Cost of Funds Drops on Cash Refunds 

MARKET INDICATOR 

 By Obinna Chima

The Nigeria Interbank Offered Rate (NIBOR) eased to around eight per cent on Friday, from 15 per cent the preceding week after the Central Bank of Nigeria (CBN) repaid N152.6 billion in matured debt and paid refunds to banks for their forex cash provision.

Traders said they expect a further drop in the overnight rate to around five percent in the next few days as government releases its May federation account allocations to its states, LGAs and its agencies.

A total of N462.359 billion was shared by the three tiers of government for the month of May, an increase over the N415.7billion distributed for April. A breakdown showed that Value Added Tax (VAT) accounted for N76.786 billion; statutory revenue, N317.562 billion, and exchange rates differential of N64.812billion.

The figures were unveiled by the Permanent Secretary, Ministry of Finance, Dr. Mahmoud Isa-Dutse. He disclosed that the Nigerian National Petroleum Corporation (NNPC), which had been defraying its N450billion indebtedness to FAAC monthly at N6.7 billion had liquidated the debt.

From the statutory allocation, the federal government got N147.682 billion; states, N74.906billion; local governments, N57.750billion while N20.505 billion went to the oil-producing areas as 13 per cent derivation. According to Mahmoud, the gross statutory revenue of N317.562billion received for the month was more than the N274.110billion received in the preceding month by N43.452billion.

“We are anticipating additional cash flow from budgetary allocations to government agencies,” one currency traders told Reuters.

Nigeria distributes revenue from its crude exports among its three tiers of government – federal, state and local. A portion of state and local government revenues passes through the banking system

Traders said about N222 billion was expected to be credited to the banking system, which would help raise the volume of cash in the money market and help push down the cost of borrowing among commercial lenders.

The central bank issued N20 billion of 356-day treasury bills at 18.6 percent and N383 billion of 167-day T-bills at 18 percent on Friday to reduce liquidity and curb speculation on the local currency.

The money market will resume trading on Wednesday after a two-day public holiday to mark Muslim festival of Eid-al-Fitr.

Meanwhile, despite a drop in system liquidity and increased primary market issuances during the week, Open Buy Back (OBB) and Overnight (OVN) lending rates trended southward on 3 of 5 trading days of the week. Available data on the CBN website showed that the week opened with negative financial system liquidity of N71.7 billion. As a result, OBB and OVN rates rose 34.8 and 37.6 percentage points on the first trading session to settle at 50 per cent and 53.3 per cent respectively.

The CBN conducted open market operations (OMO) sales on all trading days, save for Thursday and a T-bills auction mid-week while the Debt Management Office (DMO) conducted its monthly bond auction during the week. As a result, system liquidity moderated on all sessions save for Thursday when  FAAC inflow of N275.2 billion  hit the system, prompting the CBN to conduct another OMO auction on Friday to squeeze excess liquidity.

Analysts at Afrinvest West Africa Limited showed that the CBN mopped up N403.1 billion in OMO sales, hence OBB and OVN rates rose rise 25 basis points (bps) and 42bps on Friday. Accordingly, rates closed at 8.8 per cent and 9.5 per cent on Friday, down 6.4 and 6.2 percentage points week-on-week respectively

Furthermore, the Treasury Bills market closed bearish last week as average yield on benchmark bills rose 11bps week-on-week to settle at 18.2%. During the week, the CBN offered N133.3 billion in the T-bills auction held. Expectedly, investors favoured longer tenoured bills with the 364-day instrument receiving the most subscription. The central bank allotted the exact offer/subscribed amount for the 91-day (N28.1billion), while over allotting that of the 364-day tenor with N61.3 billion as against N50 billion on offer. However, the 182-day instrument was undersubscribed at N43.8 billion relative to N55.1 billion offered amount. The 91, 182 and 364-day papers were allotted at stop rates of 13.5%, 17.5% and 18.6% respectively.

“In the week ahead, we expect the CBN to continue its weekly SMIS sales and OMO mop-ups. The impact of these sales will keep liquidity tight barring any major inflow. Hence, we expect money market rates to trend higher,” Afrinvest stated.

