THE interbank money market THE interbank money market  will, this week, receive boost of N230 billion inflow, with moderation in cost of funds.  Last week, the interbank money market experienced severe scarcity of funds occasioned by liquidity outflow for dollar purchase, treasury bills (TBs) investment and liquidity mop up by the Central Bank of Nigeria (CBN).  In addition to the regular TBs offered at the primary market, the CBN issued secondary market (open market operations, OMO) TBs to mop up N26 billion during the week, which sent short term cost of funds above 100 per cent.

Relief however came on Thursday with inflow N113.5 billion from payment of matured TBs.  Reflecting the volatility caused by these developments, interest rate on Collateralised (Open Buy Back, OBB) loan rose to 105 per cent on Wednesday from 22 per cent the previous week, dropped to 46.67 per cent on Thursday, before rising again to 55.83 per cent at the close of business on Friday.

Similarly, interest rate on Overnight lending rose sharply to 107.75 per cent on Wednesday, dropped to 52.21 per cent on Thursday, and rose again to 59.25 per cent at the close of business on Friday. Cost of funds are, however, expected to moderate downwards this week or remain fairly stable due to inflow of N230.5 billion from matured TBs, which is more than enough to offset the impact of outflow of N62.4 billion via issuance of TBs.  Analysts, however, opined that the direction of interest rates will be ultimately influenced by the pace of liquidity mop up by the CBN.

According to analysts at Afrinvest Plc, a Lagos based investment firm,: “In the week ahead, there will be Treasury bills maturity of 91-day and 182-day worth N62.4 billion which would be offset by a rollover of the same amount while an OMO maturity of N168.1 billion is also expected to hit the system. We believe this will impact liquidity dynamics a great deal but we are of the view that the aggressive liquidity mop-up signal of the CBN should keep OBB and Overnight rates in check.”  Experts weigh in on conversion of debts in TBs to dollars  Last week the federal government announced plans to restructure Nigeria’s debt profile from short term debt to medium term debt as part of its broader 2016 debt management strategy to rebalance the country’s debt portfolio in favour of longer maturing debt.

Specifically, the Federal Government intends to refinance existing treasury bills obligations with cheaper Eurobonds. This  involves issuing $3 billion Foreign Currency (FCY) debt in the international capital market, with two to three year tenors, for principal repayment of maturing TBs. Among other things, the plan is aimed at reducing FG’s debt servicing cost, encourage banks to give more loans to private investors and consequently force down interest rates.

Financial analysts, however, were of the opinion that while the plan is commendable, it would expose the FG to risk of exchange rate volatility, and it may not translate to decline in interest rate or increased lending to the private sector. Commending the plan, Cowry Assets analysts stated: “Overall, we view the move by the economic managers as a positive one, especially as it is expected to enhance Nigeria’s balance of payments position, improve public sector finance, and create room for growth in the real sector amongst other things.”  Analysts at Afrinvest however noted: “Apparently, debt servicing burden could ease by reducing local currency leverage for foreign currency borrowings but this also comes with a downside risk of increased fiscal balance exposure to Naira volatility.

“However, whilst we are convinced the proposed plan by the FEC will lower government borrowing cost, the jury is still out on likely impact on domestic interest rate, the yield curve and private sector credit expansion. Our pessimism is based on the fact that: The CBN’s policy instruments – OMO and Discount Window rates – are more potent drivers of yield curve movement and lending rates than the FGN’s borrowing cost; Risk assessment of the real economy, to a large extent, determines credit policies of banks. Hence, our view is that the FGN’s debt refinancing will at best achieve a lower borrowing cost in the interim without necessarily moderating domestic interest rate environment or buoying loans to private sector.”  Naira records mixed performance as NAFEX attracts $4bn  The naira recorded mixed performance in the foreign exchange markets last week.  While the depreciated by N2 naira at the parallel market,     it maintained upward trend in the Investors & Exporters (I&E) window last week, appreciating by N1.66 against the dollar.

Vanguard survey revealed that the parallel market exchange rate rose to N367 per dollar at the close of business last week from N365 per dollar the previous week due to increased demand for dollars.  At the Investors & Exporters (I&E) window, the indicative exchange rate for the market, also known as Nigeria Autonomous Foreign Exchange (NAFEX), dropped to N364.78 per dollar at the close of business last week, from N366.44 per dollar the previous week, translating to N1.66 appreciation for the naira. Hence the naira has appreciated by N2.28 in the window for two consecutive weeks.

However the volume of dollars traded in the window last week dropped by 44 per cent to $611.6 million from $1.09 billion the previous week.  Meanwhile, the CBN revealed last week that the I&E window has attracted $4 billion into the country since inception on April 21st 2017.  CBN’s Director of Banking Supervision, Mr. Ahmed Abdullahi disclosed this in Abuja last week during a post Bankers Committee press briefing.  He said: “When we were going through the meeting today, the fact was given to us that so far, the volume of the trading that had gone on in that window is about $4 billion and that is quite a good number. It shows that the banks have done a lot of rallying. It shows that the banks have been resilient. It shows that the banks have contributed largely in bringing in foreign direct investment (FDIs), as much as possible to come into the market.  “In fact there was a particularly single ticket that was done on August 1, a transaction of $240 million. So we think that things will be looking up and we are quite hopeful that things are going in the right direction.”


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