Cost of Funds Drop on Improved Market Liquidity



By Obinna Chima

The overnight tenor of the Nigerian Interbank Offered Rates (NIBOR) dropped to five per cent on Friday, from 15 per cent the preceding Friday due to inflow of cash from the Federation Accounts Allocation Committee as well as from maturing treasury bills.

 The increased cash flow left the money market with a N267.10 billion surplus balance on Friday, reversing the N300 billion shortfall of a week ago and pushing down the cost of borrowing among commercial lenders.

Last week, financial system liquidity opened at N168.1 billion as the open buy back (OBB) and overnight rates rose 8.8per cent and 10.8 per cent to close at 28 per cent and 32per cent respectively at the end of Monday’s trading session.

The expected FAAC inflow of about N146.7billion also hit the system during the week and impacted opening system liquidity levels on Tuesday.

On the other hand, the treasury bills market saw renewed buying interest last week and as a result, the average treasury bills rate declined on all the trading days of the week.

Average treasury bills rate closed the week at 9.4 per cent on Friday, down 1.7 per cent week-on-week.

In its review of market activities last month, Afrinvest West Africa Limited stated that money market rates during the month of June saw Open Buy Back (OBB) and overnight lending rates crossing the 50 per cent mark for the first time in 2016 driven by the volatility in liquidity levels on the back of special FX intervention by the Central Bank of Nigeria (CBN after the commencement of the new FX framework.

OBB rates in June hovered from as low as 1.6 per cent to as high as 63.3 per cent whilst overnight rates trended between 2.2 per cent and 68.5 per cent. Aggregate liquidity levels hovered between deficit and N1trillion in June 2016.

In the week ahead, we expect money market rates to rise as the apex bank is scheduled to auction N94.0bn worth of treasury bills. There is also a T-bills maturity of N44.0bn scheduled to hit the system next week but the T-bills auction will taper its effect on system liquidity.

Forex Market

During the month of June, the central bank released the guidelines for the new FX framework, surpassing consensus expectations. The much awaited guidelines included the adoption of a single FX market structure and the introduction of derivatives products. On the first trading day of the new interbank market, the central bank cleared $4.02 billion of pent-up demand accumulated over months at N280/$1. Subsequently, interbank rate tumbled from the pegged N197/$1 to over N280/$1.00.

As it stands, the CBN remains the major supplier of FX even in the new FX market structure as the inflow of foreign capital has not been as swift as expected amidst global & local macroeconomic challenges.

In the parallel market, the naira appreciated to a month high of N335/$1 after the announcement of the new FX framework.

However, Afrinvest argued that the continued exclusion of 41 items in the accessibility of FX at the interbank market ensured that the parallel market continued to thrive.

Consequently, the exchange rate appreciation witnessed in the parallel market relapsed as the naira fell to N345/$1 during the last week in June.

Also last month, the CBN launched the Naira settled over-the-counter (OTC) FX futures contract by creating $1 billion each of 1 to12 months contracts. Citi Bank Nigeria Limited executed the first Naira settled OTC FX Futures on the FMDQ OTC platform last week after buying $20 million worth of naira/dollar April 2017 at N210/$1. The interbank’s spot rate hovered between N281.23/$1 and N281.49/$1.

Whilst one-year forward quote rate closed at N317.82/$1 suggesting bearish sentiments in the medium term, one-year futures quote rate issued by the CBN closed bullish at N225.00/$1.  At the parallel market, the naira traded at N347/$1 last Monday, depreciated to N355.00/$1 by midweek and closed the week at N352.00/$1.

“In the second half of the year, we believe the FX market will be shaped by the depth of the new inter-bank market. Investors continue to watch market proceedings for liquidity. Whilst we hold the view that the interbank market will become fully functional when autonomous inflow sources (other than from the CBN) increase, we remain comfortable with the current arrangement,” the Afrinvest report stated.

Bond Market Review

During the month of June, activities in the bonds market were mixed but largely bearish. The federal government through the Debt Management Office (DMO) borrowed a total of N112 billion via the sale of N22 billion, N40 billion and N50 billion of the FEB2020, JAN2026 and MAR2036 bonds respectively.

Average marginal rate at the auction cleared at 14.5 per cent, 90 basis points higher than the average rate at the May auction as investors priced in macroeconomic realities into their valuation of the offered instruments.

The Nigerian Sovereign Eurobonds also saw renewed buying interest as the announcement of FX market reforms stoked positive investor sentiment in the Nigerian Sovereign Eurobond instruments. By the second week in June, the Nigerian sovereign bonds year-to-date return had outperformed all the other sovereign bonds instruments in the sub-Saharan African region.

However, the decision by Fitch Ratings to downgrade Nigeria’s credit rating to B+ triggered a sell sentiment across the Nigerian sovereign bonds instruments. The bearish sentiment however lasted for a week as the impact of the FX reforms continued to strengthen investor sentiment.

Nonetheless, activities in the bonds market last week, according to Afrinvest was broadly bullish as average yield across benchmark bonds declined on all trading days amidst buying interest save for Tuesday when yields trended 0.1per cent northwards.

Average yield across benchmark bonds declined 0.1 per cent on Monday to close at 14.4per cent (from 14.5% on Friday) with increased activity observed on the FGN JAN2019 instrument. By midweek, average yield moderated three basis points from Tuesday’s closing levels to close at 14.4 per cent.

“The impact of the Fitch Ratings downgrade on investor sentiment towards Nigerian sovereign bonds was short-lived as renewed buy interest returned during the week. Consequently, yields dropped across the three Nigerian sovereign Eurobonds, with yields of the FGN 2023, FGN 2021 and FGN 2018 Eurobonds down 0.3 per cent, 0.3 per cent and 0.4 per cent, week-on-week respectively.

“We expect that yields in the local bonds market will continue to moderate in the week ahead as we anticipate more buying activities from PFAs and other institutional investors as they reposition their portfolios for second half 2016 though inflationary pressures remain a concern. We also expect the bullish sentiments in the Nigerian sovereign Eurobonds to persist this week as investors take advantage of attractive discount bonds within that space,” they added.