Foreign investors buy $5.9bn TBs in 3mths
Falling TB rates to trigger increased preference for bonds
By Babajide Komolafe
Credit to the economy fell by N720 billion to N32.9 trillion in May reflecting the rationale behind the recent directive of the Central Bank of Nigeria (CBN) that banks should give out 60 percent of their deposits as loans.
Last week the CBN, in a letter to all banks titled, “Regulatory measures to improve lending to economy”, signed by Ahmad Abdullahi, Director, Banking Supervision, CBN, stated: “In order to ramp up growth in the Nigerian economy through investment in the real sector, CBN has approved the following measures: All DMBs are hereby required to maintain a minimum Loan to Deposit Ratio (LDR) of 60 percent by September 30, 2019. This ratio shall be subject to quarterly review.
“To encourage SMEs, Retail, Mortgage and Consumer lending, these sectors shall be assigned a weight of 150 percent in computing the LDR for this purpose. The CBN shall provide a framework for classification of enterprises/businesses that fall under these categories.
“Failure to meet the above minimum LDR by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50 percent of the lending shortfall of the target LDR”.
These measures follow concerns expressed by members of the apex bank’s Monetary Policy Committee (MPC) over the sluggish growth of credit to the economy.
“The Committee noted the developments in the monetary aggregates and enjoined the Bank to initiate moves towards improving lending to the private sector and urged other intermediary institutions in the financial sector to support these initiatives by improving their credit delivery to boost output growth”, the MPC said in the communiqué issued at the end of its meeting in May.
Reinforcing the concerns of the MPC, the Depository Corporations survey report of the CBN for May, showed that credit to the economy fell by 2.2 percent to N32.18 trillion in May from N32.18 trillion in April.
This was triggered by 8.64 percent fall in credit to the federal government to N7.3 trillion in May from N7.99 trillion in April. It was further compounded by 0.13 percent decline in credit to the private sector which fell to N24.86 trillion in May from N24.89 trillion in April.
The report showed that Broad Money Supply (M3 money) recorded 0.77 percent month-on-month (m-o-m) decline to N34.90 trillion in May due to 11.46 percent decrease in Net Domestic Assets (NDA) to N15.79 trillion which offset a 10.25 percent increase in Net Foreign Assets (NFA) to N19.10 trillion.
On domestic asset creation, the decrease in NDA resulted from a 2.20 percent m-o-m decrease in Net Domestic Credit (NDC) to N32.18 trillion, accompanied by a 8.79 percent m-o-m rise in Other Liabilities (net) to N16.38 trillion.
Further breakdown of the NDC showed a 8.64 percent m-o-m decrease in Credit to the Government to N7.3 trillion and a 0.13 percent fall in Credit to the Private sector to N24.86 trillion.
On the liabilities side, the 0.77 percent m-o-m decline in M3 Money was driven by the 6.97 percent m-o-m decrease in treasury bills held by money holding sector to N7.07 trillion, partly offset by a 0.93 percent increase in M2 Money to N27.83 trillion.
The rise in M2 was driven by a 0.76 percent rise in Quasi Money (near maturing short term financial instruments) to N16.44 trillion and a 1.18 percent increase in Narrow Money (M1) to N11.39 trillion (of which Demand Deposits rose by 1.53 percent to N9.68 trillion while currency outside banks declined by 0.77 percent to N1.70 trillion).
Reserve Money (Base Money) climbed m-o-m by 2.60 percent to N8.15 trillion as Bank reserves spiked m-o-m by 4.66 percent to N5.70 trillion, partly offset by a 2.17 percent decline in currency in circulation to N2.11 trillion.
Foreign investors buy $5.9bn TBs in 3mths
Foreign investors’ patronage of Nigerian Treasury bills (TBs) shot up by 69 percent (y/y) to $5.9 billion in the first quarter of the year (Q1’19) from $3.53 billion in the first quarter of 2018 (Q1’18).
Financial Vanguard analysis of the Capital Importation report for Q1’19 released by the National Bureau of Statistics (NBS) last week showed that the $5.9 billion worth of TBs purchased in Q1’19 also represents 392 percent increase when compared with $1.24 billion TBs bought by foreign investors in the last quarter of 2018 (Q4’18).
The sharp increase in TBs purchased by foreign investors in Q1’19 was driven by high yields (interest rate) on the instruments, which ranged from 11 percent to 15 percent during the quarter, compared to the low interest rate environment in the United states and other developed countries.
This huge patronage however triggered a steady decline in TB rates with stop rate on 91-Days TBs falling by 122 basis points (bpts) to 10.05 percent last month from 11.27 percent in January.
The fall in TB rates coupled with the rising inflation rate according to analysts at Lagos based Cowry Asset Management Limited will shift investors shift preference from TBs to bonds.
Commenting on the capital importation report for Q1’19, they said: “We note that the humongous foreign capital inflows into Nigeria’s money market stimulated the strong demand pressure for federal government short-term instruments, especially T-bills; hence, the fall in primary market rates across the maturities.
“However, we expect treasury bills rates to move northwards in H2 2019 as real returns on the bills have become negative amid increasing inflation rates. Thus, we expect redirection of capital inflows into the bonds markets (where rates are higher and about 200 bps above inflation rate) as well as equities.”