CBN Liquidity Mop Up to Persist as N262bn Hits Interbank Market

MARKET INDICATOR

By Obinna Chima

As part of its liquidity management system, the Central Bank of Nigeria (CBN) is expected to mop up excess liquidity from the banking sector as open market operations (OMO) bill worth N261.9 billion hit the system this week.

The central bank has been issuing secondary market treasury bills also known as OMO bills, to mop–up excess liquidity in the banking system and control inflation.

Nevertheless, in the treasury bills market, performance was mixed as rates across benchmark tenors trended lower on two of the five trading days. The trading week started on a relatively quiet note with average rate across benchmark tenors staying flat at 13.9 per cent as the CBN continued its OMO mop ups.

By Tuesday however, buying interest was recorded at the shorter end of the curve and this pulled average rate five basis points lower to 13.9 per cent. The bullish sentiment was extended till Wednesday as rates further declined nine basis points on average on account of the decision by the CBN to withhold OMO auctions on the day which spurred buying interest in short tenored instruments. This positive trend was reversed on Thursday as sell-offs were recorded across shorter tenored instruments which drove average rate 10basis points higher. But average rate closed the week at 13.9 per cent, indicating a three basis points week-on-week decline.

Despite the anticipated liquidity mop up by the banking sector regulator, analysts anticipate that rates would remain at similar levels they were last week.

Meanwhile, in the money market last week, rates trended lower on three of the five trading days despite sustained OMO mop-ups by the CBN (held on all days save for Wednesday) to maintain system liquidity.

According to analysts at Afrinvest Securities Limited, at the start of the week,the open buy back (OBB) and overnight (OVN) rates inched 1.9 percentage pointsand 2.7 percentage points higher to close at 11.7 per cent and 12.7 per cent respectively consequent on tighter system liquidity (which settled at N298.1 billion, from N919.0 billion the preceding Friday) as the CBN carried out an OMO auction in which the 94-day (offered: N50billion Sold: N0.69bn) and 277-day instruments (offered:N150bn, Sold:N89. 2bn) were offered.
Also, by Tuesday, OBB and OVN rates trended higher, closing at 12.6 per centand 13.4 per cent respectively as the CBN continued its OMO mop-up, offering N50billion for the 114-day instrument (No sale) and N100 billion for the 219-day (sale of N67.7bn) bills.

In the same vein, mid-week, OBB and OVN rates trended lower to 11.3 per cent and 12.5 per cent respectively as there was no OMO mop-up conducted by the CBN. But on Thursday, OMO maturity of N113.6billion partially offset the impact of an OMO auction sale of N150 billion of the 259-day instrument; hence, system liquidity remained robust at N412.4 billion while the OBB and OVN rates declined to 9.5 per cent and 10.2 per cent respectively before closing the week at 8.5 per cent and 9.2per cent on Friday – indicative of a 1.3percentage points and 0.8 percentage points week-on-week decline.

Forex Market

Last week, the CBN continued with its weekly forex intervention sales by offeringa total of US$545.43 million into the forex market.

A breakdown of this showed that while in offered $210 million on Tuesday an additional injection of N335.43 million.

For the $210 million, while $100 million was earmarked for the wholesale market, $55million for small businesses and individuals, and $55 million for school fees and medical bills.

On the other hand, the $355.43 million was injected into the market through Retail Secondary Market Intervention Sales (SMIS). Figures obtained from the CBN revealed that the intervention was to meet requests in the agricultural, airlines, petroleum products and raw materials and machinery sectors.

The Bank’s acting Director, Corporate Communications Department, Mr. Isaac Okorafor confirmed the development. He reiterated that the CBN’s interventions in the market were aimed at sustaining liquidity in the market as well as boosting production and trade.  He explained that with increasing accretion to the country’s reserve, the Bank was in a much better position to ensure liquidity in the inter-bank sector of the market and as such would continue to intervene in order to drive growth in the economy and guarantee stability in the market, particularly now that the economy had gained steam due to an upsurge in the non-oil sector.

The CBN Spot rate, which opened the week at N305.85/US$1.00, appreciated by five kobo to N305.80/US$1.00 on Tuesday and maintained this level till the end of the week.

Similarly, the naira remained flat at the parallel market, trading at N362.00/US$1.00 throughout the week. At the Investors’ & Exporters’ (I&E) FX Window, the NAFEX rate opened the week flat at N360.14/US$1.00 and subsequently traded within a tight band of N360.10-N360.45/US$1.00. The NAFEX rate closed at N360.08/US$1.00 on Friday, indicating asix kobo appreciation week-on-week.

