Cost of funds to maintain downward trend as N135bn hits interbank market

Dollars traded in NAFEX falls by 56%

By Babajide Komolafe

COST of funds in the interbank money market is expected to maintain downward trend this week with N135 billion cash inflow enhancing market liquidity.
Last week, cost of funds (short term) dropped by over 400 basis points (bpts) following inflow of N201.2 billion which boosted market liquidity and minimised volatility.
The N201.2 billion inflow came from payment of matured treasury bills worth N101.2 billion and payment of matured FGN bonds worth N100 billion. This moderated the impact of outflow of N261.6 billion for investment in treasury bills (bills) during the week.

The outflow comprised N68.6 billion worth of secondary market (Open Market Operations, OMO) bills and N193 billion worth of Primary Market bills. These, combined with outflow for dollar purchase, especially the auction for $297 million conducted by the Central Bank of Nigeria (CBN) last Thursday caused market liquidity to decline to minus N143 billion on Thursday from minus N81 billion at the beginning of the week.

Short term cost of funds, however, ended the week lower, due to the N201 billion inflow and expectation of further inflow this week. Consequently, interest rate on Collateralised (Open Buy Back, OBB) lending fell by 47 bpts to 7.33 per cent on Thursday from 12 per cent the previous week. Similarly, interest rate on Overnight lending fell by 42 bpts to 8.42 per cent from 12.58 per cent the previous week.

Analysts projected that this trend will persist this week, with the inflow of N135.4 billion from maturing bills enhancing market liquidity.
According to analysts at Lagos based Cowry Asset Management Limited: “This week, we expect maturities via secondary market worth N135.41 billion viz: 345-day bills; hence, we look forward to further financial system liquidity ease and resultant decline in interbank rates.”

Similarly, analysts at Lagos based Vetiva Capital Management Limited said: “Supported by modest improvement in system liquidity at week close, we expect yields to trend further southwards in the T-bills market at week open. However, we maintain that consistent mop-ups from the CBN would cap demand in the space.”

Naira appreciates in parallel market as NAFEX falls by 56 per cent
The naira, last week, recorded its biggest weekly appreciation against the dollar in the parallel market in two months. Financial Vanguard analysis revealed that the parallel market exchange rate dropped to N365 per dollar on Thursday from N370 per dollar the previous week, translating to N5 appreciation for the dollar. The appreciation was occasioned by weak demand for dollars, coupled with sustained intervention of the CBN in the foreign exchange market.

Meanwhile, the volume of dollars traded in the Investors and Exporters (I&E) window dropped sharply by 56 per cent last week. Data from the Financial Market Dealers Quote (FMDQ) showed that dollars traded in the window dropped to $346.91 million last week from $791.54 million the previous week. According to FMDQ, $107.46 million was traded on Monday, $73.87 million on Tuesday, $83.76 million on Wednesday, and $81.82 million on Thursday.

In spite of the decline in turnover, the naira remained relatively stable in the window, as the indicative exchange rate, also known as Nigeria Autonomous Foreign Exchange (NAFEX) closed at N359.67 per dollar on Thursday from N359.56 per dollar the previous week.

CBN raises weekly intervention to $492m as reserve hit $31.8bn
The CBN last week increased its weekly intervention in the foreign exchange market to $492 million, from average of $195 million.
On Monday the CBN injected $195 million in three segments of the interbank foreign exchange market. In the wholesale segment of the inter-bank market, it sold $100 million, while it sold $50 million and $45 million to the Small and Medium Enterprises (SMEs) and invisible segments respectively.

On Friday, the apex bank injected another $297 million into the retail Secondary Market Intervention Sales (SMIS) segment of the foreign exchange market.
In a statement confirming the intervention on Thursday, the Acting Director, CBN’s Corporate Communications Department, Mr. Isaac Okorafor, hinted that the apex bank would increase liquidity in the market in the coming days, noting that the move by the CBN is necessary to enhance stability in the FX market.

He said that the apex bank was resolute in its determination to intervene in the forex market with the aim of uplifting the naira exchange rate, boost liquidity in the forex market and ensure timely execution and settlement for eligible transactions. He also expressed confidence that the interventions will continue to guarantee stability in the market and ensure availability to individuals and business concerns with genuine demand for forex.

Meanwhile, the nation’s external reserve maintained its upward trend   last month, rising to 30 months high of $31.81 billion as at Tuesday August 29. Data released by the CBN showed that the external reserve rose to $31.81 billion on August 29 from $30.84 billion on July 31, indicating increase of $970 million in 29 days. The external reserve had been below $32 billion since February 2015, some 30 months ago, from where it declined steadily to $23.89 billion on October 19, 2016.

Vanguard analysis revealed that from October 19, 2016, the reserve commenced a bumpy but steady upward trend, rising by $7.92 billion or 33.2 per cent to $31.78 billion on August 27 this year. Also the reserve has risen by $5.97 billion or 23 per cent since the beginning of 2017.

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