Interest Rates: How Much Higher?

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Naira interest rates are rising fast. Last Thursday, and for the second week in a row, the CBN sold an open market operation (OMO) bill with an annualized yield of 10.1%, far above the 1-year Treasury yield (T-bill) which itself had shot up to 4.00% at auction on Wednesday.

What is going on? New high-yielding OMO bills do not immediately translate into T-bill yields. The new OMO bills are destined for foreign investors holding Naira in the country, and for banks. However, they are a powerful signalling device, in our view, showing how the CBN is prepared to see interest rates develop.

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How much higher will rates go? It looks as if the CBN wishes to normalize interest rates in Nigeria after T-bill rates fell from 5.40% in January last year to 0.15% in early December. And this raises the question of what normal interest rates are.

In large emerging markets (like Brazil, Russia, India and China) one-year risk-free (government-issued) local currency bill rates are close to the inflation rate. In small markets (e.g., Ghana, Kenya) the rate is often well above the rate of inflation (see chart).

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Interest Rates Brandspurng How Much Higher

In this regard, Nigeria is an outlier with a very negative rate when adjusted for inflation.

Does this mean that Nigerian 1-year Treasury Bill rates need to go all the way up to – and even beyond – the rate of inflation? Inflation stood at 15.75% y/y in December. It would be a remarkable adjustment for banks and their customers to make. It would be difficult for borrowers but good for holders of savings accounts and money market mutual funds.

It seems likely that the authorities might want to phase in the changes over several months, in order to give time for the financial system to adjust. In this case, we would not be surprised to see 1-year T-bills rates of 10.0%, or more, by the middle of this year.

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Another way to interpret the CBN’s OMO auctions is to see them as the creation of a two-tier interest rate market: a class of OMO bills for foreigners; ordinary T-bill rates for domestic investors. However, such a strategy would face two hurdles, in our view.

First, it would require incoming foreign portfolio investors to purchase OMO bills when the issue of foreign exchange liquidity is still not fully resolved (NAFEX volumes remain lower than a year ago).

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Second, it would encourage Nigerian domestic investors to become foreign portfolio investors, moving offshore (however difficult that is) to benefit from superior rates.

The bond market clearly thinks that rates are on the rise, with the yield curve in Federal Government of Nigeria T-bills and bonds shifting rapidly upwards so far this year, even though investors are liquid and there is plenty of cash around. T-bill rates and FGN bond rates look poised to continue trending upwards for several months, in our view.

Model Equity Portfolio

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Last week the Model Equity Portfolio fell by 3.05% compared with a fall in the Nigerian Stock Exchange All-Share Index (NSE-ASI) of 3.04%, therefore underperforming it by 1 basis point. Year to date it has gained 0.33% against a gain in the NSE-ASI of 0.42%, underperforming it by 9bps.

Last week we wrote that it was fortunate that the price of GT Bank had held up when most other bank stocks were correcting, and we did not expect to be so fortunate again. Indeed, GT Bank corrected 15.8% last week and our notional position cost us 138bps.

There were few rallies, last week, in the mid-cap stocks where we have few notional positions, and this deficit remains a weakness which we intend to redress.

Interest Rates Brandspurng How Much Higher1

As forewarned in this publication last week, we made notional sales in Airtel Africa, MTN Nigeria, Dangote Cement and BUA Cement last week with a view to raising our notional cash position by between one and three percentage points.

We took advantage of reasonable liquidity and raised the notional cash position by three percentage points, with the decline of the market bringing the notional cash position up to 10.7%.

We will continue with these tactics this week to raise the notional cash position by up to a further five percentage points but will broaden the scope of our notional sales to include sales in Nestle Nigeria, Okomu Oil and Presco if necessary.

Note that we do not intend to reduce our notional positions in banks, whose results for the full-year 2020 are due to be reported soon. We think that the results will be received well by the market.

