MOVEMENT IN THE EXTERNAL RESERVES:
There was accretion to the external reserves in November following four months of consistent drawdown. FSDH Research notes that the proceeds from the US$2.86bn Eurobond issuance contributed to the growth of external reserves in November. The 30-Day moving average external reserves increased by 0.19%, from US$42bn at end-October to US$42.08bn at end-November 2018.
The decline in oil prices will also negatively affect the external reserves. However, OPEC and non-OPEC members have agreed to cut production by 1.2 mb/d, effective January 2019 for an initial period of six months. Consequently, the oil price may recover and sustain the external reserves in the short-term.
CRUDE OIL MARKET AND BONNY LIGHT PRICE:
The major driver of the crude oil movements in the short-term are the suspension of the trade war between China and US and the crude oil output cut. Already, OPEC and Non-OPEC members have agreed to cut production to avoid over supply. The daily crude oil production in Nigeria decreased by 0.96% to 1.75mb/d in October 2018, from 1.77mb/d in September. This is based on secondary data available from OPEC’s report for the month of November 2018. The total OPEC crude oil production from secondary sources was 32.90mb/d in October, an increase of 0.39% from 32.77mb/d in the previous month. Crude oil production increased mostly in UAE, Saudi Arabia, Libya and Angola while production declined in Iran, Kuwait, Venezuela and Nigeria.
In its monthly report for November 2018, the US Energy Information Administration (EIA) forecasts an average price of Brent crude oil of US$73.12/b and US$71.92/b in 2018 and 2019, respectively. The forecast is lower by $1.31/b and $3.14/b than the forecast in the October 2018 monthly report for 2018 and 2019 respectively.
According to data from Thomson Reuters, the Bonny Light crude oil price decreased for the second consecutive month. Bonny Light crude oil price decreased by 18.46% to US$59.80/b as at end-November, from US$73.34/b as at end-October. The average price of Bonny Light was US$66.32/b in November, a decrease of 19.53% from the average price of US$82.42/b recorded in October.
FOREIGN EXCHANGE RATE:
There was a further depreciation in the value of the Naira at both the inter-bank and parallel markets in November 2018, compared with October 2018. Demand pressure in the foreign exchange market persisted, as the parallel market rate ramped up to surpass rate at the I&E Window in November 2018. FSDH Research expects the CBN to maintain the current tight monetary policy stance until the foreign exchange demand pressure abates.
The value of the Naira depreciated by 0.07% at the inter-bank market in November to N306.80/US$, compared with October. Similarly, the average exchange rate at the inter-bank market depreciated by 0.07% to stand at N306.71/US$ in November, compared with N306.50/US$ in October.
The value of the Naira also depreciated M-o-M at the parallel market to N365.50/US$ as at end-November 2018, a depreciation of 0.96% from N362/US$ at end-October. The average exchange rate at the parallel market depreciated by 0.57% to stand at N363.36/US$ in November, compared with N361.27/US$ in October.
INTEREST RATE AND YIELD ANALYSIS:
The CBN continued with its tight monetary policy stance in November with the objective of maintaining stability in the foreign exchange market. The yields on the FGN securities increased in November compared with October except on 91-Day NTB.
The fixed income market analysis for the month of November shows a net outflow of N516bn, compared with a net outflow of N1.21trn in October. The major outflows in November were the Open Market Operations (OMO) and Repurchase (REPO) Bills of N2.50trn, CBN’s Foreign Exchange Sale of N529bn, Primary NTBs of N279bn and the FGN Bond auction of N40bn. Meanwhile, in October, the major outflows were the OMO and REPO of N2.07trn, CBN’s Foreign Exchange Sale of N529bn, Primary NTBs of N426bn and the FGN Bond auction of N88bn. The major inflows in November were the matured OMO and REPO Bills of N2.03trn, the Federation Account Allocation Committee (FAAC)’s injection of about N380bn, and matured NTBs of N424bn. The major inflows in October were the matured OMO and REPO Bills of N1.27trn, FAAC’s injection of about N350bn, and matured NTBs of N281bn.
At the NTBs auction, average yields moved in varying directions as the 182-Day and 364-Day NTB increased in November, compared with October 2018, while the 91-Day NTB dropped over the same period. The average yields at the NTBs auction, on the 91-Day decreased marginally to 11.23% in the month of November, compared with 11.25% recorded in October 2018. The average 182-Day NTB stood at 14.05%, up from 13.63% in October 2018. The average 364-Day NTB yield stood at 16.88% in November 2018 from 15.91% in October. Although the aggregate outflow in the market in November exceeded the inflows, the NTBs maturity repayment in November led to increase in liquidity. This led to a decrease in rates and yields.
The limited outlets for the liquidity in the financial market led to a drop in the interbank rates. The average Nigerian Interbank Offered Rate (NIBOR) was down in November compared with October 2018. The average 30-day NIBOR closed at 12.64% in November 2018, down from 13.75% in October. The average 90-day and 180-Day NIBOR also decreased to 13.88% and 14.45%, from 14.03% and 14.80% in October 2018, respectively. However, the yields on the FGN Bonds that we monitored increased in November 2018. The average yield on the 14.5% FGN July 2021 increased to 15.35% in November, from 15.11% in October. The 16.29% FGN Mar 2027 closed at 15.66% in November 2018, higher than 15.18% in October 2018; the 16.25% FGN Apr 2037 increased to close at 15.50% in November 2018,
REVISED OUTLOOK GOING FORWARD:
FSDH Research expects a total inflow of about N2.68trn to hit the money market from the various maturing government securities and FAAC in December 2018. We estimate a total outflow of approximately N579bn from the various sources, leading to a net inflow of about N2.10trn. The Debt Management Office (DMO) through the CBN has cancelled the NTB auctions scheduled for the 13th and 20th December 2018 while it will redeem the maturing securities. FSDH Research believes the DMO will use the proceeds of the Eurobond to redeem the maturing FGN Securities leaving investors with huge liquidity looking for investment outlet. Consequently, the yields on government securities and the interest rates in money market may drop in December. This is in line with the trend that FSDH Research observed in December 2017 following the issuance of Eurobonds.
The CBN may not increase the yields on the fixed income securities in December unless there are indications of significant capital flight from the financial system from foreign investors. Given the limited investment options in Nigeria, the yields of the Open Market Operations (OMO) may remain at the current levels until the end of the year.