Overnight Lending Rate Crashes on Cash Inflows 

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By Obinna Chima

The overnight tenor of the Nigerian Interbank Offered Rates (NIBOR) fell on Friday after the central bank repaid matured treasury bills and cash meant for government’s capital projects reached the system, traders said.
Overnight lending rates fell to 11 per cent, below the central bank’s benchmark 14 per cent, from 15.5 percent the previous day.
Rates had risen above 100 percent at the start of the week because of a central bank dollar auction, Reuters reported.

Traders said the bank repaid about N138.7 billion in matured treasury bills on Thursday to boost liquidity. They also said the market was flush with cash after the central bank sold fewer dollars than expected and returned excess naira.
The central bank sold $313 million at a special auction meant to clear a backlog of dollar demand .
Furthermore, traders said an unspecified amount of naira was released on Friday to fund government spending on capital projects and that additional inflows was expected before the end on the day.
Nevertheless, the NIBOR is expected to reduce further in the coming days as inflows from federation allocation to the three tiers of government for the month of September that was shared last Thursday hit the banking system.
The sum of N420 billion was approved for sharing at the Federation Account Allocation Committee (FAAC) meeting in last Thursday.
The Permanent Secretary, Federal Ministry of Finance, Dr. Mahmoud Isa-Dutse, of the net statutory allocation, the federal government got the highest sum of N120.351 billion, states N61.044 billion while local governments received N47.062 billion. The sum of N13.729 billion went to oil producing states as their share of 13 per cent derivation.
Meanwhile, the drag in system liquidity on the back of banks’ provisioning for FX forwards auction kept open buy back (OBB) and overnight lending rates at triple digits at the start of the week. However, the refunds for unsuccessful bids at the auction in addition to inflow from maturing treasury bills improved system liquidity levels.
Afrinvest West Africa Limited in its analysis of events in the interbank Naira market last week, showed that with aggregate system liquidity at N84 billion deficit at the start of the week, OBB and overnight rates rose 21.7 and 16.7 percentage points to close at 125 per cent and 128.5 per cent respectively last Monday, remaining at last week’s triple digits close.
Liquidity remained tight on Tuesday with rates at high levels; however, OBB and overnigh rates reversed uptrend by mid-week as both declined significantly by 132.8 and 133.0 percentage points to 18.9 per cent and 20.5 per cent respectively due to impact of the refunds for unsuccessful bids at the FX forwards auction which bolstered financial system liquidity.
In addition, the inflow of net N138.2 billion  in treasury bills maturities last Thursday further improved system liquidity, resulting in a 4.1 per cent and five per cent decline in OBB and overnight rates to close at 14.8 per cent and 15.5 per cent  last Thursday.
But activities in the treasury bills market started the week on a bearish note as sell sentiment was evident on the back of pressured financial system liquidity. Average treasury bills rate moved in similar mode to interbank money market rates as it inched higher in the first two trading sessions of the week but declined towards the end of the week on the back of a treasury bills maturity of N138.2 billion, closing at 17 per cent last Friday, down 62 basis points week-on-week.
“In the week ahead, we expect the inflow of circa N200 billion in FAAC allocation to improve system liquidity and expect money market rates to moderate from current levels. However, there is a high probability the CBN will react by mopping up excess liquidity through OMO auctions in pursuance of its tightening objective,” Afrinvest analysts estimated.

Forex Market

In a move similar to the special secondary market intervention auction of $4.1billion in forwards commitment held in June to clear pent-up FX demands, the CBN sold circa $313 million worth of two months forwards at rates ranging from N310/$ to N350/$1 in a special intervention auction the preceding  Friday.
The dollar forwards auction was targeted at clearing backlogs of FX demands from agriculture and agro-allied businesses, airlines and manufacturers amongst others. In line with past trend, the naira remained stable at the interbank market lasr week as it firmed 1.2 per cent week-on-week, strengthening to N304.75/$ last Friday from N307.77/$ the previous week. Nonetheless, persistent interventions by the CBN with dollar sales at the interbank segment as well as tight foreign inflows continues  to pressure the external reserves as it currently sits at $23.9 billion from $26.4 billion as at the first half of 2016.
At the parallel market, the naira/dollar exchange rate remained stable at N455/$1 on all trading days of the week save for Tuesday when it appreciated to N453/$ as Travelex continues to provide an alternative source of dollar supply for travelers and licensed Bureau-De-Change operators.
In the futures market, the OTC FX Futures contracts calendar as at October 21, 2016, showed value of open contracts at $3.7 billion as investors continue to take advantage of the attractive prices of instruments on offer.
In fulfilment of its pledge to fund forward sales under the flexible FX  regime, the CBN last week disclosed plans to within the next few months, fund the 60-day forward sales and request from the agricultural, aviation, machinery and raw materials sectors, thus guaranteeing letters of credit (LCs) for importers to ship in required goods.
A four-paragraph statement from the acting Director, Corporate Communications Department, CBN, Mr. Isaac Okorafor  confirmed that the CBN would fund the requests from the various sectors in the secondary market interbank thereby giving a boost to the importation of required goods for the overall development of the economy.
Okorafor explained that importers in the agricultural sector would be getting the largest percentage allocation of 62 percent of their requests, while importers of machinery would receive 53 per cent of their requests. Other sectors to receive allotments are the airlines, which will have 32 percent of their request settled, as well as the importers of raw materials. According to him, the move by the CBN to settle the 60-day forward sales amounting to over $300 million would further ease pressure on the naira and improve market liquidity.

Bond Market

Sentiment in the domestic bonds market was mixed but largely bearish last week as investors reacted to the release of September inflation numbers last Friday – which indicated a 17.9 per cent year-on-year rise in Headline Inflation – in addition to decreased system liquidity, Afrinvest stated.
The market started off the week bearish but sentiment turned bullish mid-week following improvement in liquidity. Weakened sentiment for long-duration bonds last Friday however sent prices down at the long end of the curve.
On week-on-week basis, yields on benchmark bonds trimmed one basis points on average to 15.1 per cent on Friday driven mainly by a rally on short and medium tenor bonds, while yields rose at the long end of the curve. In the short term, we imagine that investors in the local bonds market will continue to price in current inflation and inflation expectations in their valuation of bonds instrument; as such, expecting yields to remain at current level as inflationary pressure subsides and MPC holds off on further hike in interest rate.