• $355m OTC FX Futures Contracts Mature This Week

In line with the OTC FX futures market framework, OTC FX futures contracts valued at $354.71 million will mature this week.

However, the Central Bank of Nigeria (CBN), as has been the tradition since the OTC futures market was introduced last year, is expected to replace the maturing instrument with a March 2018 contract.

But activities at the FMDQ OTC FX Futures Market remained relatively quiet last week as total value of open contracts increased to $4.09 billion as at last Thursday, from the $3.99 billion recorded the preceding week.

The April 26 2017 (which was the cheapest instrument for an extended period of time at the launch of the Futures market) remains the most subscribed, with value of open contracts at $893.77 million, according to a report by Afrinvest Securities Limited.

Nevertheless, the central bank continued its liquidity injection drive last week as it continued Special Wholesale Intervention Forward Sales for maturing Letters of Credit (LCs). Similarly, banks continued to sell personal and business travel allowances as well as tuition and medical fees. As a result, exchange rate at the parallel market firmed up slightly.

For instance, the naira/dollar exchange rate opened the week at N460/$1, but appreciated to N454/$1 by Thursday, before closing the week at N449/$1.

However, the naira marginally weakened against the dollar at the interbank market during the week as naira/dollar exchange rate fell from N306/$1 last Monday to N306.75/$1 by Thursday before appreciating slightly to N306.50/$1.

“In the week ahead, we expect the apex bank to continue its drive to boost FX liquidity in the market. Current external reserves level of $30.3 billion (March 15, 2017) suggests that the CBN is in a healthy position to continue dollar sales to the market,” Afrinvest stated in the report.

Money Market Review

Despite a drop in system liquidity and increased primary market activities during the week,

open buy back (OBB) and overnight lending rates trended south-wards on most trading days save for Tuesday, when it rose 1.2 and 1.1 percentage points respectively.

Available data showed that the week opened with financial system liquidity at negative N66.2 billion. Nonetheless, OBB and overnight rates closed 0.5 per cent points and 0.7 per cent lower than Friday’s close, settling at 14 per cent and 14.6 per cent respectively. This was despite the announcement of an open market operations (OMO) auction by the CBN where it offered N10 billion of the 143-day and N20 billion of the 318-day instruments although no sale was however recorded.

However as the debit for successful bids at the DMO Bond auction dragged liquidity on Friday, OBB and overnight rates rose 3.3 per cent and 2.7 per cent points respectively to close at 14.3 per cent and 15 per cent, down 0.2 per cent and 0.3 per cent week-on-week respectively.

Activities in the treasury bills market were bullish last week as buying interest was evident during the trading sessions. Consequently, average yield dipped on most trading days save for Monday when it closed flattish as late sell-offs tapered the impact of the earlier buying interest on yields. Subsequently, average treasury bills yield closed 16.8 per cent on Friday, down two per cent week-on-week. In the primary market, the central bank auctioned N39 billion, N48.5 billion and N126.3 billion respectively of the 91-day, 182-day and 364-day instruments. The auction was oversubscribed by 0.8 times with investors showing more interest in the longer dated bills.

But this week, it is expected that treasury bills maturity of N135 billion would hit the system, although its impact on system liquidity level is expected to be tapered by a scheduled roll-over of the same amount.

Bond Market Review

The local bonds market was relatively quiet ahead of the DMO’s scheduled primary market auction. Average yield on benchmark bonds opened the week at 16 per cent and closed flattish on the first three trading days. Last Wednesday, the DMO offered N45 billion, N50 billion and N35 billion respectively of the JUL 2021, MAR 2027 (New issuance) and MAR 2036 instruments.

The auction was oversubscribed by 0.6 times as total subscription stood at N216.4 billion relative to offered amount of N130 billion. Investors showed preference towards the longer tenored instruments as total subscription to the MAR 2027 bond stood at N75.99 billion relative to offered amount of N50 billion whilst total subscription to the MAR 2036 instrument settled at N102.18 billion relative to offered amount of N80 billion.

The Federal Government through the Debt Management Office also commenced the issuance of the first tranche of the Retail Savings Bond. The savings bond (with a maturity date of March 22, 2019) was offered at an interest rate of 13.01% (paid quarterly). Offer for subscription was open from Monday 13th March – Friday 17th March.

Contrary to the performance recorded the preceding week, performance of the Sub-Saharan sovereign Eurobonds was largely bullish as investors hunted for bargains across board despite a rate hike by the US FED during the week. Consequently, yield on all SSA sovereigns fell save for the Nigerian 2021, South African 2041 (up 6bps apiece) as well as the Gabon 2024 and Ivory Coast 2028 (up 3bps apiece). Average yield on the Ghana, Kenyan and Zambian sovereign Eurobonds dropped 15basis points (bps), 8bps and 17bps respectively whilst yield on the South African 2017 declined 29bps.

Inflation

For the first time in 15 months, the Consumer Price Index (CPI), which measures the rate of inflation, dropped to 17.78 per cent (year-on-year) in February 2017, the National Bureau of Statistics (NBS) said last week. In its latest CPI report released on Tuesday, NBS said the figure was 0.94 per cent points lower when juxtaposed with the 18.72 per cent posted in January. According to the NBS, the new figure marked the first time in 15 months that the headline CPI has dipped on a year-on-year basis. The NBS traced the development to the effects of a slower increase in food and non-food prices as well as favourable base effects over 2016 prices. However, price increases were recorded in all divisions that constitute the headline index, said the report.

Housing, water, electricity, gas and other fuel, education, food and alcoholic beverages, clothing, foot ware and transportation services provided the major divisions that accounted for accelerating the pace of increase in the headline index. On a month-on-month basis, the headline index rose by 1.49 per cent in February 2017, representing a 0.48 per cent points higher from the 1.01 per cent recorded in January.

Similarly, the food index rose by 18.53 per cent (year-on-year) in February, up by 0.71 per cent points over what was recorded in January (17.82 per cent).

Etisalat Dollar Debt

Nigerian banks last week opposed a proposal by Etisalat Nigeria to convert part of a $1.2 billion loan from dollars into naira and want Abu Dhabi telecoms group Etisalat and its other shareholders to recapitalise it instead. A banker with knowledge of the negotiations told Reuters that the seven-year syndicated loan, on which Etisalat Nigeria missed a payment, has a dollar portion of $235 million which the telecoms operator wants to convert into naira to overcome hard currency shortages on Nigeria’s interbank market.

“Etisalat is asking for us to convert the dollar component to naira but banks don’t want that option and have told them to talk to their parent to settle the loan,” the source said, adding that regulators favoured the conversion.

The UAE’s Etisalat own 45 percent of Etisalat Nigeria, while Abu Dhabi’s Mubadala owns 40 percent of the company, which is due to meet its lenders on Thursday for debt talks mediated by Nigeria’s central bank and the telecoms regulator.

This meeting came about after authorities agreed with local banks to prevent Etisalat Nigeria, which was not available for comment, going into receivership. Nigeria has been running short of dollars as a result of lower global prices for oil, its major export. It economy entered a recession last year for the first time in 25-years. Most of the 13 lenders involved in the Etisalat Nigeria loan had raised dollars abroad to participate, meaning that further naira weakness would see them receive fewer dollars.