LATEST UPDATES
Card-image-cap

Finance | Savings, Thrift & Investment

The Markets in Review: Why Have Savings Rates Fallen? – Coronation Research

Feb 14, 2023   •   by Coronation Research   •   Source: Coronation   •   eye-icon 280 views

Why have savings rates fallen? Generous short-term (90-day and 180-day) saving rates that were available in December have disappeared. Our view is that a combination of large bond market redemptions and, quite likely, the Central Bank of Nigeria's new banknote policy have combined to increase market liquidity and influence the change. 

 

Why Have Savings Rates Fallen?

A month ago, we wrote that we expected market interest rates to fall during the first quarter of this year because liquidity in the financial system was likely to be high (see Coronation Research, Investment Outlook - Better Times in 2023, 11 January). What we forecast has actually happened very quickly, with T-bill rates crashing during January and early February. Meanwhile FGN bond rates, particularly at the long end of the curve, are holding up. What is going on?

 

 

 

There is no doubt that we have seen a very steep decline in T-bill rates as well as the deposit rates which banks offer to their professional counterparties. Mid-teen deposit rates that were available in December became high single-digit rates in January and then became low single-digit rates in early February. Nigeria's commercial banks that were in great need of liquidity in December were turning away offers of deposits in early February. 

 

The most likely explanation for this is the high level of redemptions from the FGN bond market. As well as this, the new banknote policy may be playing a role. The Central Bank of Nigeria planned to replace all existing bank notes with new ones by 10 February, an action which is being challenged in the courts. The policy is forcing holders of old bank notes to deposit them while attempts to withdraw these sums from ATMs are stymied by shortage of new bank notes - witness the queues outside ATMs. This results of these two dynamics are large amounts of Naira sitting on banks' balance sheets. These sums make their way to the short-term money markets, depressing T-billrates. 

 

The evidence for this comes from recent T-bill auctions. The level of supply of T-bills, i.e., the amount offered by the CBN at each auction, generally follows a pattern ofrolling over redemptions of existing bills. The level of supply in January and early February has not been not unusual. What has changed is the level of subscription, which rocketed to over N1.0 trillion (see chart). The response of the CBN has been to allow rates T-bill rates at auction to fall.

 

FGN bond rates and issuance 

This CBN's actions in its T-bill auctions contrast with those of the Debt Management Office in its FGN bond auctions. Offers and allotments of FGN bonds have increased as the DMO sets out to borrow much more than it did last year. We can see this in the DMO's issuance calendar for Q1 2023, where the outline plan is to borrow N360.0bn in each of January, February and March as opposed to N150.0bn forthese months a year ago.



The level of subscription at FGN auctions has been high (see chart) and the DMO has taken advantage of this by making large allotments. At the most recent auction on 30 January the scheduled offer of bonds (across four maturities) was N360.0bn but the eventually allotment was N662.6bn. 

 

The DMO allotted roughly 82% of the subscription level. This gives the DMO the ability to front-end load its sales of FGN bonds in 2023 by selling almost twice (1.84x) its scheduled offer. At the same time, it means that the DMO has to offer quite juicy interest rates in order to keep investors happy. So FGN bond rates remain quite high

 

FX

Last week, the exchange rate at the Investors and Exporters Window (I&E Window) closed flat at N461.50/US$1. Elsewhere, the foreign exchange (FX) reserves of the Central Bank of Nigeria (CBN) slipped by 0.60% to US$36.82bn, as the CBN continues to intervene across the various FX windows. 

 

General election are just around the corner and the CBN can at least be satisfied that its policy of gradual depreciation of the I&E Window rate is being applied consistently. And with a high level (by historical standards) of FX reserves, we think it is unlikely to change its course over the coming two months.

