official rate.
Total external debt service payment gulped $US1.556 billion; 54% of the sum was expended on commercial Eurobond interest payments.
Some 28% of this amount was allocated to service multilateral taken and 17% for bilateral loans.
Meanwhile, debt office said total public debt to gross domestic product as at December 31, 2020 was 21.61%.
It however consider this to be within Nigeria’s new limit of 40%, resulting from recent adjustment to fiscal responsibility act.
The MPC decisions
In line with analysts’ expectation, the MPC maintained status quo on all policy rates at the end of the 2-day MPC meeting which ended today, 23rd March 2021.
However, the decision was not achieved by consensus as three committee members voted to hike the benchmark Monetary Policy Rate (MPR) – two by 50bps and one by 100bps – and six voted to maintain the MPR at 11.5%.
Then, the asymmetric corridor around the MPR was retained at +100bps/-700bps while the Committee voted to retain the Cash Reserve Requirement (CRR) at 27.5%, and liquidity ratio at 30.0%.
Outlook and Key considerations of the MPC
Policymakers considered moderate recovery in output growth in Q4-2020, associated mainly to the positive impacts of monetary and fiscal measures implemented to reflate the economy.
It noted the GDP growth swung positive in Q4-2020, albeit marginally at +0.1% year on year, from the COVID-19 induced recession between Q2-Q3:2020.
Nevertheless, the committee noted downside risks to growth as efforts to achieve herd immunity continued to face headwinds.
There were apparent concerns about the unabated rising trend of domestic prices and re-emphasized the exigency for monetary and fiscal policy collaboration to finance productive ventures, improve aggregate supply and push down prices.
The MPC also noted that fiscal headroom remained constrained and fragile, following the twin shocks of the pandemic and oil price volatility and the continued build-up of public debt.
Chapel Hill Denham said the second MPC meeting of the year held against the backdrop of rising inflationary pressures and widening external and fiscal imbalance.
“Headline inflation rate touched a 4-year high of 17.33% year on year in February, while trade deficit widened (to 6.2% of GDP) in Q4-2020, despite the series of FX rate devaluations and currency controls introduced to stem outflows”.
It said macroeconomic stability challenges became apparent in 2020, but the CBN choose to adopt a pro-growth stance to support businesses and households against the COVID-19 induced economic recession, arguing that inflation is mainly a supply-side phenomenon.
“The benefits of the CBN’s pro-growth stance reflected favourably in the Q4-2020 GDP print, as the economy posted a suspiring early recovery from recession, although the slackness in the labour market persisted, as shown in rising unemployment rate”, it added.
The investment firm explained that with GDP growth back in the positive territory, the expectation of investors is that the CBN will, over the near term, redirect its policy goals from growth, towards its primary mandates of price and exchange rate stability.
Against this backdrop, the MPC essentially had two policy options heading into the meeting: hike policy rate to reduce imbalances, or maintain status quo to consolidate on the recovery.
“The MPC opted for the latter, which was in line with our expectation”, analysts stated.
Analysts at Chapel Hill Denham said in a note that while the CBN might have kept policy rate constant at the MPC meeting, they note that financing conditions have tightened considerably over the past four months.
They attributed this to weaker level of liquidity in the money market, as well as a more hawkish balance sheet policy by the CBN.
“The CBN has used its balance sheet to tighten bank and non-bank liquidity, specifically using the issuance of Special bills, Cash Reserve Requirements (CRR debit) and OMO auctions to mop-up liquidity in the financial system and raise market interest rates.
As a result, the one-year open market operation (OMO) and Nigerian Treasury Bill auction stop rates has risen to 10.10% and 7.00% from 6.75% and 0.15% in November 2020, respectively.
“We do not expect to see a reversal in this trend and retain our expectation of a 100bps rate hike in 2021.
“In our view, the lack of consensus in reaching the status quo outcome yesterday signals a pivotal shift in the thinking of the MPC, in preparation for a more hawkish policy era.
“We see a very strong possibility of a 50-100bps rate hike at the May/July MPC meeting, if the economy maintains a positive GDP growth momentum in Q1-2021”, Chapel Hill Denham stated.
The committee arrived at this decision following the consideration of various macroeconomic variables like; the high rate of Unemployment (33.3%), the upward inflationary pressure (17.33%), and the insipid economic growth (0.11%) as of the fourth quarter of 2020.
“The decision to hold the rate and other policy parameters is in line with our expectation, given that the committee appeared tilted at the previous meeting more towards growth stimulation, which the economy is in dire need of considering the week figures posted in Q4 2020”, analysts said.
Furthermore, at the previous meeting in January, the chairman had posited that inflation is more of a supply side factor, hence validating the committee’s reluctance to tighten.
The committee noted that pursuing a hawkish stance, could cause a spike in cost of capital and worsen the current unemployment concern in the economy.
On the other hand, the committee was unwilling to pursue a dovish stance given negative real returns with the rising consumer price index.
CSL Stockbrokers said MPC will continue to play down on the current inflationary pressure, which remains largely supply-side driven since tightening will further increase cost of capital and slow down investments needed to boost recovery of an ailing economy.
“Also, we consider a dovish decision far-fetched in the short to medium term as this may be bad for the currency.
“We however do not completely rule out tightening in the short to medium as any hit to the exchange rate could spur a hawkish stance – signaling a desperate move to attract more greenback”, the firm stated.
Nigeria to Make Eurobond Call as FX Scarcity Deepens