Total turnover on I & E window during the week stood at $801.11 million.

In the FMDQ OTC futures market, the total value of open contracts of the Naira settled OTC futures increased by US$105 million to US$3.3 billion relative to the US$3.2billion recorded the preceding Friday,which implied a 3.3 per cent increase in market size. The APR 2018 instrument (contract price: N360.59) was the most subscribed with a total value of US$659.9million while JAN 2019 instrument (contract price: N361.94), was the least subscribed with a total value of US$45.5million.

“In line with trend, we expect the CBN to maintain its weekly interventions in theforex market, thus keeping rates at similar levels across segments,” analysts at Afrinvest stated.

Bond Market

Performance of the local bond market was largely flattish last week with marginal movements in yield. Average yield stood at 13.8 per cent on Monday (the same level recorded the preceding Friday).

However, it was observed that buying interest across longer tenored bonds with APR 2037 experienced the most buying interest (down 5 basis points to 13.0%). However, on Tuesday sentiment was mildly bearish as yield on 10 of 16 instruments rose, driving average yield by three basis points higher.

Analysts observed renewed investor interest at the shorter end of the curve midweek as yields on MAY 2018, JUNE 2019 and OCT 2019 bonds fell 32 basis points, 10 basis points and four basis points to 15 per cent, 14 per cent and 13.9per cent respectively.

Average yield remained at the same level till the end of the week, closing at 13.8 per cent. This implied a flat performance week-on-week.

According to Afrinvest, near term outlook for bond yields remained broadly anchored on forex market stability and inflation development.

Meanwhile, the National Bureau of Statistics is expected to release itsFebruary 2018 inflation report this week, just as analysts anticipates further moderation of inflation to 14.8 per cent in February, from 15.1 per cent in January.

“In the absence of negative inflation surprises in coming months, our yield expectation remains bullish as external sector balance stabilises further on the back of stable oil prices and robust foreign portfolio inflows,” Afrinvest added.

But performance of African sovereign Eurobonds last week was largely bearish as yield on 14 of 22 instruments advancedweek-on-week.

Despite the negative performance of the market, average yield across Senegalese instruments fell three basis points week-on-week in line with the increased appetite shown at the Eurobond issuance in the week. On Tuesday, Senegal joined other African countries – Nigeria, Egypt and Kenya – which have already issued Eurobonds in 2018. The West African country issued US$2.2 billion in two tranches – US$1.2 billion at 4.75% for a 9-year tenor and US$1 billion at 6.75% for a 29-year tenor. A total of US$10.3 billionwas received as bids signalling sustained investor interest in high yield emerging and frontier foreign currency debts as well as improving domestic macroeconomic fundamentals and remarkable stable political environment in the country.
Sentiment towards Nigerian Corporate Eurobonds remained upbeat, as yield onnine of the 12 instruments declined week-on-week.

 

IMF’s Article IV

 

The Director of the International Monetary Fund (IMF) last week urged the Nigerian Senate to confirm the Monetary Policy Committee (MPC) members of the CBN as well as the Bank’s deputy governors and non-executive directors who were nominated for the positions by President Muhammadu Buhari since last year.

The fund’s directors have also emphasised the need for the Nigeria government to pursue growth‑friendly fiscal adjustment, saying it would help frontload non-oil revenue mobilisation and rationalise current expenditure in the country.

According to them, this was necessary in order to reduce Nigeria’s ratio of interest payments to revenue to a more sustainable level and create space for priority social and infrastructure spending.

The fund’s directors proffered the advice in the IMF Article IV Consultation with Nigeria, released by the executive board. The IMF, in the Article IV Consultation, also noted ongoing efforts to improve tax administration in the country, just as they underlined the need for more ambitious tax policy measures, including the reform of value‑added tax, increased excise, and rationalising tax incentives.

“The implementation of an automatic fuel price‑setting mechanism, sound cash and debt management, improved transparency in the oil sector, increased monitoring of the fiscal position of state and local governments, and substantially scaled-up social safety nets should support the adjustment,” the IMF added.

The IMF directors welcomed Nigeria’s exit from recession and the strong recovery in foreign exchange reserves, helped by rising oil prices and new foreign exchange measures. They commended the progress in implementing the Economic Recovery and Growth Plan (ERGP), including the start of a convergence in forex windows, tight monetary policy, improvements in tax administration, and significant strides in improving the business environment.