Forex Transactions

In the foreign exchange (forex) market last week, the CBN continued with its weekly intervention in order to boost FX liquidity and keep investors’ confidence upbeat. However, in comparison to the preceding week (US$831.5million), the volume of intervention this week (US$435.0million) was significantly lower.

At the official market, the naira exchange rate marginally depreciated from N305.60/$ the preceding week to settle at N305.85/$1. However, at the FMDQ NAFEX segment, the naira appreciated 2.5 per cent week-on-week  to close the week at N362.16/US$1 while rates at the parallel market also improved, appreciating to N368/US$1 from N370/$1 in the previous week. “We opine that the convergence in rates between the NAFEX and Parallel market continues to serve as a proxy for the potential impact of the adoption of a floating exchange rate.

“In the FMDQ OTC Futures segment, the lacklustre performance which has been recorded in recent weeks continued as investor appetite remains dampened by the upward revision of contract prices. Also, the last of the initial 12 contracts which were issued in June 2016 following the adoption of a “flexible exchange rate regime” matured during the week and notably, none of the contracts which were worth $1 billion each was completely subscribed within this period,” Afrinvest added.

During the week, the total value of open contracts declined to $2.7 billion, from US$3.3 billion in the prior week as the naira/dollar JUN 2017 contract matured and was replaced by the naira/dollar JUN 2018 instrument. As noted earlier, the weaker appetite for these futures contracts was reflected in the fact that the NGUS MAY 2018 instrument which was earlier issued still remains unsubscribed.

“We believe the stability in the FX market will be sustained in the short to medium term as the CBN continues its drive to boost FX liquidity in the markets. Hence, we expect to see similar rates in the coming week.”

One of the leading providers of global equity indexes, MSCI, last week announced its resolve to delay its decision on a potential reclassification of the MSCI Nigeria Index to stand-alone market status to the November 2017.

The MSCI had Tuesday indicated that the newly introduced Investors’ and Exporters’ forex window targeted at foreign portfolio investors could earn Nigeria reprieve from being demoted from the MSCI’s frontier markets index. Nigeria as at last Tuesday was under review for possible demotion from the MSCI’s frontier markets index to “standalone” status. This, according to the index provider, stemmed from “continuous deterioration of the market accessibility” after the introduction of restrictions on foreign currency trading in 2015.

Eleven Lagos-listed stocks on the Nigerian Stock Exchange (NSE) are currently on the MSCI Frontier Markets 100 index with a weighting of around seven per cent. That is the fourth largest after Kuwait, Argentina and Vietnam.

Bond Market Review 

Performance in the local bond market last week was relatively bearish as yields rose prior to the Debt Management Office’s Primary Market Auction (PMA) which took place last Wednesday. Consequently, average yield on benchmark bonds rose 11bps week-on-week to close at 16.1%. The DMO offered N40 billion, N50 billion and N50 billion of the JUL 2021, MAR 2027 and APR 2037 instruments respectively at the Wednesday auction. The PMA was undersubscribed by N18.1billion with a total subscription of N158.1billion relative to offered amount of N140 billion.

“Investors’ preference was skewed towards the longer duration APR 2037 instrument as total subscription for the bond stood at N88.2 billion relative to offered amount of N50 billion whilst total subscription for the MAR 2027 instrument was N57.4 billion relative to offered amount of N50 billion. “The JUL 2021 instrument was undersubscribed with a total subscription of N12.5 billion compared to the offered amount of N40 billion.

“Investors strong preference for longer duration bonds at the auction is an indication of the fact that traders still have a medium term dovish expectation for interest rate. Notwithstanding, the DMO allotted N4.2 billion, N30.3 billion and N64.8 billion of the JUL 2021, MAR 2027 and APR 2037 instruments at marginal rates of 16.19%, 16.19% and 16.20% respectively,” Afrinvest stated.

In another development, the FGN issued a 5-year US$300.0m diaspora bond in the US debt market last week which was oversubscribed by 130.0% and priced at 5.62%. The DMO still has two outstanding major issuances this year – US$328.0m in Sukuk to fund road projects as well as US$64.0m via Green Bond.