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Interest Rates: How Much Higher? - Brand SpurInterest Rates: How Much Higher? - Brand Spur

Latest News

Hong Kong Productivity Council Theme of the Year 2021: “Make Smart Smarter”

  • Smarter Era of Intelligent Manufacturing Launch Ceremony
  • Witnesses New Milestone for Reindustrialisation in Hong Kong

HONG KONG SAR - Media OutReach - 26 February 2021 - The Hong Kong Productivity Council (HKPC) launches a series of activities in 2021 themed "Make Smart Smarter". The campaign with "Smarter Era of Intelligent Manufacturing Launch Ceremony" was kicked off today, revolving around the theme of "reindustrialisation".

Interest Rates: How Much Higher? - Brand Spur

The "Smarter Era of Intelligent Manufacturing Launch Ceremony" was officiated together by Dr David Chung, Under Secretary for Innovation and Technology, HKSAR Government (fourth from left); Mr Clemente Contestabile, Consul General of Italy in Hong Kong (third from right); Ms Rebecca Pun, Commissioner for Innovation and Technology, HKSAR Government (second from right); Dr Daniel Yip, Chairman of the Federation of Hong Kong Industries (third from left); Mr Roberto Leone, Managing Director of NiRoTech Limited (first from right); Mr Willy Lin, Chairman of HKPC (fourth from right); Mr Mohamed Butt, Executive Director of HKPC (second from left) and Mr Edmond Lai, Chief Digital Officer of HKPC (first from left).

Co-organised by the Federation of the Hong Kong Industries (FHKI), this spotlight event exhibited and introduced an excellent example of reindustrialisation whose research and development were undertaken by HKPC. Gaining support from the Innovation and Technology Bureau and funding support from the R&D Cash Rebate Scheme of the Innovation Technology Commission of the HKSAR Government, production has been successfully commenced in NiRoTech Limited (NiRoTech), a local intelligent security product manufacturer.

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This smart production line, named the "OWL" intelligent production line, gives into full play the characteristics of an owl's wisdom, piercing eyes, flexible body, soft neck (360o vision) and agile movement. These perfectly echo the key features of this intelligent production line which has high flexibility, excellent agility to cater for different production needs, stringent and precise production capacity, as well as non-stop operation. Five key "S.M.A.R.T" elements: Speed, Multi-function, Accuracy, Reliability and Traceability, can be seen in this production line offering edges of intelligence and efficiency enhancement.

In order to effectively respond to Hong Kong manufacturers' demands on production space, the "OWL" production line adopts a U-shape compact layout design and incorporates the beauty of the "Industry 4.0" (i4.0) lean manufacturing "vision", significantly reducing the factory area to meet the unique land constraints of Hong Kong. NiRoTech's smart factory only occupies 10,000 square feet, saving 50% of the land. It is also equipped with 12 robots and large amount of customised intelligent automation systems and digital technologies. Compared with traditional manual production, the overall production capacity increases by 1.5 times.

Mr Willy Lin, Chairman of HKPC, and Dr Daniel Yip, Chairman of FHKI, were joined by Mr Clemente Contestabile, Consul General of Italy in Hong Kong; Dr David Chung, Under Secretary for Innovation and Technology, Ms Rebecca Pun, Commissioner for Innovation and Technology; Mr Roberto Leone, Managing Director of NiRoTech; as well as Mr Mohamed Butt, Executive Director of HKPC and Mr Edmond Lai, Chief Digital Officer of HKPC, for the launch of the ceremony.

In his welcoming address, Mr Willy Lin, Chairman of HKPC, said, "HKPC is committed to offering staunch support for Hong Kong SMEs in technology R&D and technical aspects, with the aim of creating value for the industrial development of enterprises with state-of-the-art technologies. The 'OWL' intelligent production line is an excellent example of applying innovative technologies that also fits perfectly with HKPC's theme of this year 'Make Smart Smarter'. As owl represents wisdom, by being smarter and using innovative technologies such as IoT, AI, big data, intelligent robots and smart production processes to unleash production opportunities of i4.0, it will certainly scale up productivity and contribute to successful reindustrialisation in Hong Kong, thus achieving the goal of 'Make Smart Smarter'".

