Following the downgrade of Nigeria’s economic outlook last week by Moody’s last week, demand at the Open Market operation (OMO) has weakened. Analysts at Afrinvest also alluded that, the waning interest of foreign investors is also as a result of uncertainties in the domestic economy.
The interbank rates trended lower last week on the back of improved system liquidity to ₦888.5 billion given the net OMO inflows of ₦154.1 billion. As a result, Open Buy Back (OBB) and Overnight Rate (OVN) rose by 1.4 per cent apiece to settle at 2.4 per cent and 3.1 per cent respectively.
On Thursday last week, the Central Bank of Nigeria (CBN) conducted an OMO auction (₦400.0 billion) to absorb liquidity following ₦344.9 billion OMO inflows.
As with the previous week, subscription was underwhelming at 0.02x and 0.8x for the 96-and-362-day windows while there was no sale on the 187-day OMO. Overall, the CBN sold ₦190.8 billion worth of OMOs across the 96-and-362-day windows at marginal rates of 11.5 per cent and 13.3 per cent respectively.
“In our view, the weak demand at the OMO auction reflects waning interest of foreign investors, due to uncertainties in the domestic economy and the recent downgrade of the country’s outlook by Moody’s”, said Afrinvest.
Treasury bills
In the secondary T-Bills market, performance was largely bearish as average yields across benchmark tenors rose 43 basis points (bps) w/w to close at 7.9 per cent. Only the medium-term instrument recorded gains with yields down 8bps to 7.3 per cent, the short-and- long term instruments recorded sell-offs with yields rising 22bps and 114bps to 7.3% and 9.2% respectively.
As OMO maturities worth ₦532.7bn hit the system next week, it is believed that the CBN will continue its liquidity management operations (OMO auction). However, the current foreign investors’ apathy towards OMO instruments is a major concern.
Bonds Market
The domestic bonds market posted a bullish performance this week as average yield across tenors declined 41bps w/w to 11.6 per cent. At the mid-end, bonds witnessed the most buying interest w/w, shedding 77bps in yields while the long-end notes trailed closely, shedding 33bps on average. Lastly, there were sell-offs on the shorter-dated notes as yields advanced 2bps w/w.
The bullish momentum in the sovereign Eurobonds market persisted this week, leading to a decline in yield for all instruments under our coverage except for the ZAMBIA 2027 instrument which advanced 2bps. High demand continued in the ZAMBIA 2024 and 2022 instruments as yields pared 206bps and 231bps respectively. In the same vein, yields in NIGERIA 2049 and GHANA 2049 instruments declined 83bps and 88bps respectively w/w.
The corporate Eurobonds market also sustained its positive performance this week as yields declined across all instruments save the SINBAYE GOLD LTD instrument which rose 58bps w/w. The MAURITIUS BAYPORT 2020 instrument maintained previous week’s position, as the most demanded instrument, with yield paring 88bps. SEPLAT 2023 and FIDELITY 2022 instruments also witnessed high demand as yields declined 74bps and 56bps w/w in that order. We expect increased buying interest next week as investors seek high yielding emerging markets assets.
Foreign exchange market
The external reserves sustained its downtrend, depreciating 0.3 per cent ($130.0 million) to $39.7 billion from $39.8 billion as at 27/11/2019 which raises concerns on the CBN’s ability to maintain exchange rate stability.
The outlook for the foreign exchange (FX) reserves remains dim due to low oil prices and increasing reversal of Foreign Portfolio Investment (FPI) inflows.
The CBN spot rate close the week at ₦306.95/$, appreciating by 5kobo w/w from ₦307.0/$. At the parallel market, the exchange rate traded flat all week to close at ₦360.00/$.
At the Investors’ & Exporters’ (I&E) FX Window, the NAFEX rate ended the week at ₦363.14/$ on Friday, depreciating 33kobo w/w from ₦362.81/$. Activity level in the Import and export (I&E) Window advanced 44.4% to $1.2 billion from $879.4 million recorded in the previous week.
Last week, there was increased buying interest at the OTC FX futures market, leading to an uptrend in the total value of the contracts by 3.5 per cent to settle at $10.1 billion from $9.7 billion recorded in the previous week.
The NOV 2020 contract saw the most buying interest as investors took additional position worth $175.3 million, with the total value of the contract increasing to $265.1 million. Meanwhile, the APRIL 2020 contract enjoyed the least buying interest as investors bought only $1.1 million to put the value of the contract at $746.1 million. In the coming week, we expect the CBN to sustain its weekly intervention in the forex market.
