Last week was an eventful one for the global and domestic economy as we move towards the end of the first quarter of 2023. In the global space, the US Federal Reserve raised the federal fund rate by 25bps to a range of 4.75% – 5.00%, signaling an end to its aggressive rate hikes amidst the banking sector crisis. Locally, the DMO had a successful bond auction in March, raising N563bn which exceeded its planned target of N360bn, with strong demand seen across four different bond maturities. Likewise, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) increased the MPR by 50bps from 17.5% to 18% in March 2023, making it the second consecutive hawkish tone this year, albeit less aggressive compared to January. Other notable domestic happenings last week were the latest data on currency in circulation, equities market update and happenings in the currency space. Here are five important developments we think you should know.
US Fed increases interest rate further by 25bps – The US Federal Reserve increased its key policy rate by 25bps to a target range of 4.75%-5% last week. The 25bps hike signaled the end of its aggressive tightening. This is in order to balance the two conflicting issues of runaway inflation and the turmoil in the banking system. As a result of the FOMC raising interest rates, the 2-year Treasury yield dropped significantly to 4% after the rate hike, and the Dow dropped by 500 basis points. The market is currently pricing a hold decision at the May and June policy meeting. However, the Fed’s dot plot continues to price in another 25bps increase at the next policy meeting in May, before leaving the rate unchanged over the rest of the year.
MPC of the CBN raise rates by 50bps; signals further slow hikes – The MPC of the CBN increased the Monetary Policy Rate (MPR) by 50 basis points from 17.5% to 18% in March 2023 and left other policy parameters unchanged. The 18% MPR is the highest since November 2002 when the key policy rate was 18.50%. The decision to raise the MPR was made in response to the lingering elevated inflationary pressures, global headwinds, and uncertainties, as well as the upcoming subsidy removal in June. This indicate CBN commitment to tightening monetary policy and stabilizing the economy. However, the Committee’s tone suggests the end of the hiking cycle might be underway as the risk of overtightening comes to the forefront of policy making more so that inflationary pressures are expected to remain high over the rest of the year, amid increased headwinds to domestic growth. We expect the increase in the Monetary Policy Rate (MPR) will lead to higher borrowing costs and could help to moderate inflation, albeit slightly.
Naira Swap Update – Nigeria’s currency in circulation dropped to a low of
N982 billion in February 2023, with a significant decline of 29.4% from the previous month’s N1.39 trillion. This is the lowest level recorded since November 2008. The Central Bank of Nigeria (CBN) has been able to mop up 74% of the excess liquidity by recovering N2 trillion out of the N2.7 trillion previously outside the banking vaults. It is worth noting that c. N3 trillion was in circulation when the Naira swap was initially introduced. The shortage of cash has affected economic activities and caused difficulties for businesses, especially those that rely on cash for transactions. Consequently, it is expected that domestic growth will moderate significantly by the first quarter of 2023 with sectors such as Agriculture, Manufacturing, and Trade expected to be the worst hit.
March Bond Auction – The DMO conducted a successful bond auction in March by raising
N563bn, which exceeded its planned target of N360bn. The auction received subscriptions totaling N809bn across four different bond maturities. The bid-to-offer ratio stood at 2.25x, indicating strong demand at the auction. However, despite borrowing N207bn less than the February bond sold, the weighted average rate increased by 13bps from the 15.23% recorded in February. This auction recorded the highest bid-to-cover ratio of 1.44x on a YTD basis. Rates on the 2028s, 2032s, 2037s, and 2049s maturities closed at 14%, 14.75%, 15.20% and 15.75% respectively. Overall, YTD local borrowings via FGN bond and NTB auctions stood at N2.3trn, which represents 21.3% of total budgeted borrowing. In our view, we expect system liquidity which averaged –N40bn last week, to improve in the coming week due to Federation Accounts Allocation Committee (FAAC) disbursement. With the liquidity coming in the form of coupons and FAAC, we expect bond rates to dip further or remain flat between now and the end of April. Nonetheless, we expect rates to go up after April, given that the FG plans to borrow heavily, and the international market is not favorable at the moment. Therefore, the Debt Management Office (DMO) will have no choice but to make bond rates attractive to investors.
Currency and Stock. On a YTD basis, the NGXASI return printed at 7.11%. On gainers and losers, twenty-eight (28) equities appreciated in price last week while Twenty-seven (27) equities declined.
In the parallel market, the naira appreciated by
N14 to close the trade on an average of $/ N746 WoW. The I&E window closed at $/ N461.67 with the appreciation of N0.33 Wow basis. At same time, NAFEX rate appreciated by N0.14 WoW to settle at $/ N461.15