He continued, "It is really encouraging to see this 'reindustrialisation' example witnessing the concerted efforts of the Government, industries, business chambers and HKPC to promote reindustrialisation in Hong Kong! HKPC sincerely urges various sectors to work together to accelerate reindustrialisation for the swift recovery of Hong Kong economy and to ensure the "Made-in-Hong Kong" brand to continue to shine bright in the international arena -- Make Smart Smarter".

Dr David Chung, Under Secretary for Innovation and Technology, said, "the Government has been actively promoting 'reindustrialisation' in recent years by providing support in infrastructure, finance, technology and talents in order to create new area of growth and great job opportunities which would help alleviate Hong Kong's competitiveness. I wish to see more enterprises 'Make Smart Smarter', and make good use of these opportunities provided by I&T, as well as the support from the Government, to work and contribute together in turning Hong Kong into an international I&T hub".

Dr Daniel Yip, Chairman of FHKI said, "This collaboration of HKPC and NiRoTech serves as a valuable reference for industrialists on how to integrate i4.0 into production lines to enhance efficiency, elevating their confidence to set up high value-added manufacturing facilities in Hong Kong. With comprehensive policy support and HKPC's professional consultative service, FHKI believes that more Hong Kong manufacturers will join the force of 'reindustrialisation' by pursuing technological advancement and setting up smart manufacturing plants locally, taking the Hong Kong industries into a new era".

The "OWL" intelligent production line integrates the smart adoption of advanced robots with machine vision, smart electrical and mechanical devices, laser processing and sensor technologies. Also, by incorporating AI, IoT, human machine interface, real-time data collection and data analytic technologies, it ensures the full automation and digitalisation of production, assembly and monitoring to achieve big data analytics. Apart from three technologies whose patents are soon to be applied, the project also assists NiRoTech's business planning in exploring the emerging markets and grasping new opportunities.

Mr Roberto Leone, Managing Director of NiRoTech, said, "Mechatronic Manufacturing in Hong Kong: our strategy was clear from the start when we sought HKPC's assistance for help to realise intelligent production. For some, this goal was still immature and very difficult to achieve, especially with Hong Kong being chosen as our operation hub. Today we can proudly say we have achieved it with the system in Hong Kong operating satisfactorily as schedule. Despite there are challenges as the COVID-19 pandemic was affecting all in 2020, the result is now vividly in front of us, and we can touch it. Yet this is only the first step of a long journey".

For more details about "Make Smart Smarter", please visit the dedicated website:

About Hong Kong Productivity Council

The Hong Kong Productivity Council (HKPC) is a multi-disciplinary organisation established by statute in 1967, to promote productivity excellence through integrated advanced technologies and innovative service offerings to support Hong Kong enterprises. HKPC is the champion and expert in facilitating Hong Kong's reindustrialisation empowered by i4.0 and e4.0 -- focusing on R&D, IoT, big data analytics, AI and Robotic technology development, digital manufacturing, etc., to help enterprises and industries upgrade their business performance, lower operating costs, increase productivity and enhance competitiveness.

The Council is a trusted partner with comprehensive innovative solutions for Hong Kong industries and enterprises, enabling them to achieve resources and productivity utilisation, effectiveness and cost reduction, and enhanced competitiveness in both local and international marketplace. It offers SMEs and startups immediate and timely assistance in coping with the ever-changing business environment, accompanying them on their innovation and transformation journey.

In addition, HKPC partners and collaborates with local industries and enterprises to develop applied technology solutions for value creation. It also benefits a variety of sectors through product innovation and technology transfer, with commercialisation of multiple market-driven patents and technologies, bringing enormous opportunities abound for licensing and technology transfer, both locally and internationally.

For more information, please visit HKPC's website:

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