By Babajide Komolafe
The scarcity of funds which pervaded the interbank money market towards end of last week will intensify this week as the Debt Management Office (DMO) issues N135 billion worth of FGN bonds. Last week, the money market experienced acute scarcity of funds as the Central Bank of Nigeria (CBN) stepped up its liquidity mop up efforts by offering N431 billion worth of treasury (TBs).
The TB offer recorded 100 per cent over-subscription due to the attractive interest rate (yield) ranging from 16 per cent to 17.99 per cent. Breakdown analysis revealed that public subscription to the offer was N881 billion while the CBN sold N538 billion.
In the secondary market, where existing TBs are sold, the apex bank offered N290 billion worth of OMO (open market operation) bills. Public subscription stood at N322 billion while the CBN sold N322 billion. In the primary market, where fresh TBs are sold, the CBN offered N141 billion worth TBs, while public subscription and amount sold stood at N559 billion and N216 billion respectively.
The scarcity of funds triggered by these outflows caused short term interbank interest rates to rise by over 200 basis points (bpts) during the week.
Data from Financial Market Dealers Quote (FMDQ) revealed that interest rate on Collateralised (Open Buy Back, OBB) lending rose by 246 bpts to 36 per cent on Friday from 11.33 per cent the previous week. Similarly, interest rate on Overnight lending rose by 258 bpts to 38 per cent on Friday from 12.17 per cent the previous week.
This trend might persist this week due to the N135 billion FGN bond offer by DMO this week.
According to the bond offer circular for September, issued last week, the FGN Bond comprises of three tenors, namely: N35 billion 5-year, 14.50 per cent FGN JUL 202; N50 billion worth of 10-year, 16.2884 per cent FGN MAR 2027 and N50 billion 20-year, 16.2499 per cent FGN APR 2037.
This outflow as well as outflows for purchase of foreign exchange will offset the impact of N123.53 billion inflow from maturing treasury bills (bills) comprising N28.82 billion worth of 338-day bills worth and N94.71 billion worth of 339-day bills, and thus worsen the liquidity conditions of the interbank money market.
Analysts project another ‘status quo’ MPC
Meanwhile financial market analysts have projected that the Monetary Policy Committee (MPC) of the CBN will, this week, and for the seventh time retain key policy rates at current levels.
Since its July 2016 meeting when it raised the Monetary Policy Rate (MPR) by 200 bpts to 14 per cent while maintain Liquidity Ratio (LR) and Cash Reserve Ratio (CRR) at 30 per cent and 22.5 per cent respectively, in a bid to address rising inflation, the Committee has left the rate unchanged in the sixth subsequent meetings.
At the end of its meeting July, the MPC cited ‘uncertain economic conditions and high inflation’ as the rationale for leaving the MPR, Liquidity Ratio (LR) and Cash Reserve Ratio (CRR) unchanged.
“Against the backdrop of the rather unclear outlook around key economic activities especially food production especially, contraction of inflation, as well as relative stability in the foreign exchange rate, the MPC was reluctant to alter the current monetary policy configuration in any fundamental manner”, said CBN Governor, Godwin Emefiele at the end of the July meeting.
In various projections ahead of the MPC meeting this week, financial analysts said that the need to stabilise the foreign exchange market and the expected huge fiscal injections into the economy will compel the 12 members of the MPC to largely vote to retain the MPR and other policy rates at current levels.
“As has been the case with all meetings held so far in 2017, we expect the committee members to maintain status quo on policy rates as they sit to deliberate on recent happenings in the global and domestic landscape next week,” said analysts at Lagos based Afrinvest Plc.
Explaining further, they stated: “However, we expect emphasis to be placed on the need to consolidate gains in the forex market whilst urging for more fiscal-monetary policy coordination to sustain recent improvements in domestic macroeconomic fundamentals. We highlight our thoughts on possible MPC considerations below.
“While our medium term outlook favours a gradual monetary easing, we believe the stabilization of the forex market is paramount to achieving monetary policy objectives. The forex market despite improvements recorded so far in the year, it still is in a fragile state as the CBN is yet to harmonize all rates at the official market.
“As such, in the event that a unified rate is not achieved, monetary easing poses a threat for forex stability. Furthermore, the current realities of Nigeria’s budget deficit, suggests the need for the fiscal authorities to continuously fund this disparity which current tightening stance enhances; though at a higher cost to government.”
Analysts at Lagos based Cowry Asset Management Plc also stated: “We opine that the Monetary Policy Committee (MPC), scheduled to meet on Monday and Tuesday, September 25 and 26 respectively, will retain the benchmark interest rate, MPR, at 14 per cent despite sustained moderations in inflation rate, increase in global crude oil prices and the recent exit from economic recession. This is partly predicated on anticipated increase in public sector spending and the need to ensure positive real returns on investments in order to attract foreign portfolio inflows.”
