Naira face devaluation threat

Transcription

1 Naira face devaluation threat P a g e 1...as oil prices skydive September, November Fixed Income Update Current Average Yield Treasury Bills % Treasury Note 12.25% Macroeconomic Variables Inflation Rate 8.10% MPR 12.00% GDP Growth 6.54% Current Bond Metrics Average Coupon 13.30% Average Clean price Average YTM 12.02% Average MD 2.34 Meristem Bond Index Index Level YtD Return -3.38% QtD Return -1.33% MtD Return -1.33% WtD Return 0.01% Executive Summary We analyse the effect of falling oil price in the global space and how it affects largely oil dependent nations. We particularly explore how this impacts Nigeria viz a viz possible measures put in place to stabilize the economy through monetary and fiscal policies. In October, average yield on T-Bills increased by 0.09%, as yields in 12M tenor declined by 0.06% while all other yields increased. In the same period, demand for bonds was tempered as average yield increased by 0.35% pegging at 12.08% compared to 11.73% in previous month. At the inter-bank currency market, the Naira depreciated by 1.10% due to devaluation threats on the currency as a result of excess demand in the market which has continually necessitated CBN s continued defence of the Naira. In the year, Naira has outperformed its African peers as YtD depreciation pegged at -2.74%. However, we expect the turbulence in the global oil space to be curbed soon enough, as OPEC compels the large oil exporting nations to reduce output. The bond market was tempered in October as foreign investors sell down on investment in order to retain present value before existing. This is in accordance with our expectations that headwinds accompanying the 2015 elections would drive yields northward. In Q3:2014, capital inflow of USD1bn was injected into bond portfolios. We are of the opinion that domestic investors would key into longer term bonds due to attractive yield in anticipation of a reduced interest rate post-election. Investors are also expected to pull funds from equities market into fixed income instruments. This would temper the yield environment.

2 P a g e 2 NIBOR across Tenors Declined In the month of October, average NIBOR rate across tenors witnessed a marginal decline of 0.02% to peg the average rate at 12.59% (vs % in September). The call rate was primarily responsible for the minimal decline, as it pared 0.14%, while the 6M tenor trimmed 0.03%. On the contrary, the 1M and 3M tenors appreciated by 0.01% and 0.10% respectively. The OBB and O/N rates both declined marginally by 0.04% at month end to peg the OBB and O/N rates at 10.25% and 10.50% respectively, signaling that the system remains awash with liquidity. Chart 1.1: NIBOR across Tenors Jun Oct 2014 O/N 1M 3M 6M Chart 1.2: Average T-bills and Bonds T-bill Bonds Source: FMDQ; Meristem Research Weak Appetite for Bond Instruments Yields on T-bills increased across tenors by 0.09% to peg the average yield at 11.10%. Yields were volatile during the month getting as high as 11.57% across tenors on the 20 th of October, before a gradual moderation to 11.10% by month end. However, yield on the long end of the curve, 12M tenor, dropped slightly by 0.06% while other tenors increased with the highest of 0.24%, 0.14% and 0.25% demonstrated in 1M, 3M and 6M accordingly. There was a weak appetite for bonds as average yield increased by 0.35% Month-on-Month (M-o-M) to 12.08% (vs % in previous month) with the highest increase noticed in the 3YR, 5YR, 10YR and 20YR with respective increase of 0.58%, 0.69%, 0.18% and 0.40%.

3 P a g e 3 Naira Depreciates over fear of Devaluation The local currency has been undulating since the beginning of July, recording the highest appreciation in August when exchange rate was NGN160.90/USD. However, during the month, rate was high at NGN165.65/USD despite the Central Bank of Nigeria s (CBN) intervention. The CBN offered a total of USD3.00bn in seven RDAS auctions, 3.2% decline from previous month, selling USD2.99bn at a marginal rate of NGN155.75/USD. The constant weekly dollar sales by the CBN is a measure to enhance naira stability, thus alleviating the threat of devaluation. Despite this measure, the YtD depreciation of the Naira measured at -2.65% as at end of October. In spite of the depreciation in naira, it continues to outperform some of it African peers. Ghana, South Africa, Mauritius, Kenya and Egypt currencies have YtD depreciations of 35.06%, 5.53%, 4.49%, 3.82% and 2.93% in that order. During the month however, Ghana and Mauritius currencies appreciated by 2.05% and 0.38% respectively while Egyptian and Kenyan currencies held firm against the green back. In the BRICS economy, South Africa, India and Chinese currencies appreciated by 2.18%, 0.64% and 0.43% respectively while Russia and Brazilian currencies depreciated by 8.61% and 1.26% accordingly. With the election drawing close and heightening country risks, we envisage further pressure on the domestic currency. However, with the continuous defense of the Naira by the CBN, we expect the currency to exchange within the range of NGN NGN170.00/USD by yearend. Chart 1.3: MtD Country depreciation across countries Chart 1.4: Naira Trend from July to October 9.00% 7.00% 5.00% 3.00% 1.00% -1.00% -3.00% Source: Bloomberg; CBN; Meristem Research

