Nigeria: NGN resilience underpins carry trade


Athe 22/23 July MPC, a 50% CRR on public sector funds was introduced to address systemic inefficiencies in liquidity management. This measure also aimed to reduce the banks’ ability to tap cheap government deposits in order to purchase higher yielding T-bills and OMOs.

• Despite an initial rebound in T-bill rates, the CRR on public sector deposits has had a benign intrinsic impact on the Nigerian yield curve in the absence of new OMOs. That said, we suspect another increase in the CRR on public sector funds will probably take place in coming months to squeeze fiscal liquidity further.

• We continue to recommend the 6- and 12-m carry trade, which certainly offers value. The CBN needs to maintain a broadly attractive rate regime to attract portfolio inflows and ensure there is an incentive to hold NGN assets domestically. This in itself makes unlikely any cut in the MPR (currently at 12%) during the remainder of Governor Lamido Sanusi’s term or indeed that the CBN will allow a disorderly move down in market rates.

• Despite the sustained single-digit inflation environment (8.7% y/y in July), Nigerian bonds have failed to rally, which reflects the increasingly uncertain global risk environment and limited foreign bid, but also the lack of domestic appetite for sub-13% levels. We will continue to play a 13-13.8% yield range in the short term.

• While the exchange rate has remained under pressure (161.9 on 22 Aug), the NGN has actually held up well relative to mainstream EM currencies. This reflects the policy-determined nature of USD/NGN. Given the country’s robust FX reserves, the elevated oil price and further likely squeeze in NGN liquidity, we do not expect a qualitative shift up in the exchange rate.

• The tight valuations of the Nigerian Eurobonds (spreads ranging between 288 bps and 317 bps) simply do not offer enough protection against the likely increase in US yields, hence our underweight recommendations


Gadio Samir, Standard Bank


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