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Investors anticipate further decline in TB rates as CBN sells N122bn

Banks record N250bn decline in demand deposits

By Babajide Komolafe

The decline in yields on treasury bills (TB)    which commenced last month is expected to persist this week when the Central Bank of Nigeria (CBN) sells N122 billion worth of    fresh bills.

The decline in TB yields which is driven by increased demand from investors,    is reflected in the huge oversubscription recorded in the last primary market auction conducted by the apex bank on October 2nd.

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CBN

While the CBN offered and sold N134 worth of TBs, total public subscription stood at N338.2 billion, translating to152 percent over subscription.

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In response the CBN reduced the stop rates of the 91-Days bills, 184-Days bills and 364-days bills of 11.08 percent, 11.60 percent and 13.20 percent respectively from 11.10 percent, 11.75 percent and 13.30 percent from the last auction.

Analysts at Lagos based Cowry Assets Management Limited projected that this trend will persist this week due to increased demand for TBs by investors.

They said: “In the new week, CBN will refinance T-bills worth N121.88 billion, viz: 91-day bills worth N5.85 billion, 182-day bills worth N3.50 billion and 364-day bills worth N112.54 billion. We expect their stop rates to decline marginally, particularly at the long end of the curve, as investors have shown sustained preference for the 364-day bills in previous auctions. We also expect NIBOR to moderate amid maturing N463.98 billion OMO-bills.”

Meanwhile, the CBN is expected to sustain the tempo of its liquidity mop operations this week by selling secondary market (Open Market Operations, OMO) TBs to curb the impact of the anticipated inflow of    N463.9 billion from maturing bills.

Last week, the apex bank,    in response to inflow of N347 billion from matured OMO bills,    mopped up N381.9 billion via OMO TBs. This caused sharp decline in interbank money market liquidity which prompted average short term cost of funds to rise by 886 basis points (bpts).

Data from FMDQ showed that interest rate on Collateralised (Open Buy Back, OBB) rose by 872 bpts to 11.43 percent last week from 2.71 percent the previous week. Similarly, interest rate on Overnight lending rose by 900 bpts to 12.43 percent last week from 3.43 percent the previous week.

According to analysts at Lagos based Afrinvest Securities Limited, the cost of funds may remain elevated due to CBN liquidity mop up.

They said: “Given large inflows worth N464 billion from OMO maturities expected next week, we believe the CBN would continue to keep rates in check through regular auctions. We also expect that the elevated system liquidity levels would  continue to drive rates lower in the secondary T-Bills market.”

 

Banks record N250bn decline in demand deposits

Meanwhile, the CBN last week released its Depository Corporation Survey report for August which showed that banks recorded N250 billion or 2.5 percent decline in demand deposit while currency outside the banks rose by 2.6 percent.

The report also showed marginal increase of 0.13 percent in credit to the private sector, reflecting banks’ difficulty in meeting the CBN’s 60 percent Loan-to-Deposit ratio (LDR), which was recently increased to 65 percent.

According to the report, Broad Money Supply (M3 money) fell by 1.23  percent month-on-month (m-o-m) to N35.25trillion in  August  2019.

This resulted from 11.10 percent decrease in Net Foreign Assets (NFA)  to N15.70  trillion which offset  partly 8.45 percent  increase  in Net Domestic  Assets (NDA)  to N19.45trillion.

On domestic asset creation, the  increase  in NDA resulted from a 2.57  percent m-o-m  increase  in Net Domestic Credit (NDC) to N34.29  trillion, accompanied by a  4.31  percent m-o-m  decline  in Other  Liabilities (net) to N14.75  trillion.

Further breakdown of the  NDC showed a  3.43  percent    m-o-m  increase  in Credit to  the Government to N9.46trillion and a 0.13 percent    rise  in Credit to the Private sector to N24.84trillion.

On the  liabilities side, the  1.23  percent    m-o-m  decline  in M3 Money was driven by the  2.44  percent    m-o-m  increase in M2 Money to  N27.57  trillion,  which was  partly offset by a  3.37  percent    increase  in treasury bills held by money holding sector to  N7.66trillion.

The  decline  in M2 was driven by a  2.90  percent    fall  in Quasi Money (near maturing short term financial  instruments) to N16.34 trillion and a 1.77  percent    decline  in Narrow Money (M1) to N11.25trillion (of which Demand  Deposits  fell  by  2.50  percent    to N9.59trillion while currency outside banks  rose  by  2.65  percent    to N1.65  trillion).

Reserve  Money (Base Money)  plunged  m-o-m by  6.70  percent to N6.98  trillion as Bank reserves  nosedived  m-o-m by10.02  percent to N4.64trillion, partly offset by a  0.79  percent rise in currency in circulation to N2.02trillion.

Meanwhile analysts at Lagos based Financial Derivatives Company have    said that      synergy between the monetary and fiscal policies is critical to achieving the objectives of the LDR policy of the CBN.

Noting that recent fiscal policy measures such as increase in the Value Added Tax rate, increase in utility tariff can undermine the purchasing power of consumers and hence reduction in demand for goods and services and ability of private sector to increase productivity, thus reducing demand for credit, they said: “Private sector lending is critical to the development of the private sector which gives credence to the CBN’s regulations and efforts to promote loans to the private sector. However, there’s the need for synergy between monetary policies and fiscal policies in the country. If fiscal policies in the country continue to undermine consumers’ purchasing power, private sector activities in the country would be affected which ultimately defeats the aim of the LDR initiative.”

 

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