Analysts highlight risks to NAFEX as turnover hits $10.4bn
By Babajide Komolafe
The Central Bank of Nigeria (CBN) will this week step up its liquidity mop-up in a bid to offset impact of N333 billion inflows into the interbank money market.
Already, the apex bank is scheduled to mop-up N174.15 billion this Wednesday through Open Market Operation (OMO) treasury bills (bills) auction. The auction comprises 91-day bills worth N39.01 billion, 182-day bills worth N48.45 billion and 364-day bills worth N86.69 billion.
The inflow of N333.83 billion scheduled to hit the interbank money market on Thursday comprises maturing bills including 91-day bills worth N39.01 billion, 182-day bills worth N48.45 billion, 356-day bills worth N159.68 billion and 364-day bills worth N86.69.
Last week, the apex bank mopped up N156 billion on Thursday to checkmate inflow of N156 billion from matured bills. The liquidity mop up, in addition to funds outflow for Naira back-up in the USdollar auctions by the CBN, triggered sharp increase in cost of funds, with average short term interbank cost of funds rising by 221.7 basis points (bpts) week-on-week (w-o-w).
Data from the Financial Market Dealers Quote (FMDQ) showed that interest rate on Collateralised lending (Open Buy Back, OBB) rose by 218 bpts to 29.17 per cent last week from 7.33 per cent the previous week. Similarly, interest rate on Overnight lending rose by 225 bpts to 30.92 per cent last week from 8.42 per cent the previous week.
Analysts however projected moderation in cost of funds this week, based on expected positive net inflow into the interbank money market notwithstanding liquidity mop-up activities of the apex bank.
According to analysts at Lagos based, Vetiva Capital Asset Management Limited: “Amidst sustained OMO auctions from the CBN, we expect a mixed trading sentiment to dominate the T-bills market at week open. However, we foresee more cautious trading towards the mid-week amidst the anticipated ?174.15 billion T-bills primary market auction slated for Wednesday. That said, we believe improvement in system liquidity via ?160 billion OMO maturities, by Thursday will eventually support demand in the fixed income market at the latter part of the week.”
Analysts highlight risks to NAFEX as turnover hits $10.4bn
Financial Vanguard investigations revealed that the Investors and Exporters (I&E) foreign exchange window has recorded turnover of $10.4 billion since inception on April 21st. This translated to average weekly turnover of $494.58 million.
Investigation also revealed steady increase in turnover in the window, with $2.77 billion traded in the last four weeks, from Monday August 11th to Friday September 7th. This translated to weekly average turnover of $692.25 million during the period. Last week, turnover in the window rose by 103 per cent to $705.08 million from $346.91 million the previous week.
As a result the naira appreciated by N1.17 as the indicative exchange rate for the window, also known as Nigeria Autonomous Foreign Exchange (NAFEX) dropped to its lowest level of N358.5 per dollar at the close of trading last week from N359.67 per dollar the previous week.
Financial Vanguard analysis revealed that the naira appreciated by N20.54 or 5.4 per cent between Friday April 28th, when NAFEX closed at N379.04 per dollar and Friday last week.
Analysts at Lagos based Financial Derivatives Company Limited however warned that the impressive dollar inflow through the I&E and appreciation of the naira could be jeopardised by two major risks.
In a review of the I&E window, contained in the FDC Bi-monthly Bulletin, the analysts stated: “The question in every analyst’s mind is ‘how sustainable are the gains in this FX market segment?’ The CBN’s continued participation, though a declining function of time, and stable oil proceeds have helped drive this success.
“Therefore any threat to oil prices and production will affect the sustainability of this market. Two major risks come to mind and these are risks to oil proceeds and the risk to foreign portfolio investment which is partly a function of perception.”
Risk to dollar inflow from crude oil proceeds
Analysing the risk to dollar inflow through oil proceeds, they stated: Nigeria’s oil revenue is both production and price sensitive. On the domestic side is the level of oil production.
“There are also talks about the possibility of Nigeria being included in the Organisation of Petroleum Exporting Countries (OPEC) output cut, as the Minister of State for Petroleum has been invited to the September 22 meeting in Vienna. The worst case scenario is for Nigeria to be included and this is revenue and reserves negative for Nigeria.
“On the global side, the price of Brent crude (a variant of Nigeria’s Bonny Light) has been hovering within the range of $50 to $52 per barrel. As with any other commodity, oil is subject to volatility and price shocks, the most recent been the Tropical Storm Harvey which has led to the shutdown of refineries in Texas, USA. “The impact of this weather phenomenon is a fall in demand for oil which can lead to a rise in crude inventories. The Tropical Storm also affected production but the production shortages are smaller in comparison to the rise in inventory level. Hence the main question is how fast refineries will resume operations; the faster the better.”
Risk to foreign portfolio investment inflow
On the risk foreign portfolio investment inflow, the stated: “The other risk is of subdued investor confidence in the Nigerian economy. So far, there has been an in-crease in portfolio funds which was one of the driving factors influencing the stock market rally. “This is because of improved investor confidence in the market: the forex market is operating more efficiently than before, the exchange rate has appreciated in comparison to Q1, proxies for growth such as the Purchasing managers index are pointing towards a slow but gradual recovery and Q2 Gross Domestic Products (GDP) growth came in positive at 0.55 per cent.
“However, as easily as these funds have come in, they can also flow out if there is a change in perception and this would affect trades at the IEFX window which also depends on foreign portfolio inflows (FPIs).”