Fund Managers Face Tough Investment Choices over OMO Restriction


Obinna Chima

The decision by the Central Bank of Nigeria (CBN) to restrict individuals and local firms, non-bank financial institutions inclusive, from investing in its open market operations (OMO) auctions has narrowed investment choices for Pension Fund Administrators (PFAs) and fund managers in the country to Treasury Bills and stocks.

The PFAs hold significant amount of government securities in their portfolio as required by law, which also include OMO bills because of its attractive rates.

Unfortunately, the uninspiring performance of the Nigerian Stock Exchange (NSE), another investment window, further compounds the woes of the PFAs and fund managers. The NSE All-Share Index has depreciated year-to-date by 16.17 per cent, to close last Friday at 26,348.73 basis points.

A report by Stanbic IBTC Stockbrokers Limited last Thursday showed that PFAs’ exposure to equity investment has dropped significantly from a high of 9.25 per cent in April 2018, to as low as 4.93 per cent in August 2019.

The CBN last Thursday completely prohibited individuals and local firms from investing in both its primary and secondary OMO auctions. With this new directive, investing in OMO bills is now for banks and foreign investors alone.

But speaking with THISDAY yesterday, a top official at one of the PFAs, who pleaded to remain anonymous, expressed disappointment about the development, saying operators in his sector would in the coming days prevail upon their regulator, the National Pension Commission (PenCom) and the Securities and Exchange Commission (SEC), to engage the CBN.

“We would be engaging the central bank through our regulators, PenCom and SEC, to find a way out of the situation,” she explained.

However, speaking in a telephone chat with THISDAY, the co-founder of Cardinal Stone Partners Limited, a Lagos-based investment firm, Mr. Mohammed Garuba, pointed out that until the CBN decided to announce the policy, it was only in Nigeria that private sector and individuals were allowed to invest in OMO.

While welcoming the decision of the central bank to place the restriction, he explained that OMO auction was supposed to be strictly between the central bank and banks.

“It is a liquidity management tool. PFAs and the rest were never supposed to invest in OMO. For normal Nigerian Treasury Bills (NTBs), it is open to everybody, you fill your forms and go for auction. But OMO is 100 per cent at the central bank’s discretion. The central bank can decide to issue it anytime or any day they like. That is how it is everywhere in the world apart from Nigeria,” Garuba explained.

According to him, the, “abnormality the central bank did was to say foreign investors are allowed to participate in OMO.”

This, according to him, was why some market participants are not happy with the policy.

“We don’t mind the central bank removing everybody, but why should foreign investors have preferential treatment?” he queried.

When reminded that the decision to allow foreign investors to participate was to continue to attract foreign inflows, Garuba said: “They (CBN) should pass those foreign investors to treasury bills. When you (CBN) start to use OMO, you are sending the wrong signal that you are panicking and when you make it too obvious, you create opportunities for more questions than answers.”

He, however, anticipated that with the new directive, interest rate in the NTBs market would drop significantly in coming days, saying, “Now that OMO has been left for only banks, the banks would not bid with corporates and individuals for treasury bills because they know they can get OMO at higher interest rates. So NTBs would be left for PFAs, other corporates and individuals.”

“We think the CBN is trying to use this to settle banks as well as to continue to attract foreign investors. It’s a carrot and stick approach. On one hand, the central bank has punished the banks and on the other hand, it wants to slightly give them preferential treatment with this,” he added.

In his contribution, the Chief Executive Officer, Graeme Blaque Group, a financial advisory firm, Zeal Akaraiwe, argued that the fact that persons and corporates were borrowing money from banks to buy government securities as discovered by the central bank, was a signal that the market was pricing corporate risks lower than sovereign risks. This, he described as an impossibility.

“If that is the case, the market is signalling to you that your OMO and NTB rates are not priced properly and the reaction should have been to lower the rate,” he added.

On his part, an analyst at Ecobank Nigeria Limited, Mr. Kunle Ezun, anticipated that in the coming days, there would be a significant reduction in market demand for OMO.

“We expect that there would be rate reduction in the NTB market. For those banks that are net takers in the interbank market, they would be the ones to enjoy because rates would drop, while those that earn a lot of interest income from treasury bills, this new policy would affect them because we expect that rates would crash,” Ezun predicted.