By Obinna Chima
Nigeria’s external reserves sustained its accretion last week as it closed at $28.699 billion on Thursday.
The current value of the reserves, according to checks by THISDAY, represented an accretion by 10 per cent or $2.605 billion, compared with the $26.094 billion it was at the beginning of this year.
Nigeria’s external reserves are majorly derived from the proceeds of crude oil sales. Oil prices rose on Friday after reports that the Organisation of Petroleum Exporting Countries (OPEC) members delivered more than 90 per cent of the output cuts they pledged in a landmark deal that took effect in January. Supply from the 11 members of OPEC with production targets under the deal fell to 29.92 million barrels per day, according to the average assessments of the six secondary sources OPEC uses to monitor output, or 92 per cent compliance.
The International Energy Agency (IEA) – one of OPEC’s six sources – said the cuts in January equated to 90 per cent of the agreed reductions in output, far higher than the initial 60 per cent compliance with a 2009 OPEC deal.
The Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) meeting had at its last meeting expressed hope that the increase in oil prices would be complemented by production gains to provide the needed tailwinds to sustainable economic activity.
Money Market Review
Activities in the money market were mixed last week as the open buy back (OBB) and overnight rates trended northwards on most trading days of the week. OBB and overnight rates inched one per cent and 0.8 per cent points to close at 11.5 per cent and 12 per cent respectively on the first trading session of the week as the N391.7 billion debit for successful open market operation (OMO) sales at the preceding Friday’s primary market auction dragged system liquidity. Rates however retreated in the following two trading sessions despite the absence of a major inflow before trending northwards towards the end of the week. OBB and overnight rates settled at 11.33 per cent and 12.17 per cent on Friday, up 7.9 per cent and 8.2 per cent week-on-week respectively.
According to a report by Afrinvest West Africa Limited, in contrast to the preceding week’s performance, activities in the treasury bills market were mixed as investors sold off on shorter dated treasury bills instruments.
Consequently, average yields trended higher on three out of five sessions. The impact of the debit for the preceding Friday’s OMO auctions weighed on system liquidity last Monday as it led to a 25 basis points increase in average yield as investors sold off particularly in the treasury bills instruments maturing in February and March 2017.
“We believe investors may be liquidating their positions in anticipation for this week’s treasury bills primary market auction (PMA). At the PMA, the CBN will be auctioning N32.4 billion of the 91-day, N30 billion of the 182-day and N80 billion of the 364 day instruments.
“We expect that investors will subscribe to the longer dated instruments in expectation of a medium to long term moderation in yield environment.
“In the week ahead, we project money market rates to trend northward as the demand for primary market instruments expected to be auctioned by the CBN and Debt Management Office (DMO) weigh on financial system liquidity,” Afrinvest stated.
The naira/dollar spot rate at the Interbank market closed the first trading session of the week at N305.25/US$1.00 similar to the prior weeks and traded at that level throughout the week, save for Friday when it marginally appreciated by N0.25 to N305.00/US$1.00. The parallel market rate however depreciated throughout the week, eventually settling at N506.00/US$1.00 on Friday.
The spread between the interbank and the parallel market continued to widen despite the resumption of sale to the BDC operators earlier in the year.
Also, the non-deliverable naira settled OTC FX futures contracts continue to underperform. As at market close on Friday, none of the contracts on offer had been fully subscribed. Total value of open contracts as at Friday 10th February stood at $3.9 billion, a far cry from the total contracts value of $12 billion.
“We expect rates at the interbank to remain at current levels while pressure on parallel market rates continue to mount,” Afrinvest stated.
Performance in the domestic bonds market was largely bearish as average yield across benchmark instruments rose 14 basis points (bps) week-on-week to close at 16.3 per cent. During the week, The FMDQ OTC Exchange signed an MoU with S&P DJI – the Global Index Provider and Rating Agency- and launched the S&P/FMDQ Nigeria Sovereign Bond Index. The agreement marked S&P Dow Jones Indices’s first-ever agreement with an Africa-based exchange to offer fixed income-based indices.
FG’s Eurobond Oversubscribed
The federal government last week announced that its US$1 billion Eurobond was 780 per cent oversubscribed, demonstrating a strong market appetite for Nigeria. The government also revealed that the newly established US$1 billion Global Medium Term Note programme will bear interest at a rate of 7.875 per cent and will mature on 16th February 2032, with a bullet repayment of the principal. Nigeria intends to use the proceeds of the notes to fund capital expenditure in the 2016 budget.
A statement signed by the Director Information in the Ministry of Finance, Mr. Salisu Na’inna Dambatta said: “The development was clearly a sign of renewed confidence in the economy which has been hurt by the slump in crude oil prices.”
The notes represented the country’s third Eurobond issuance, following issuances in 2011 and 2013.
“The notes were approximately eight times oversubscribed with orders in excess of US$7.8 billion compared to a pre-issuance target of US$1 billion, demonstrating strong market appetite for Nigeria.
“This is despite continued volatility in emerging and frontier markets and it shows confidence by the international investment community in Nigeria’s economic reform agenda.
“The offering attracted significant interest from leading global institutional investors.
“The notes will be admitted to the official list of the UK Listing Authority and available to trade on the London Stock Exchange’s regulated market,” the statement added.
Banks to Support Export, Import Substitution
The banking industry last week committed to contribute five per cent of their profit-after-tax (PAT) towards the support of eligible and bankable export and import substitution projects. Based on the industry profit and loss account in the past three years, and given average five per cent VAT charge for the period, it was estimated that about N25 billion will be realised from their annual contributions. While the scheme will commence in 2017, it will be bankrolled from banks’ 2016 financials initially.
Addressing journalists in Abuja shortly after the regular meetings of the Bankers’ Committee, Director, Banking Support Department, Central Bank of Nigeria (CBN), Alhaji Ahmed Abdullahi said the new initiative for funding agriculture and small and medium enterprises (SMEs) will boost federal government’s diversification efforts.
He said the fund will be made available to any firm or entrepreneur who aims to boost export drive or promote import substitution like processing of raw materials locally to reduce importation of finished items. The funding pattern will be based on equity partnership arrangement and not loan and with no interest charge- and will run for a 10-year maximum duration. Indications also emerged yesterday that the apex bank may not have foreclosed the use of virtual currencies in the run as it is still weighing the benefits and consequences which could result from the eventual adoption.
New Tax Policy
The Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) last week endorsed the new national tax policy recently announced by the federal government to shore up the country’s dwindling revenue base, occasioned by the shortfall in oil prices as well as activities of militant and vandals in the Niger Delta.
The acting Chairman of the commission, Shettima Umar Abba Gana, had in July 2016, canvassed the upward review of value added tax from 5 per cent to about 7.5 per cent in order to improve the country’s revenue base. He had observed that VAT was a high tax revenue yielding instrument that could be used to shore-up revenue required for financing the ever-expanding public expenditure needs of all tiers of government adding that the current VAT rate of five per cent was one of the lowest in the world.
In a statement signed by RMAFC’s spokesman, Mr. Ibrahim Mohammed, the Commission reiterated its support for initiatives including the newly introduced revised tax policy, which would go a long way in boosting the nation’s revenue base for sustainable national development.