Mr. Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, recently clarified that the current Finance Act will be rendered ‘null and void’ once the proposed Tax Reform Bills are passed into law by the legislative and executive branches of the government. This statement was made during a stakeholder session for tax consultants and Chief Financial Officers (CFOs). Oyedele emphasised that the government does not intend to introduce an annual Finance Act moving forward, as the committee has advised against the issuance of a Finance Act for 2024.
In another development, the United Kingdom has urged Nigeria to deepen its economic reforms, particularly by addressing detrimental practices within state-owned enterprises (SOEs) that hinder trade and investment. The UK’s Permanent Representative to the World Trade Organisation (WTO), Simon Manley, spoke about this during Nigeria’s Trade Policy Review in Geneva last Monday. While crediting Nigeria’s progress in economic reforms, including the removal of fuel subsidies and improvements in monetary policy, Manley stressed the need for more rapid and comprehensive actions to create a more business-friendly environment.
During the week under review, system liquidity was short-lived as a result of the bond auction debit on Wednesday. The liquidity surplus was not sustained beyond Tuesday. At the NAFEM Window, the exchange rate traded at a high of $/₦1,707.50 on Thursday, and at a low of $/N1,601.50 on Wednesday. The market closed the week at $/N1,652.62 on Friday.
Interbank rates surged sharply due to significant liquidity constraints in the financial system. Several factors contributed to the liquidity squeeze, primarily driven by substantial outflows from the bonds and NTBs auctions. A liquidity deficit of approximately ₦330 billion was recorded on Wednesday, leading to a sharp rise in Overnight Rate (O/N) and Open Repo Rate (OPR), to a tune of about 600 basis points—according to data from the FMDQ’s website. At the beginning of the week, O/N opened at 26.69% and OPR, at 25.18%. We saw highs of 32.83% and 32.25%, respectively. The week, however, closed at 32.81% and 32.19% for O/N and OPR.
The Federation Accounts Allocation Committee (FAAC) has allocated a total of ₦1.41 trillion for October, to be distributed between the three tiers of government. Some market participants have expressed expectations of this particular FAAC inflow to be indicative of the start of the year-end buying season.
As the year draws to a close, there has been significant discussion surrounding the federal government’s efforts to secure funds to cover the deficit in the 2024 fiscal year budget. In the most recent auction, the Debt Management Office (DMO) sold a total of ₦346.155 billion in bonds, far surpassing the ₦120 billion initially offered—a remarkable difference of nearly 300%. This marks an increase of approximately ₦56 billion compared to the previous month’s allotment.
The stop rates have also experienced notable increases. The April 2029 bond, which closed at 20.75% in October, saw a 25 basis points rise, closing at 21% in the latest auction. Similarly, the February 2031 bond saw its rate climb by 26 basis points, reaching 22% from 21.74% last month.
These hikes are reflective of the government’s efforts to attract investor interest in a challenging economic environment. For the primary market, the increase indicates a higher cost of borrowing for the government, as it needs to offer more attractive returns to investors. This also suggests heightened inflationary expectations and increased risk premiums in the face of fiscal challenges. Secondary market participants could face pressure on bond prices in the short term if investors expect further hikes or if inflation concerns persist.
BONDS TENOR | APRIL 2029 | FEBRUARY 2031 |
AUCTION DATE | 18-11-2024 | 18-11-2024 |
SETTLEMENT DATE | 20-11-2024 | 20-11-2024 |
MATURITY DATE | 17-04-2029 | 21-02-2031 |
TENORS | 5-YEAR | 7-YEAR |
AMOUNT OFFERED (₦) | 90 BILLION | 90 BILLION |
SUBSCRIPTION (₦) | 75.560 BILLION | 294.025 BILLION |
AMOUNT ALLOTTED (₦) | 63.530 BILLION | 282.625 BILLION |
STOP RATES (%) | 21.0000 | 22.0000 |
PREVIOUS STOP RATES (%) | 20.7500 | 21.7400 |
On Wednesday, the Debt Management Office (DMO) successfully allotted approximately ₦693.05 billion in Treasury Bills (T-Bills), signifying about an 11% increase over the initial amount offered. This marks a rise of more than ₦72 billion compared to the NTBs auction held two weeks ago. However, there were shortfalls in the first two tenors: the 91-day tenor fell short by approximately ₦7 billion, while the 182-day tenor experienced a larger shortfall of nearly ₦12 billion. Conversely, the 364-day tenor, saw an oversubscription of over ₦1 trillion, resulting in an overall surplus allotment of more than ₦100 billion for the auction.