4 Dec-13 Jan-14 Jan-14 Feb-14 Mar-14 Mar-14 Mar-14 Apr-14 Apr-14 May-14 May-14 Jun-14 Jun-14 Jul-14 Jul-14 Aug-14 Aug-14 Sep-14 Sep-14 Oct-14 P a g e 4 Global Oil Price Plunges The continuous fall in crude oil price has been negatively impacting oil producing countries, chiefly oil-driven economies. Since July 2014, the oil price has been trending south due to oversupply of oil and weakening demand across Europe, China, Brazil, Japan, US and emerging markets. The excess supply was caused by resumption to oil production in countries like Libya, South Sudan and Iraq as well as energy efficiency in those countries. The dumping of crude oil at very cheap prices by ISIS to fund their course also contributes to the oversupply. On the demand side, the hunger for Liquefied Natural Gas as substitute for Brent crude and bonny light is also responsible for the weak demand for crude oil. Although, measures were put in place by OPEC to defend the price through output cut by its member nations including; Saudi Arabia, Russia and Ukraine, but this has proved abortive. In our opinion, if this reluctance persists, after OPEC s meeting on November 27, then further decline might be expected. Thus, making us weary of how a continuous decline will affect fixed income instruments in Nigeria due to the country s heavy dependence on oil revenue. Chart 1.5: Global Oil Supply WTI (USD) OPEC Basket (USD) BRENT (USD) Bonny Light (USD) 80 Source: Bloomberg OPEC Meristem Research What s the Rhythm for Nigerian Economy? The Nigerian budget was benchmarked on an average oil price of NGN77.50pb, oil output of 2.388mbpd and an exchange rate of NGN160/USD. The unexpected

5 P a g e 5 oil shock has affected the financial plans of the Nigerian government. According to Neil Shearing Chief emerging market economist of capital economics in London, Bloomberg, Nigeria has joined Russia, Colombia and Venezuela in the list of the biggest losers from the decline in oil prices. Oil revenue accounts for c.80% of Nigeria s government revenue, thus making the decline in both price and export quantity (U.S. reducing exports due to shale oil; oil theft in the Niger Delta) negatively affect the country s revenue. Additionally, high importation of food, refined oil and gas due to inadequate refining capacity makes the Nigerian currency threatened. A weaker currency would increase cost of importation, thus calling for the CBN for support via reserves. According to CBN report, government reserves have declined by 3.04% from end of September to 3 rd November These murky events have made investors skeptical as devaluation of the currency is envisaged to be the option. Chart 1.6: Nigerian Foreign Reserve Foreign Reserve Monthly Moving Average Source: FMDQ; Meristem Research Safety in longer bond Instruments The fear of Naira devaluation, coupled with issues of Insurgency, and electoral commotion has widened the country s risk premium beyond the prevailing level of return, thus necessitating investors exit. We expect PFAs and institutional investors to tread cautiously in the face of economic reality. Albeit, we are of the opinion that this a right time for investors to take position in the fixed income instruments. Taking a cue from the yield environment when the erstwhile CBN governor was suspended, yields on fixed income instruments

6 P a g e 6 rose from 9.81% in 19 th February to 11.86% by March ending as capital flew for safety. Investors who took advantage of the situation were duly rewarded as normality returned and the yield declined to 10.38% by May. We envisage that the same scenario might likely play out, as we expect tighter fiscal and monetary measures would be put in place to stabilize the economy over time. Possible measures to achieve this goal includes, increase government borrowing, developing non-oil-revenue generating sectors, tax increase, and devaluation of the naira or reduction of expenditure (possibly through removal of subsidy). However, with the participation of the incumbent president, increase tax or remove subsidy is not feasible as this would hamper his support in the coming election. Likewise, reducing interest rate would increase liquidity as cost of borrowing reduces. This would increase importation especially as the country gets closer to year end and more Naira is expected to change for dollar, which would further weaken the currency and probably tend towards devaluation of the currency. We envisage an increase in capital expenditure as well as diversification of the economy (in the services, manufacturing and agricultural sector) to boast investment and revenue generation. Despite all odds, the economy is expected to rebound post-election as anticipated risk would be minimized. Therefore, longer term bond are advised at the moment, such as the 3YR, 5YR and 7YR bonds with an average yield of 12.66%. So, holders are expected to enjoy the decline in yield post-election. Despite all measures looked into, we are of the opinion that the election might not pose as much threat as speculated. Global oil supply is expected to temper through OPEC s efforts to defend oil price. We expect increased participation of investors post-election.

7 P a g e 7 Contact Information Brokerage Services gbadunolasokunbi@meristemng.com ( ) Investment Banking/Corporate Finance adejumokeawolumate@meristemng.com ( ) seunlijofi@meristemng.com ( ) Wealth Management sulaimanadedokun@meristemwealth.com ( ) damilolahassan@meristemng.com ( ) Tel: Registrars muboolasoko@meristemregistrars.com ( ) Tel: Trustees yinkaadegbola@meristemng.com ( ) Tel: Client Services tounomonaiye@meristemng.com ( ) Investment Advisory ifeomaogalue@meristemng.com ( ) Corporate websites: Investment Research saheedbashir@mersitemng.com ( ) kemiakinde@meristemng.com ( ) research@meristemng.com Tel: Meristem Research can also be accessed on the following platforms: Meristem Research portal: meristem.com.ng/rhub Bloomberg: MERI <GO> Capital IQ: ISI Emerging Markets: Reuters: FactSet:

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