September is definitely living up to the popular phrase “September to Remember!” It has been filled with many action-packed events that have had a huge impact on the local and global markets. It started with the unexpected change in the proposed date for the new Nigerian Eurobond issue, to an epic and jaw-dropping MPC meeting and the collapse of Evergrande, the biggest Chinese property developer, with over $300bn in debt. There is so much to unpack and we are here for it. But first, for those who love to watch finance series, Billions is back! A year after the Covid-19 pandemic cut the dynamic fifth season short. That said, let us start with the MPC meeting that took place last week.

Status quo but with a twist…

The Central Bank of Nigeria voted unanimously to leave its monetary policy rate unchanged at 11.5% during its September 2021 meeting. The decision came against the backdrop of decelerating inflation and its commitment to supporting the domestic economic recovery. Since the last MPC meeting in July 2021, there have been noticeable movements in dominant macroeconomic variables. The YoY headline inflation decelerated for the fifth consecutive month to 17.01% in August 2021; Brent crude inched up slightly by 1.60% from $74.48/bl on the 27th of July 2021 to $75.67/bl yesterday; local oil production rose slightly by 0.76% from 1.31mbpd in June 2021 to 1.32mbpd in July 2021, although still far from the 1.8mbpd target; the exchange rate on the I&E FX Window fell by 34bps from $1/₦411.67 to $1/ ₦413.07; and the position of our FX reserves improved by $1.94 billion from $33.33 billion on the 27th of July 2021 to $35.27 billion on the 15th of September 2021, as it appears that the CBN has started drawing on the IMF SDR allocation.

On inflation, while we expect that base effect should provide further support to the trend of disinflation in the headline index, it is important to recognize the growing relevance and dominance of some downside risks, notably, the FX situation. Also, the possible deregulation of the downstream oil sector, which is expected to accompany the implementation of the Petroleum Industry Bill, threatens the trajectory of prices by way of a higher cost of premium motor spirit.

The Trigger…

“There have been rumors the central bank has shut down all bank accounts belonging to, how true is this sir”

At the last MPC meeting, the key focus and highlight was on the BDCs and the decision to stop all sales to all BDCs henceforth. Just as we were still trying to analyse and evaluate the decision taken at the last MPC meeting, we were hit by another the jaw-dropping decision at the MPC meeting last week. In the bid to address the fast devaluation of the Naira in the parallel market, the Apex Bank intensified the battle to protect the Naira from speculators by targeting the ownership, intent, and processes of Aboki FX. The CBN Governor, Godwin Emefiele, while responding to questions after the MPC meeting on Friday, September 17, 2021, referred to Mr. Olumide Oniwinde, the owner of AbokiFX as an illegal FX dealer who will be prosecuted for endangering the Nigerian economy. AbokiFX is a popular website that publishes the parallel market exchange rate of the Naira against other currencies of the world daily. According to the CBN governor, Mr. Olumide Oniwinde started the abokiFX operation in 2015 and has since milked the economy by taking positions while manipulating the exchange rate. He also confirmed that the apex bank wrote a memo to banks to provide information about AbokiFX as he stated that the CBN has been studying the activities of AbokiFX in the last two and half years.

Shortly after the MPC meeting, released a statement addressing some of the comments made by the Apex Bank and stating it will temporarily be suspending online rate publication as of September 17th.

Emefiele: Have Nigerians ever asked how Aboki FX collects the data it publishes on its website?

AbokiFX: We only publish what we source on the streets of Lagos, hence the phase Lagos Parallel Rate. The rates sourced are carefully collated, reviewed, and a mean is published from the data pool.

Emefiele: How many BDCs can claim they have seen a staff of AbokiFX coming to ask for rates?

AbokiFX: Our staff have a daily routine of going to the market to gather rates, as all BDCs in the country have their rates clearly displayed on their rate board.

Emefiele: Abokifx makes money from trading FX and market manipulation.

AbokiFX: We do not Trade FX neither do we have the power to manipulate the rates as we do not create the rates.

Naira, back to Earth?

While we encourage the Apex Bank to curb FX manipulations, we are still left to wonder if this solves the real problem which is liquidity – as demand continues to outstrip the supply of the dollar. We believe that the deciding factor as to whether stability will return to the market in the near-term will be determined by the CBN’s ability to provide liquidity to the Commercial Banks. As for our long-term view, nothing has changed, and the Naira remains on its space exploration trip unless we are able to attract FDIs.

Another Financial Crisis?

Remember the global financial market crisis in 2007-2008, that was triggered by the burst in the United States housing bubble? I’m sure you remember, considering it was of the most serious financial crisis since the Great Depression. It started out with the unethical lending to low-income homebuyers, excessive risk-taking by global financial institutions, and then finally, the collapse of Mortgage-backed securities (MBS), as well as the vast web of derivatives linked to those MBS. Financial institutions worldwide suffered severe damage, reaching a climax with the bankruptcy of Lehman Brothers. Why does this matter? And why is Evergrande tagged the next Lehman Brothers?

Evergrande, another Lehman Brother?

Evergrande is the second largest real estate developer in China and was at one point part of the illustrious Fortune 500 companies list dished out by the US-based Fortune magazine. The company made its mark during the infrastructure-fueled growth of the Chinese economy back in the 2000s. However, things went south when Xi Jinping decided to address the bad loans problem plaguing its banking sector by severing backstops like refinancing of short-term debt and imposing credit limits on real estate developers, which constricted their ability to generate revenue from new projects. Evergande’s operating income has crashed 75 percent since 2018. The company said property sales would fall in September, usually a buoyant month for the real estate sector.

Evergrande share price

Payments due Thursday includes $83.5 million of interest on an 8.25%, five-year dollar bond, Bloomberg-compiled data show. Evergrande also needs to pay a 232 million yuan ($36 million) coupon on an onshore bond the same day. The developer’s stock sank by as much as 19% on Monday to the lowest level since 2011, due to waning confidence.

Ripple effect on financial markets?

While we expect the default of Evergrande to have an impact on the financial markets, the impact of the Chinese credit market will be catastrophic if there is no government intervention. Remember, China is the second largest economy in the world and largest consumer of commodities and other services. If Evergrande goes down, it will take its millions of suppliers with whom it owes billions of yuan down with it. It will also lead to a lending freeze in the entire credit system in the manner that Lehman Brothers’ collapse did in the US. The only saving grace could be that the Chinese President, Xi Jinping, may not want a full-blown crisis in his hands, and the emergency liquidity injection by PBoC on Saturday suggests the central bank will try to fight the situation to contain wider damage to the financial system.

Where is the money?

The recent sell-off in global financial assets on the back of a possible default by Evergrande, has created attractive entry points in the SSA space particularly on the long end of Nigeria and Ghana Eurobonds.