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Excess liquidity to exceed N1trn as patronage for OMO bills declines

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…Credit to private sector rises by N331bn in October

By Babajide Komolafe

THE volume of excess liquidity in the interbank money market is set to surpass the N1 trillion mark this week, aggravated by declining patronage for secondary market (Open Market Operations, OMO) treasury bills.

Investors anticipate further decline in TB rates as CBN sells N122bn(Opens in a new browser tab)

Last week, the market closed with excess liquidity of N888.5 billion following decline in patronage of OMO bills which blunted efforts by the Central Bank of Nigeria (CBN) to mop up inflow of N344.9 billion from OMO bills which matured during the week.

The upsurge in liquidity caused average short term cost of funds fall by 140 basis points (bpts), with interest rate on Collateralised (Open Buy Back, OBB) lending dropping by 136 bpts to 2.43 percent last week, from .3.79 percent the previous week. Similarly, interest rate on Overnight lending dropped by 143 bpts to 3.07 percent last week, from 4.5 percent the previous week.

The apex bank in a bid to mop up the excess liquidity occasioned by the inflow, auctioned N400 billion worth of OMO bills. However, it could only sell N190.8 billion due to weak demand following declining appetite for OMO bills by foreign investors.

This development according to analysts at Lagos based Afrinvest Securities Limited is due to apprehension among foreign investors over uncertainties in the nation’s economy, as reflected in the recent downgrade of the country’s outlook by Moody’s.

The global rating company had on Wednesday changed its outlook on the government of Nigeria’s ratings to negative from stable. It, however, affirmed the B2 long-term local and foreign currency issuer ratings, the B2 foreign currency senior unsecured ratings, and the (P)B2 foreign currency senior unsecured MTN programme rating.

N750bn boost in interbank liquidity underway(Opens in a new browser tab)

Explaining the rationale for the downgrade, Moody’s said: “The change of outlook to negative is informed by the increasing fragility of the country’s public finances and sluggish growth prospects.

“The increasing fragility of Nigeria’s public finances is evident in the greater reliance by the government on financing from the CBN over the last three years to cover persistently large fiscal deficits, with CBN cash advances reaching 2.5 percent of Gross Domestic Product (GDP) on a net basis at the end of September 2019, in addition to government debt instruments held by the CBN worth 1.4 percent of GDP. In particular, CBN advances are more expensive than debt funded on the domestic capital market as the CBN applies a penalty rate on top of its monetary policy rate currently at 13.5 percent.”

Given the exclusion of local investors from OMO bills sales, the impact of Moody’s downgrade on foreign investors’ appetite for OMO bills, the inflow of N532.7 billion from maturing OMO bills this week, is expected to aggravate the excess liquidity in the interbank money market.

Expressing this concern in their outlook for the market this week, Afrinvest analysts said: “As OMO maturities worth N532.7 billion hit the system next week, we believe the CBN will continue its liquidity management operations (OMO auction). However, the current foreign investors’ apathy towards OMO instruments is a major concern.”

Credit to private sector rises by N331bn in October

Meanwhile credit to the private sector rose by N331 billion to N25.79 trillion in October from N25.46 trillion in September, reflecting impact of the apex bank’s loan to deposit ratio, LDR, of 65 percent directive on banks’ lending activities. However, credit to the government fell sharply by N1.394 trillion or 13.41 percent to N9 trillion in October from N10.399 trillion in September.

The above were highlights of the CBN’s depository corporations survey released last week.

According to the survey, Broad Money Supply (M3 money) rose by 0.66 percent month-on-month (m-o-m) to N35.26 trillion in October 2019. This was due to a 5.91 percent    increase in Net Foreign Assets (NFA) to N14.73 trillion which offset a 2.80 percent decrease in Net Domestic Assets (NDA) to N20.53 trillion.

The decline in NDA, according to the survey, was chiefly driven by a 2.98 percent m-o-m decrease in Net Domestic Credit (NDC) to N34.85 trillion, mellowed by a 3.24 percent    m-o-m fall in Other Liabilities (net) to N14.32 trillion.

Further breakdown of the NDC showed a 13.41 percent m-o-m decrease in Credit to the Government to N9.05 trillion; however, Credit to the Private sector increased by 1.30 percent to N25.79 trillion.

On the liabilities side, the survey showed that the 0.66 percent m-o-m rise in M3 Money was driven by the 3.53 percent increase in treasury bills held by money holding sector to N7.63 trillion, which was partly offset by a 0.08 percent m-o-m decline in M2 Money to N27.63 trillion.

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The decrease in M2 was chiefly driven by a 4.76 percent moderation in Narrow Money (M1) to N10.59 trillion (of which Demand Deposits moderated by 6.39 percent to N8.89 trillion while currency outside banks surged by 4.77 percent to N1.70 trillion), as Quasi Money (near maturing short term financial instruments) increased by 3.07 percent to N17.04 trillion. Reserve Money (Base Money) rose m-o-m by 6.40 percent to N7.45 trillion, also Bank reserves increased m-o-m by 8.49 percent to N5.08 trillion, accompanied by a 2.51 percent increase in currency in circulation to N2.06 trillion.

Vanguard

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