FBNQuest Capital Fixed Income Q2/Q3 2018: A holding operation in the quarter ahead
A holding operation in the quarter ahead
· A different focus in monetary policy: The monetary policy committee (MPC) has not shifted its stance for two years. Its rationale has been tweaked from declining to address the challenges in the macroeconomy for which it was not responsible to shoring up offshore portfolio investment in Nigerian securities.
· Progress with disinflation barely noticed: At its meeting in late May the MPC almost ignored the gains in disinflation while stressing the risks of pre-election spending as well of a synchronised exit by offshore players. In our view both risks have been overstated. Out of faith almost, we still see a token policy rate cut in H2 2018.
· Fx policies to stay: The CBN’s unorthodox fx policies have exceeded expectations. NAFEX has attracted the offshore flows, and the CBN responded to an EM-wide wobble in late May by providing the fx supply for some exiting foreign investors. There is negligible pressure for a new direction. Any change before the election in February is highly unlikely and our hunch is continuity through to end-2019, underpinned by a favourable oil price environment. Our price forecasts are at the conservative end of the spectrum.
· Rewards for debt externalisation: The FGN/DMO policy of debt externalisation has made its positive mark. Combined with the success of NAFEX, it has attracted large investor inflows and rewarded the authorities with sizeable yield compression since Q4 2017. Further, the approved 2018 budget has a lower domestic financing target for the DMO while possible Eurobond issues could be deployed to pay down maturing NTBs.
· Yields set to tread water: These positives notwithstanding, we suspect that investor caution will prevail and expect a modest fallout from US monetary policy normalisation in Nigeria. We see FGN bond yields (other than the short end) still within a range of 13.50% to 14.00% at the end of Q3.