 

Bonds & T-bills

Last week, the Federal Government of Nigeria (FGN) bond secondary market was bullish as the average benchmark yield for bonds fell by 17bps to close at 13.08%. Across the curve, the yield on the 3-year bond declined (-97bps to 11.11%), while the yields on the 7-year (14.10%) and 10-year (14.30%) bonds closed flat. At the FGN bond auction, the Debt Management Office (DMO) is expected to offer N360.00bn (US$779.64m) across the February 2028 (reopening), April 2032 (reopening), April 2037 (reopening) and April 2049 (reopening) maturities, though the level of subscriptions and allotments may be much higher than this (see page 2). Our view remains that elevated Federal Government domestic borrowing will drive yields upwards overthe course of this year. 

 

Activity in the Treasury Bill (T-Bill) secondary market was also bullish as the average yield for T-bills fell by 10bps to 1.48%. However, the yield on the 300-day T-bill closed flat at 3.86%. At the T-bill primary auction, the DMO allotted N417.06bn (US$903.71m) worth of bills. The auction recorded a total subscription of N1.06tn, a similarly high level to the level at the previous auction, implying a bid-to-cover ratio of 2.53x (vs 4.73x in the last auction). Consequently, stop rates declined across the 91-day (-19bps to 0.10%), 182-day (-150bps to 0.30%) and the 364-day (-254bps to 2.24%, implying an 2.29% yield) bills. Elsewhere, the average yield for secondary market OMO bills fell by 68bps to 1.29%, while the yield on the 81-day OMO bill closed flat at 3.02%.

 

Oil

Last week, the price of Brent ended two consecutive weekly losses, up 8.07%, the biggest weekly gain since 13 January, to settle at US$86.39/bbl, the highest level since 26 January. As a result, Brent is up 0.56% year-to-date and is trading at an average of US$83.79/bbl, 15.44% lower than the average of US$99.09/bbl in 2022. 

 

Oil prices climbed after Russia’s deputy Prime Minister Alexander Novak, revealed that the country will cut oil production by 500,000 bpd in response to the recently-introduced price cap and the European Union import ban with effect from March 2023. Hence, we maintain that prices are likely to remain well above the US$75.00/bbl set in Nigeria’s government budget

 

Equities

Last week, the NGX All-Share Index gained 0.21% to settle at 54,327.30 points. Consequently, its year-to-date return rose to +6.00%. MTN Nigeria (+1.68%), Oando (+1.56%) and Lafarge Africa (+1.39%) closed positive while Sterling Bank (-7.36%), Fidelity Bank (-7.00%) and Cadbury Nigeria (-6.91%) closed negative. Performances across the NGX sub-indices were broadly negative as the NGX Insurance (-3.32%) led the losers, followed by NGX Banking (-0.90%), NGX Consumer Goods (-0.63%) and NGX Pension (-0.43%), while the NGX Industrial Goods (+0.65%), NGX Oil & Gas (+0.63%) and NGX-30 (+0.34%) sub-indices closed positive

 

Model Equity Portfolio

Last week the Model Equity Portfolio rose by 0.48% compared with a rise in the NGX All-Share Index of 0.21%, outperforming it by 27bps. Year-to-date it has risen by 6.08% compared with a rise of 6.00% in the NGX All-Share Index, outperforming it by 8bps.


 

Last week we wrote that we would look for some overweight positions to take and report back. Our overweights are as follows. We already have an overweight in Nestle Nigeria (5.77% versus a 2.89% index weight). We intend to create a five-percentage point overweight in Dangote Cement over the coming week, reasoning that its Q4 results may be good (after Q3 results were held back, partly by floods, in Nigeria) and that the recently-announced share back may still provide support. We will move up towards a neutral weight in Seplat. We will continue to trim positions in Guinness Nigeria, Nigerian Breweries and Flour Mills of Nigeria in order to provide sufficient notional cash to get this done, as well as making a small downward adjustment to our notional position in Airtel Africa in order to bring this down to its neutral index weight (21.08%) as this will release a little more notional cash.

Related items.

Get the App

apple-store  play-store

Connect with us


Proshare is a professional practice focused on delivering research and information services to bridge the gap between investors and markets; by delivery on credible, reliable, and timely engagements through the following areas — Impact Research, Market Intelligence, Strategic Advisory, Stakeholder Relations & Digital Media.