Interbank Rate Falls after Banks Rediscount Debt Notes

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MARKET INDICATOR

By Obinna Chima

Nigeria’s interbank overnight rate eased 20 per cent points to 15 per cent on Friday from Thursday’s close after some banks approached the Central Bank of Nigeria’s (CBN) discount window for short-term cash accommodation, traders said.

The cost of borrowing had peaked at 60 per cent for overnight lending on the interbank on Wednesday and eased to 35 per cent on Thursday after banks resorted to rediscounting their fixed income instruments to get short-term cash from the central bank.

According to Reuters, last Thursday, some banks increased their borrowing from the Standing Lending Facility (SLF) of the central bank to around N420 billion in a bid to ease liquidity pressure, after the central bank debited commercial lenders for forex purchase at the new forex market.

The cost of borrowing at the central bank SLF window was 14 per cent, but not all commercial lenders choose to resort to the facility because they are required to pledge their treasury bills or bonds holdings as collateral for borrowing.

The central bank last month decided to ditch the peg on the naira to allow the currency to trade freely on the interbank market, abandoning its 16-month-old peg at 197 to the dollar last week.

Last Monday, the central bank sold $3.5 billion on the forward market after it auctioned $532 million and intervened on the interbank market to clear a backlog of hard currency orders worth around $4 billion. The bank then debited banks’ accounts for the naira proceed, leaving the market short of cash.

“Interbank lending rates are seen dropping further next week because of expectations of cash flow from budget disbursement to government agencies,” one dealer told Reuters.

The Federation Account Allocation Committee (FAAC) distributed N305 billion of oil revenue among its three-tier government last Wednesday. Half of the May disbursal will pass through the banking system this week.

The increased allocation, which was N23.628 billion higher than the N281.500 billion shared on April was attributable largely to improved collections in mineral and non-mineral receipts. Of the N305.128 billion shared, the federal government received N187.367 billion while the states and local governments got N95.035 billion and N73.268 billion respectively. The sum of N18.423 billion is for 13 per cent Derivation to oil and gas producing states.

Minister of Finance, Mrs. Kemi Adeosun had disclosed that the gross revenue available from the Value Added Tax (VAT) was N65.116 billion as against N65.259 billion distributed in the preceding month, resulting in a decrease of N0.143 billion.

She stated that the gross statutory revenue of N237.466 billion received for May was higher than the N213.817 billion in April.

Money Market Review

 

Money market rates last week were largely dictated by CBN’s special interbank FX market intervention. Financial system liquidity opened the week at N750.5 billion. Open Buy Back (OBB) and Overnight rates rose from 1.6 per cent and 2.2 per cent the preceding Friday to close at 17.3 per cent and 18.7 per cent respectively last Monday due to special FX intervention carried out by the CBN where a backlog of about $4.0 billion pent-up FX demand was cleared.

The surge in rates continued on Tuesday and Wednesday causing system liquidity to shrink significantly, but moderated to 30 per cent and 34.4 per cent at the end of Thursday’s trading session. But a report by Afrinvest West Africa Limited showed that both rates eventually settled at 19.2 per cent and 21.2 per cent week-on-week respectively.

As at last Monday, the average treasury bills rate rose 0.5 per cent to close at 9.7 per cent as the market reacted to the special FX intervention, and eventually closed the week at 11.1 per cent on Friday, up 1.9 per cent week-on-week.

“In the week ahead, we believe money market rates will moderate slightly as the FAAC allocation hit the system. We also expect the frequency of the special FX intervention auction to reduce and the impact of the debits on liquidity levels tapered whilst interbank market remains liquid,” the Afrinvest report stated.

Forex Market

The adoption of a single interbank market last week saw the end of the official peg of N197/$1, to N281.50/$1 at the interbank market whilst appreciating at the parallel market. Average interbank rate trended circa N282/$1 throughout the week. Despite the adoption of a single interbank FX market, it was observed that some deposit money banks continued to charge rates close to parallel market rates for dollar transactions on naira debit cards. At the parallel market, the naira traded at N345/$1 on most days during the week, save for Wednesday when it appreciated to N335/$1.

 

 

Bond Market Review and Outlook

Activities in the bonds market last week were mixed. In the Eurobonds market, contrary to last week where there was renewed buying interests in Nigerian sovereign Eurobonds on the back of the reforms in the FX market, the decision of Fitch Ratings to downgrade Nigeria’s credit rating to B+ triggered a sell sentiment across the three Nigerian sovereign Eurobonds. Nevertheless, contrary to last week when the Nigerian corporate bonds witnessed selloffs as investors worried about their default risk due to the new FX framework, most corporate bonds witnessed buying sentiments this week save for the Diamond Bank 2019 bond (+0.2%) and the FBN 2021 bond (+3bps) as investors weighed the fundamentals of the issuers.

 

Fitch Downgrade

Fitch Ratings last week downgraded Nigeria’s long-term foreign currency Issuer Default Rating (IDR) to ‘B+’ from ‘BB-’ as well as the country’s long-term local currency IDR to ‘BB-’ from ‘BB’. But the global rating agency assigned a stable outlook to the country. The issuer rating on Nigeria’s senior unsecured foreign-currency bonds was also downgraded to ‘B+’ from ‘BB-’.

Nigeria’s Country Ceiling was also revised downwards to ‘B+’ from ‘BB-’ and its Short-Term Foreign-Currency IDR affirmed at ‘B’. The agency, with dual head offices in New York and London, pointed out that the downgrade of Nigeria’s IDRs, among others, was because its fiscal and external vulnerability had worsened due to a sharp fall in oil revenue and fiscal and monetary adjustments that were slow to take shape and insufficient to mitigate the impact of low global oil prices.

It hinged its decision to the renewed insurgency in the Niger Delta in the first half of 2016, which has lowered oil production, magnifying pressures on export revenues and limiting the inflow of hard currency. Fitch also forecast that Nigeria’s general government fiscal deficit was expected to grow to 4.2 per cent in 2016, after averaging 1.5 per cent between 2011-2015, before beginning to narrow in 2017. It noted that government has adopted a fiscal adjustment strategy centred on raising non-oil revenue and has made some progress in raising tax revenue by improving revenue collection and improving the control over revenue raised by government departments and state-owned enterprises.