Cost of funds rose significantly in the interbank money market last week following series of liquidity outflow which caused market liquidity to fall by 26 per cent to N96 billion, week-on-week (WoW).
During the week, the interbank money market experienced outflow through treasury bills sale and foreign exchange sales by the Central Bank of Nigeria (CBN). Liquidity Financial Vanguard analysis of market activities showed that the apex bank sold Nigerian Treasury Bills (NTB) worth N279 billion, comprising secondary market or Open Market Operations (OMO) Bills of N45 billion and primary market bills of N234 billion.
This nullified the impact of inflow of N234 billion from matured bills during the week, and was compounded by outflows to fund dollar sale of over $257.5 million by the CBN during the week. As a result, market liquidity fell by 26 per cent from N128.9 billion the previous week to N96 billion at the close of business on Friday. In response, short term interbank interest rates rose by 400 basis points compared to the previous week.
According to data by Financial Market Dealers Quote (FMDQ), interest rate on collateralised lending (Open Buy back, OBB) rose by 420 basis points to 14.7 per cent last week from 10.5 per cent the previous week. Similarly, interest rate on overnight lending rose by 380 basis points to 15.3 per cent from 11.5 per cent the previous week.
CBN forex intervention hits $3.1bn, reserve rises to $30.3bn The foreign exchange intervention of the CBN rose to $3.1 billion last week even as the naira depreciated to N397 per dollar in the parallel market at the close of business on Friday. Meanwhile, the nation’s external reserve resumed its upward movement last week rising by $28 million to $30.32 billion on Thursday, from $30.29 billion Thursday of the previous week.
Recall that last week the reserve recorded its first weekly decline since October, when it declined by $50 million to $30.297 billion. CBN boost FOREX supply In a related development, CBN sustained its intervention in FOREX market in its determination to ensure ample supply of foreign exchange liquidity in the market. The apex bank last weekend auctioned the sum of US$418 million at the retail-SMIS at a marginal rate of N310/$. The airlines, agriculture, petroleum and raw materials/machineries sub sectors benefitted from the auction.
A statement by the CBN’s acting director of Corporate Communication, Mr Isaac Okoroafor, stated: ‘‘In the weeks ahead the CBN will sustain its intervention through the sale of foreign exchange to all segments of the market i.e. PTA/BTA, Wholesale SMIS, Retail SMIS and the BDC. ‘‘The Bank will sell short tenured forwards of 7-30-day maturity to meet demand of manufacturers and all other foreign exchange users.
These significant injections of foreign exchange into the market should reassure all foreign exchange users of our determination to continue to meet all legitimate FX demand in the market while striving to achieve exchange rate stability in the market.’’ Declining fortunes of the naira Consequently, the CBN, since Monday February 20, 2017, when it announced new measures to boost dollar supply and forestall the declining fortunes of the naira in the parallel market, has injected $3.1 billion by intervening in the forex market 16 times as follows: Tuesday February 21, $417 million; Thursday February 23, $231 million; Monday February 27, $180 million; Friday March 3, $350 million; Monday March 6, N367 million; Tuesday March 7, $100 million; Thursday March 9, $170 million; Tuesday March 14, $190 million; Wednesday March 14, $150 million; Thursday March 16, $100 million, Monday March 20, $143 million; Thursday March 23, $100 million; Monday March 27, $185 million; Thursday March 30, $100 million; Monday April 3, N240 million and Thursday April 6, N100 million.
However, despite the additional dollar injection, the naira depreciated by N7 or 1.7 per cent in the parallel market, as the parallel market exchange rate rose from N390 per dollar the previous week, to N397 at the close of business on Friday. This according to Afrinvest Plc, a Lagos based investment firm, indicates that the one month appreciation of the naira in the parallel market from N520 per dollar on Monday February 21, has ended.
The company stated: “Whilst the recent moves by the Apex Bank to ease FX liquidity constraints and force the convergence of the parallel and official markets rates are commendable, the month-long rally in the parallel segment seems to have come to a halt regardless of efforts by the CBN to guarantee supply for retail invisibles demand. This further justifies the call for removal of capital controls and readmitting the 41 inadmissible items in order to further reduce the parallel market premium and ensure FX rates convergence. We continue to see FX rate trending within the band of N390.00 and 400 per dollar in the parallel market pending a review of the 41 items exempted from accessing FX at the official market.”
Nigeria’s Eurobonds continue to appreciate The increased demand for Nigeria’s sovereign and corporate eurobonds persisted last week prompting prices to rise for the second consecutive week. Consequently, the 10-year, 6.75 per cent Jan 28, 2021 bond appreciated by $.36 while yield fell to 5.40 percent; the 10-year, 6.38 per cent Jul 12, 2023 bond appreciated by $0.39 while yield fell to 6.03 per cent. But the 5-year, 5.13 per cent Jul 12, 2018 bond depreciated by $0.02 while yield rose by 3.87 per cent. On the corporate side, sentiment was bullish on Nigerian Corporate Eurobonds as investors hunted for bargains. Consequently, yields fell on all the Nigerian corporates save for Diamond 2019 (up 3bps) and FBN 2021 (up 15bps).
The Fidelity Bank 2018 saw the most buying interest as yield fell 83bps whilst yield on the Access 2021 and Guaranty 2018 declined 8bps apiece. Likewise, bargain hunting in FBN 2020 and Zenith 2019 saw yields on both notes drop 13bps and 2bps respectively. FDC projects further decline in inflation rate Meanwhile, Financial Derivatives Company Limited, a Lagos based investment firm has predicted decline in March inflation to 16.4 per cent. The inflation rate recorded its first decline in 15 months to 17.78 per cent in February from 18.82 per cent in January.
The Nigeria Bureau of Statistics (NBS) is expected to release the inflation rate for March this week. In its Economic Bulletin issued last week, FDC stated: “We are forecasting that headline inflation will decline for the second month running to 16.4 per cent, as a result of further waning of the 2016 base year effects. The reasons for a moderation in the price level in March are not farfetched.
February/March 2017 was the period when the CBN’s aggressive intervention in the forex market forced a major appreciation in the Naira (13.5% to N392) and has fed mildly into retail prices. “However, more significantly is the steep decline in the price of diesel from a peak of N260 to N195 at the wholesale level. Power also improved in the month with average output at the grid at 3773MW. The 90-day transmission lag effect of the CBN’s forex policy as well as manufacturer’s inventory cycle may have delayed some of the pass-through effect of raw material and finished goods cost reduction. The full impact of these policies will become manifest in the months of April and May.”
Source: VANGUARD
