Cost of funds to rise as N140bn bond offer pressures interbank

External reserve to overshoot $31bn

By Babajide Komolafe

THE upward trend in cost of funds in the interbank money market last week, will persist this week, due to outflow of N140 billion for FGN bond sale.

The Debt Management Office will, this week, offer three varieties of FGN bonds comprising N40 billion worth of five-year bonds, N50 billion worth of 10-year bonds, and N50 billion worth of 20-year bonds.

The outflow of funds to invest in these bonds, combined with outflow for participation in forex sales by the Central Bank of Nigeria (CBN) will nullify the effect of expected inflow of N87.7 billion from matured treasury bills, and hence aggravate scarcity of funds in the interbank money market, leading to further rise in cost of funds.

Last week, the market was gripped with intense scarcity of funds due to outflow of N295 billion comprising OMO bills worth N65.8 billion and Primary market bills worth N266 billion. These outflows in addition to outflow for forex purchase nullified the effect of inflow of N220 billion from statutory allocation funds and N87.6 billion from matured bills.

This development occasioned wide swings in cost of funds during the week, with interest rate on Colateralised lending (Open Buy Back, OBB) rising from 3.3 per cent at the beginning of the week  to 51.7 per cent on Wednesday before dropping to close the week at 18.2 per cent. Similarly, interest rate on Overnight lending rose from 4.4 per cent, to 53.4 per cent, before dropping to close the week at 19.3 per cent.

The above trend, according to analysts at Afrinvest Plc, a Lagos based investment firm, is expected to persist this week. “Next week, we expect money market rates to fluctuate to liquidity dynamics dictated by the apex bank’s activities in the primary market, particularly OMO auctions and forex intervention auctions. Debits for successful bids at the DMO scheduled monthly bonds auction as well as FGN savings bonds auction are also expected to weigh on liquidity towards the end of next week”, they projected.

External reserve to overshoot $31bn

The nation’s external reserve will this week cross the $31 billion mark, owing to the continued upward movement which persisted last week.

The reserve last week rose by $140 million to $30.98 billion on Thursday from $30.84 billion Thursday of the previous week. In April the reserve gained $570 million, rising from $30.29 at the end of March to $30.86 billion at the end of April. On year to date basis, the reserve has risen by $5.14 billion from $25.84 billion at the end of 2016, to $30.98 last week Thursday.

Naira appreciates to N385/$ as CBN injects $594m

The naira appreciated to N385 per dollar in the parallel market as the CBN sustained increased dollar sales to bureaux de change, and intervention in the interbank foreign exchange market. The apex bank sold $40,000 to each of the over 3000 BDCs. This enhanced dollar supply at the retail segment prompting the parallel market exchange rate to fall to N385 per dollar from N391 per dollar the previous week.

The CBN also intervened in the interbank market selling $594.6 million dollars for spot, wholesale, forwards, SME and invisible transactions. The naira, however, depreciated marginally at the Investors and Exporters Forex window (IEFW) forex window, as NAFEX, the benchmark rate for the market, rose slightly to N377.95 per dollar on Friday from an opening rate of N376.54 per dollar.

Cautious optimism about IEFW dominate Access Bank forex seminar

Notwithstanding the lacklustre performance of the naira at the newly created Investors and Exporters Forex window  (IEFW), banking experts who spoke at the Access Bank 2017 FX seminar held last week, expressed optimism that the initiative will help in boosting confidence in the forex market and enhance dollar inflow from foreign investors. They, however, stressed that it is still early days and more works needs to be done in terms of understanding the operations of the new market.

Leading discussions at the  seminar, which was themed: “Nigerian Foreign Exchange Market – Paving the Way Towards Restoring Confidence”, Access Bank’s Group Managing Director/Chief Executive, Mr. Herbert Wigwe said: “We as regulators, market participants and businesses should sit down together to understand the modus operandi of the recently introduced forex markets and how it will impact on our businesses going forward.

“We are beginning to see inflows into the market, it is still very early days yet, but at least we are beginning to see semblance of inflows. We must work together to strengthen this market in which we do business.”

On his part, Managing Director/Chief Executive, Financial Derivatives Company, Mr. Bismarck Rewane noted that: “The IEFW will increase the number of suppliers in the foreign exchange market and reduce the dominance of the CBN, as well as move us closer to effective exchange rate. It is an attempt to make price discovery more efficient and the achievement of a perfect market.”

Mr. Dapo Olagunju, the Group Head, Global Markets in Access Bank, said there were more people at the IEFW who wanted to sell foreign exchange than those willing to buy. Olagunju assured that the era of dollar scarcity might end soon, saying that the CBN’s capacity to sustain its interventions in the foreign exchange market would increase.

On her part, Associate Vice President, Market Development and Regulation, FMDQ OTC, Mrs Jumoke Olaniyan, the said that the Nigerian foreign exchange market was halfway to getting a free float. Olaniyan attributed the likely free float to the IEFW that allowed the value of the naira to be determined by the forces of demand and supply.

On  foreign investors’ response to the IEFW, Managing Director/Chief Executive, Rencap Nigeria Limited, Mr. Temi Popoola said that while there are many investors out there interested in investing in Nigeria, they need confidence, and uniformity of exchange rate. He said: “All these investors need confidence. Confidence has been broken in the last 18 months, and it takes time to build confidence. Investors expect the exchange rate to overshoot to N420 per dollar before retracing its steps to around N385 or N390 per dollar.”

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