By Samir Gadio, Emerging Markets Strategist, Standard Bank Plc
Despite ample liquidity pushing down secondary market T-bill yields in recent months (364-d tenor currently around 12.7%), we still like the short USD/NGN carry trade given the favourable exchange rate outlook for H1:14 and considering the degree of tradability of the debt and FX markets.
Given the flattening of the FGN curve with the 5-10y portion in a 12.7-12.8% range, we are struggling to see further duration gains without the CBN easing formal monetary policy. We see this as unlikely in coming months.
• The MPC left the MPR, SDF, SLF and the general CRR rates unchanged at 12%, 10%, 14% and 12%, respectively, at its 18/19 Nov meeting, in line with our expectations. The CRR on public sector funds was also retained at 50%. Besides, the MPC held the banks’ FX NOP steady at 1% and maintained the liquidity ratio at 30%.
Meanwhile, the CBN’s reticence to conduct expensive OMO operations has translated into large NGN liquidity surpluses (reaching daily highs of NGN826bn in Oct and NGN417bn in Nov), which contributed to the downward pressure on fixed income yields.
The CBN’s decision to reintroduce the RDAS and suspend the WDAS, impose a cap on USD sales by banks to the BDCs, as well as place further regulations surrounding FX cash importation by banks, contributed to the favorable NGN performance in the official and interbank markets, albeit at the expense of a wider spread with the parallel market.
Inflation fell to 7.8% y/y in Oct 13 and is expected to remain within the CBN’s new 6-9.0% target in the medium term.
We remain underweight Nigerian Eurobonds as the valuations look expensive and limit any meaningful yield compression in the short-to-medium term.