Bear curve flattening underway, government debt rises in Q1 2022 and corporate tax collections accelerate to 7-year highs
The week that was (June 6-10)
Mixed trends along the curve as short-term rates rise while long-term bonds fall: Diverging trends along the Naira yield curve continued last week: Short-term Nigerian Treasury Bill (NTB) yields continued their upward trend (Avg: +16 bps w/w) while as bond yields declined over the week, with the long end down around 5-10bps. Liquidity conditions were relatively adequate with a decline in bank borrowing from the CBN discount window (daily average: -86% p/p at NGN 1.6 billion). That said, interbank rates jumped on Friday (+600 basis points to 14%) due to some outflows for FX auction settlements.
At Wednesday’s NTB auction, the CBN (on behalf of the DMO) responded to relatively stronger demand, with bid coverage at 2.1x (last 1.6x), selling NGN 183 billion worth of short-term debt against its target of NGN 174 billion. Interestingly, the apex bank lowered the stop rate over the 12-month term to 6.44% (last 6.49%), which in light of the May 2022 rate hike gives credit to the argument that the tightening decision was largely symbolic. Indeed, the CBN’s actual behavior on other fixed income instruments suggests some change: rates on 12-month OMO yields remain at 10% and recent maturities of 3m special bonds have been rolled over. at 0.5%.
Figure 1: Naira yield curve
Eurobond sale drives up Nigeria’s debt in Q1 2022: The DMO released Nigeria’s debt figures at the end of March 2022, which showed that Nigeria’s total public debt (FGN and State) increased by 5% from the end of December 2021 to NGN 41.6 trillion (23 % of nominal GDP) or USD 100 billion. In terms of mix, domestic debt continued to dominate at NGN 25 trillion (60% of total debt) while external debt stood at $39.6 billion. External debt increased by 5% compared to December, due to the sale of Eurobonds at the end of March 2022. On the domestic side, the large increases stem from the issuance of Treasury bills, the stock now amounting to NGN 4.4 trillion, reflecting the net issuance of DMO. position on the front since the pandemic. As I have noted for some time, this net issuance treasury stance goes against everything the Department of Finance asked when it sold $3 billion worth of Eurobonds in 2018 as part of an alleged plan to reduce refinancing risk. Today, the stock of Treasuries is now above the level of 2018 and the Eurobonds sold have not yet reached maturity.
Chart 2: Nigeria – Public Debt
Bonds outstanding stood at NGN 14.2 trillion, up about NGN 278 billion from end-December 2021, although the DMO sold NGN 883 billion worth of bonds during the first quarter 2022. Fear not, the missing gap reflects the NGN 605 billion January maturities of the 2022 bond FGN which were later rolled over.
Rising foreign collections drive up corporate tax revenue in Q1 2022: The National Bureau of Statistics (NBS) released data on Corporation Income Tax (CIT) revenue for the first quarter of 2022, which showed a 36% year-on-year increase (+53% year-on-quarter). ) to reach NGN532 billion, the highest quarterly printing since the second quarter of 2015 NGN621.50 billion). Looking at the breakdowns, the growth came largely from foreign CIT payments (+75%y/y to NGN323bn) amid strong local collections (+37%y/y to NGN209bn).
Figure 3: Quarterly CIT collections
Source: SNB, FIRS
The naira remains broken, the foreign exchange reserves increase after: Nigeria’s external reserves posted what must be their first increase in weeks: +0.2% p/p to $38.6 billion (5.8 months of import cover). On the currency front, the official rate remains stuck at 419 NGN/$ although the CBN continues to sell between 440 and 460 at its SMIS auction and to foreign investors. That said, the parallel market continues to trade at lower levels (NGN600-610/$).
The Weak Ahead (June 14-17)
In the coming week, the market will focus on the NTB auction where the CBN on behalf of the DMO would seek to refinance NGN 35 billion worth of paper. There are also minute maturities of OMO of 20 billion NGN. In terms of data, the SNB is expected to release inflation figures for May 2022.
Inflation probably exceeded the 17% level in May 2022: In line with global trends, inflation in Nigeria likely accelerated further during May, likely fueled by the continued spiral in diesel prices (+22% m/m) and the depreciation of the naira in the market parallel. Diesel is the primary fuel used in interstate food transportation and pass-through effects likely supported an acceleration in headline inflation between 17.75-17.85% y/y on my numbers.