Deep-pocket business events that shaped economy last week ending June 23
The week in review started with seemingly bad news from the Debt Management Office (DMO), which revealed that Nigeria’s total public debt stock increased by 4.5% q/q in Q1-18 to NGN22.71 trillion with domestic debt accounting for 70.3% of total debt and external debt accounting for 29.7%.
It would be recalled that few weeks ago, several international finance watchdogs including the International Monetary Fund (IMF) had warned Nigeria of allowing its debt profile to jump beyond manageable limits.
Leading macro-economic analysts say widening debt profile amid (1) increasing vulnerability of the economy to external shocks, (2) government’s inability to effectively diversify its revenue base, and (3) frail economic growth, raises concern over the fiscal sustainability of the economy.
However, during the week, the President of Nigeria issued an Executive Order for the removal of Value Added Tax (VAT) from “All forms of shared transportation”, including air travel.
Prior to this decision, it was reported that domestic air transport was the only mode of commercial transportation that paid VAT, with road, rail, marine, and foreign airlines exempted from the levy. Whilst we note the loss of an estimated NGN11.55 billion in tax revenue to the government, this development is likely to spur demand for domestic air travel and enable domestic airlines compete favourably with their African counterparts.
Within the week, the equities market reversed into a loss, as negative sentiments extended from the tail end of last week. The ASI dropped by 2.74% to 37,862.53 points, owing to profit taking. All sessions in the holiday-shortened week closed in the red, causing the Year-to-Date and Month-to-Date return to turn negative at -0.64% and -1.00%, respectively. The Oil & Gas (-5.94%) index recorded the most loss, owing to significant sell pressures in SEPLAT shares. The Industrial Goods (-3.39%), Banking (-1.96%), and Consumer Goods (-0.50%) indices also closed negative, while the Insurance (+3.39%) index closed positive. Notably, JAPAULOIL remained the best performing stock for the third consecutive week, and remains the best performing in the month so far with a staggering 123.81% MtD return.
Besides, the overnight lending rate shed 67 bps on average, w/w, to close at 3.58%. Despite the CBN’s OMO intervention on Tuesday, where it mopped up NGN137.40 billion from the system, liquidity remained relatively healthy and was further boosted by Thursday’s inflows from OMO bills (NGN 377.62 billion) and primary market repayments (NGN66.68 billion).
Analysts say this week, inflows from maturing OMO bills (NGN183.27 billion) and the monthly FAAC disbursement (c. NGN300 billion) are likely to outweigh outflows; thus, higher liquidity. In effect, a contraction in the overnight lending rate is likely.
Despite healthy liquidity, activities in the treasury bills market were bearish as general emerging market weakness filtered into the domestic space, leading to selloffs by foreign investors. Consequently, average yield rose 31 bps to 12.89%.
Investor sentiment was negative across the short (+56 bps) and mid (+35 bps) ends of the curve, amid selloffs of the 83DTM (+173 bps) and 174DTM (+112 bps) bills, respectively. However, yield at the long (-7 bps) segment contracted, amid increased demand for the 286DTM (-33 bps). Meanwhile, at this week’s primary market auction, NGN5.40 billion, NGN20.00 billion, and NGN14.62 billion of the 91-day, 182-day, and 364-day bills were allotted.
The bills were 1.58x oversubscribed, with yields closing lower across the 91-day (10.00%; previously 10.20%) and 182-day (10.30%; previously 10.50%) bills. Yield on the 364-day bill closed at 11.50% once again.
Whereas market pundits expect a reversal of the bearish trend on the back of anticipated healthy liquidity, trading in the bond market was similarly bearish, again on the back of selloffs by foreign investors. As a result, yields rose by 22 bps on average, w/w, to 13.53%. There was sell pressure at the short (+27 bps), mid (+18 bps), and long (+22 bps) ends of the curve, with the JUN-2019 (+58 bps), MAR-2027 (+34 bps), and JUL-2034 (+25 bps) bonds recording the most significant expansions, respectively.
This week, experts at Cordros Capital expect yields to take a cue from auction stop rates. The group said “we reiterate our expectation for modestly higher yields in the medium term, anchored on (1) weakening signs of monetary easing, (2) capital flight amid higher yields in safe haven assets, (3) political uncertainty stemming from the upcoming elections, and (4) increased government borrowing to fund the 2018 budget.
At the FGN bond auction scheduled for Wednesday, 27th June 2018, the DMO plans to offer NGN60 billion – NGN20 billion of the APR-2023 (reopening), NGN20 billion of the MAR-2025 (re-opening), and NGN20 billion of the FEB 2028 (re-opening) – in bonds to investors.
On foreign exchange, last week activities showed that the naira remained flat against the dollar at NGN362 in the parallel market for the third consecutive week, while it strengthened by 0.02% to NGN361in the IEW.
Total turnover in the IEW rose to USD906.02 million, from USD619.06 million last week, with bulk of transactions (99.74%, previously 90.38%) traded within the NGN360-NGN369/USD band. During the week, the apex bank injected USD210 million into the FX market, allocating USD100 million to the wholesale window, and USD55 million apiece to the SMEs and invisibles segments.
In the FX forwards market, the NGN/USD strengthened across all major dated contracts — 1-month (+0.10%), 3-month (+0.30%), 6-month (+0.80%), and 1-year (+0.86%) – to NGN364.34. NGN370.85, NGN382.52, and NGN399.76, respectively.
