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High interest rate shrinking activity in bonds market – Report


The burgeoning bonds market in Nigeria has largely remained under utilized due to over concentration on banks for finances by corporate bodies, a research report by Dunn Loren Merrifield, has said.

The research firm maintained in its monthly report titled, ‘Bonds Watch’ for July, that major cause of the anomaly was the Central Bank of Nigeria (CBN)’s stance on Monetary Policy Rate (MPR) which has seen it retaining the interest rate at 12 per cent.

At the end of the fourth MPC meeting, the MPR was retained at 12.00 per cent while Cash Reserve Requirement (CRR) was increased to 12 per cent from eight per cent and net forex open position was reduced to one per cent from three per cent.

It said, “Following the outcome of the MPC meeting, we observed intra-day volatility in bond prices across all maturities as a result of demand/supply pressures.”

The report further observed that prior to the current tight policy stance, which commenced in fourth quarter of 2010, activity in the corporate bond market had started gaining some level of traction as a few companies had raised debt capital to refinance their expensive bank loans, as well as finance expansion projects.”

However, “The tight monetary stance led to the gradual slowdown in the issue of sub-national and corporate bonds; issuers have since gone back to the expensive bank loans for their financing requirements,” the report said.

It noted that a reduction in interest rate was needed to stem the rate of inactivity in the bonds market, adding that only then will the tone of events in the general economy take a turn for the better.

“Despite arguments in favour of the monetary policy stance, and the weakness of the transmission mechanisms to deliver the benefits of lower interest rates within the broad economy, we hold a contrary opinion. We argue that if the ‘weak’   transmission mechanisms are sufficient to deliver the effects of the current tight policy stance, then they should be sufficient vice versa.

“In addition, our perspective goes beyond the current view that the flow of credit to the economy can only be through banks. Whilst we agree that banks remain the key source of credit in Nigeria, we believe the nascent bond market remains largely untapped by corporate,” the report said.

“In our opinion, given Nigeria’s dependence on imports – from toothpicks to cars, the pressure on the domestic currency will remain until domestic output improves significantly on the back of a concerted drive from the fiscal and monetary authorities to stimulate sustainable economic growth, thereby easing some of the pressure on the domestic currency,” it added.


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