Nigeria’s runaway inflation means low treasury bill yields will not last

The yield on the 91-day T-bill dropped below zero in November before a slight recovery into positive territory.

The Nigerian economy is being weakened by low oil prices and the impact of the Covid-19 pandemic.

Inflation at 15.75% in December has “gone beyond the tolerance level” for the central bank’s monetary policy committee (MPC), says Moses Ojo, chief economist at PanAfrican Capital Holdings in Lagos.

Equities are likely to suffer, as hitting the inflation target will be the central bank’s overriding priority this year.

“Once the economy exits recession even narrowly, the MPC’s focus will shift to price stability.”

• Higher interest rates will push T-bill yields up, starting at the end of the first quarter, he says.
• Yields will increase by about 500 to 600 basis points by the end of 2021, predicts Ojo.
• Banks and the currency – the naira – will benefit but not the wider stock market.
• Banks will earn higher yields on T-bills, but the wider equity market will suffer because there will be funds switching from stocks to fixed income, says Ojo.
• Higher yields tend to encourage foreign investment in T-bills, and “this will ease the pressure on the naira at least in the short term,” he adds.

Consumer price inflation in December was the highest level since late 2017. Food prices rose even faster, at 19.6%.

Upside inflation risks will persist into 2021, according to a note from Jacques Nel, head of Africa macro at NKC African Economics in Cape Town.

• Naira weakness is likely to contribute to this by pushing up costs for foodstuffs and durable consumer goods, writes Nel.
• The central bank’s persistent failure to meet its inflation goal has increased pressure on it to meet its latest – less ambitious – target of 11.95% by the end of 2021, he argues.

Liquidity

Yvonne Mhango, head of research for sub-Saharan Africa at Renaissance Capital in Johannesburg, expects that inflation will be stuck in the early to mid-teens in 2021. She argues in a research note that T-bill yields will stay low for as long as there is liquidity driving demand for the paper.

• In January and February, more than N2trn ($7.9bn) of open market operations (OMOs) will mature, ensuring strong liquidity flows into T-bills, she writes. But OMO maturities will decline sharply from the end of March, she explains.
• “We expect naira depreciation pressure to persist and accelerating inflation to compel the central bank to withdraw liquidity. Yields are likely to pick up on the back of this,” which will be positive for the banks, Mhango writes.

Globally, some interest rate cuts may be reversed this year. That will increase the pressure on Nigeria’s central bank to raise rates to be able to offer a premium, says Nkemdilim Nwadialor, equity research analyst at Chapel Denham Hill in Lagos.

• Higher T-bill yields will improve the interest from investment earned by banks, says Nwadialor.
• She expects the yield on one-year T-bills to rise to between 5% and 8% at the end of this year.
• Even that will mean returns well below the rate of inflation, she notes. It will be a “long climb” before T-bills start producing positive inflation-adjusted returns, adds Nwadialor. “It’s not going to happen in the next 12 months.”