In terms of stop rates, the 91-day and 182-day tenors maintained their previous levels at 18.0000% and 18.5000%, respectively. However, the 364-day tenor saw a notable increase, rising by 50 basis points from 23.0000% to 23.5000%, another all-time high recorded.
It goes without saying that the current economic outlook is such that the DMO and the government would raise rates to attract investment. The increase in rates, especially for the 364-day tenor, indicates a higher cost of borrowing for the government as it competes with inflation and market expectations of tighter monetary policy. These higher yields could signal inflationary pressures and potential risks, which may influence investor sentiment and market behaviour in the near term.
AUCTION DATE | 20-11-2024 | 20-11-2024 | 20-11-2024 |
ALLOTMENT DATE | 21-11-2024 | 21-11-2024 | 21-11-2024 |
MATURITY DATE | 20-02-2025 | 22-05-2025 | 20-11-2025 |
TENOR | 91-DAY | 182-DAY | 364-DAY |
OFFER (₦) | 41,892,409,000 | 28,457,893,000 | 540,450,137,000 |
SUBSCRIPTION (₦) | 35,413,911,000 | 18,878,307,000 | 1,122,876,185,000 |
ALLOTMENT (₦) | 35,413,911,000 | 16,922,307,000 | 640,712,184,000 |
STOP RATES (%) | 18.0000 | 18.5000 | 23.5000 |
PREVIOUS STOP RATES (%) | 18.0000 | 18.5000 | 23.0000 |
During the week, the Nigerian Senate approved President Bola Tinubu’s $2.2 billion new borrowing plan. This is a significant development that could have wide-reaching implications for the Nigerian economy, financial markets, and investor sentiment.
As the Monetary Policy Committee (MPC) convenes today, the markets are looking forward to the decision of the committee, especially in light of the current macroeconomic conditions and the stance taken by the Central Bank regarding interest rate hikes. Despite multiple interest rate hikes, inflation does not seem to be abating.
Interest rate changes generally take time to influence the broader economy, and their effect on inflation is not always immediate. Even if the rates are high, other factors—such as global commodity prices, supply chain issues, or internal demand pressures—might be suppressing the desired impact. There could also be a mismatch between market expectations and the actual impacts of rate hikes, or the effect may be slower than anticipated. While these points are good reasons, some analysts hold the view that high inflation in Nigeria is due to the Naira depreciation and limited production across the country.
Given that might not be achieving the desired inflation control, the MPC could consider focusing on other areas of the economy. Some possibilities could be, instead of another rate hike, the MPC could use tools like altering reserve requirements for commercial banks or focusing on improving fiscal policy coordination, tackling inefficiencies in government spending, or targeting specific inflationary sectors (like food or fuel) through subsidies or regulation.
The passage of the Tax Reform Bills is expected to streamline the tax system, reduce regulatory ambiguity, and provide a clearer framework for businesses and investors. This move is seen by many as a step towards stabilising the fiscal environment and addressing Nigeria’s long-term revenue challenges.
We expect the MPC to either hike further (based on the sustained Naira pressure and rekindled global inflationary concerns) or maintain (to allow for effective transmission of the aggressive tightening measures implemented thus far this year). It is our humble opinion that there is no fundamental basis for further additional monetary policy action at this time as the fiscal authorities (regardless of cost) seem to be aligned with monetary policy. It is also expected that with the accretion to foreign reserves, the CBN is in a better position to defend the currency than it was at the beginning of the year. We expect more focus on structural reforms to support economic stability, such as improving the business climate, addressing supply-side constraints, or formulating policies that could make the increase in foreign currency reserves positively stabilise exchange rates.
We expect to see the impact of a gradual rebalance in global power. In essence, escalations might not be as intense going forward as Russia’s actions in recent days seem to have reminded other world powers of the direct costs of escalation. We foresee a clear shift in the balance of global power in the works. As a consequence of this, oil prices are likely to trend in tandem with President-elect Trump’s promises, and cryptocurrency prices should stay bullish into his inauguration.
