Cost of funds to stabilise as N181bn inflow boost market liquidity

THE nation’s external reserve continued its downward trend last week as it fell by $200 million to $30.49 billion last week Thursday from $30.69 billion Thursday of the previous week.

According to the Central Bank of Nigeria (CBN), the reserve has been on the downward trend since May 4th 2017, when it peaked at $30.99 billion. Since then the reserve has fallen for 22 consecutive days by $500 million.

Meanhwile the volatility in cost of funds in the interbank money market is expected to abate this week due to respite from inflow of N181 billion boosting liquidity.

Last week, cost of funds experienced wide gyrations with average short term interest rate rising to 135.8 per cent on Wednesday from 22.7 per cent on Monday, before falling to 12.1 per cent at the close of business on Friday.

The sharp increase in cost of funds between Monday and Wednesday was caused by outflow of funds for participation in the dollar sales by the Central Bank of Nigeria (CBN) as well as N42.7 billion for purchase of treasury bills. The outflow worsened the scarcity of funds in the market, with market liquidity dropping from minus N28 billion on Monday to minus N144 billion on Thursday.

However, relief came on Thursday via the inflow of N415 billion from statutory allocation funds, which caused average short term interest rate to fall to 12.1 per cent and market liquidity to improve to minus N22 billion on Friday.
This week the market will enjoy inflow of N181.8 billion inflow from payment of matured treasury bills. This will cancel out the effect of outflow of N117.1 billion from treasury bills sale and dollar purchase. These developments are however not expected to result into sharp volatility in cost of funds as experienced in recent times.

According to analysts at Afrinvest Plc, a Lagos based investment firm, “In the week ahead, we expect money market rates to trend lower at the start of the week as a scheduled N23.6bn OMO maturity hits the system. We also expect rates to rise by midweek as CBN continues forex (FX) interventions as well as OMO mop-ups. The Apex bank is scheduled to auction N26.1 billion, N11.0 billion and N80.0 billion of the 91-day, 182-day and 364-day instruments in next Thursday Primary Market Auction. The impact of the debits for successful bids at the auction is however expected to be offset by a scheduled maturity of the same amount next week.”

Naira depreciates to $382/$ in parallel market
In spite of injection of $286.5 million into the foreign exchange market, the naira depreciated to N382 per dollar in the parallel market last week.

During the week, the CBN continued its intervention in the foreign exchange market by injecting $286.5 million comprising $200 million for Wholesale Secondary Market Intervention Sales (SMIS), $50 million for small and medium enterprises (SMEs) and $36.5 million for invisibles like Business Travel Allowance (BTA), Personal Travel Allowance (PTA), medicals, and schools fees.

The apex bank also sold $40,000 to each of the 3,145 bureaux de change (BDCs) translating to $125.8 million injection into the BDC segment.

In spite of this injections, the parallel market exchange rate rose from N375 per dollar the previous week to close at N382 per dollar Friday last week.

This depreciation according to BDC sources was due to increased demand during the week. A BDC operator who spoke on anonymity said the market experienced demand from Muslims travelling to Mecca ahead of the commencement of the Ramadan period. He however expressed optimism that the naira will appreciate this week to below N380 per dollar.
The naira however enjoyed stability in the interbank market as well as the Investors & Exporters segment, where the exchange rate remained between N378 per dollar and N380 per dollar.

Analyst projected continued stability in the foreign exchange market this week as the CBN is expected to sustain its intervention in the market.

“In the current week, we expect further stability in the foreign exchange market with possible appreciation against the dollar subject to CBN’s level of intervention”, said analysts at Cowry Assets Management Limited.
Afrinvest analysts also projected: “We expect the calmness in the forex market to remain sustained in the short to medium term as we presume the outcome of the Thursday OPEC meeting will further strengthen stable global oil prices and also solidify Nigeria’s external reserves position. This in turn will make the CBN more comfortable with its continuous intervention programme.”

Impact of MPC decision on financial markets
Meanwhile the Ecobank research team have provided insights into the likely impact of the decision of the Monetary Policy Committee (MPC) to retain all policy rates.

Citing challenges weighing down the domestic economy and the uncertainties in the global environment, the MPC at the end of its 3rd meeting for the year on Tuesday retained the Monetary Policy Rate (MPR) at 14 per cent. The committee also retained the Cash Reserve Ratio (CRR) at 22.5 per cent; Liquidity Ratio at 30 per cent; and the asymmetric corridor at +200 and -500 basis points around the MPR.”

Investors preference
Explaining how the this decision will influence asset pricing and investors preference in the financial market, Ecobank analysts, Kunle Ezun and Kenneth Asenime in a research note stated: “The MPC decision will have a muted impact on current portfolio holdings in terms of pricing, but it does not help address the widened income gap, depressed aggregate consumption and credit availment to the real sector of the economy.

“In terms of business impact, with a muted impact on pricing, investors’ fixed income portfolios in naira denominated assets are preserved and stable in short to medium term.

“The MPC’s decision to leave the MPR unchanged ensures an “holding status” on assets prices – domestic investors are likely to remain confident in NGN denominated assets over the short- to medium-term: the yields on the 364-day Treasury bills would likely be sustained around 21 – 22%, and the bond yields stabilising around 16.5 – 17.0% in short to medium term.

“In terms of business impact, high yielding government security is positive for the Deposits Money Banks (DMBs), and somehow in sync with strategic decision to hold a short term fixed income position. Subscriptions in primary market auctions (NTBs and FGN Bonds) are generally well covered, reflecting strong domestic demand, which underscore investors’ confidence in the CBN’s monetary policy stance.

“However, notwithstanding any unexpected liquidity management operations by the CBN, the recent decision to keep the MPR unchanged is unlikely to see secondary market yields shift considerably from their current levels over the short term. The recent change in CBN’s foreign exchange policy management might have had a significant impact on the moderation of consumer prices month-on-month; however the impact is somehow less significant on the consumer prices year-on-year, when compared with about 69.77% increase in foreign exchange inflows via CBN in April 2017. Over all, the short end of the curve will remain attractive as concerns over the outlook for NGN and inflation continue to be influenced by CBN’s monetary policy in the short term”.

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