By NKIRUKA NNOROM

What is the future of FGN Bonds in view of JPMorgan’s negative outlook?

In actual fact, we have sent a mail to the JP Morgan, James Marshall that only an entity in Nigeria today can tell you the liquidity of the market. Last year, we got the market, all the dealing members reporting their activities. So, JP Morgan, and I think another by Standard Chartered research said the liquidity in the market had gone very low and they were concerned and that was what led to that negative outlook.

And how did they determine the liquidity in the market. You remember that central bank last year had taken off the one percent open position limit and they felt that the speed with which you could get out of your position is affected.

They felt that liquidity is not so much as funding, but how quickly you can get of your position, so, if you want to buy $100 million dollars, how quickly can you get it out.

Lets’ be honest, when foreign portfolio investors come in, they don’t come all at once, but when they want to get out, they want to do that at the same time. The truth is the market was not deep enough to have everybody go out at the same time.

So, immediately the crude oil price started heading south, they wanted to go out at once, the corporate treasurers started accelerating their own demand and when you have such a situation, you have a much higher level of demand over the natural supply of the market.

So, JP Morgan quickly set negative outlook because of the level of liquidity. We think they will restore this because, quite frankly, the level of liquidity in the market, interestingly, has come back and is actually much higher than where it was  prior to when central bank issued that circular.

You are also aware that the central bank after its attempt to reduce speculative tendencies took that open position to zero at first, later brought it at point one percent and has now taken it back to point five, so the standard amount that the banks traded in foreign exchange was $500,000 dollars and that was back to where it was before the circular was issued.

We have no doubt that the negative outlook will be reversed by JP Morgan. The liquidity in the bonds market remains strong, the liquidity in the foreign exchange market has been restored , and you know that the crude oil price itself is already beginning to bounce back gradually, so, I think there should be no problem going foward.

Do you envisage the return of foreign investors to the market?

Definitely, foreign investors that had indicated interest to take their money out have successfully taken their money out. That is the major strength and test for the policies of the central bank.

Now that the exchange rate has gone to N180/190, after the election, with the sort of growth that Nigeria is being positioned to achieve, with the level of the exchange rate, which the central bank had said is appropriately priced, and with the sort of yields in the market at 14/15 percent, I think the country will witness, in actual fact, a higher level of foreign inflows more than it did before.

Immediately the elections are over and the transition, which is expected to be smooth, takes place, Nigeria will be set for another bull run in terms of development of the economy.

What about FGN bonds crowding out other bonds in the market?

I think the way to look at the capital market, is to look at the savings side, the investment side. It is no brainer that the federal government will likely borrow this year to shore up its revenue against the expenditure. When it does that and it demands more money, you will expect the price to go up. So, yields may go up.

The federal government may also decide not to borrow which it has started doing and issue Eurobonds, but the point is if we continue to grow our savings base in the country, there will be less of federal government crowding out the market. The truth is corporate entities will want to issue bonds. Whether they issue bonds at this level is a different discussion because if Treasury Bills are at 13 percent and bonds are nosing 14/15, then the corporate bonds will be much higher.

Corporate treasurers usually avoid issuing long term when interest rates are high; they rather stay short term and look to borrowing long when interest rates are low. So, I think this year and probably next year, if the interest rate remains high, corporate treasurers will go more to the short term where nobody is going to crowd them out.

The truth is that banks will continue their intermediation role; the federal government will probably borrow more, but do not forget that the savings base is also increasing and everybody is desirous of finding a way to increase that saving. What we have done is simply pension. Everyone is thinking through how the reforms will come in the insurance industry such that it can grow significant savings pool.

When we grow that savings pool from pension and insurance sectors, we will talk less of federal government crowding out the private sector.. In actual fact, if the federal government does require any funds, we will still it to come to the market to establish the benchmark and that is how it works. So, I think the federal government will borrow more, I don’t think there is any crowding out, and it will push up the rate.

Even without borrowing more, we have seen where the rates are because if for any reason inflation trends up, the central bank will take rates up. So, at times interest rate may go up, not necessarily from federal government demanding to borrow more, but really from inflation strategy of the central bank.

The truth is if the states come to the market to borrow, they will get the fund as long as the bonds are well structured, but they must be prepared to pay more. I think we have seen a corporate that is already borrowing at 16.45 percent. So, if a top corporate in Nigeria is looking at borrowing at 16.5, the states themselves are going to be under pressure to pay more if they decide to come to the capital market. That is what we will likely see in 2015.

What is the value of Commercial Papers (CPs) expected at FMDQ this year?

We issued the first one last year. A couple of issuing houses have approached us to make enquiries on this. We are also taking a market developmental approach towards this to support the market in ramping up very quickly.

This year alone we have had visits from investment banking firms talking about the sort of commercial papers they will like to bring to the market and these are across industries, not only in the banking sector, but in the fast moving consumer goods and also in telecommunications sector. We expect about N200 billion commercial papers to be issued this year.

Were there penalties/sanctions for market participants that probably flouted market rules last year?

We spent last year putting the platform together, getting the members on board. We have put together our penalties and our enhancement as self regulatory organiSation in place. We are going through the process of educating the market on those infractions. We spent last year educating them on trading practices, now we are letting them know what the sanctions will be when you don’t keep to the general trading practices and rules we have put in place.

This week, we also spent time with some of the dealing members getting them familiarised with the infractions that are in place and the ones that are being monitored. We are set to go live this month; we have been tracking the infractions and attaching sanctions to them for them to know. What usually happens is that while you are putting new trading rules in place, you also want the market to get accustomed to the fact that once they don’t trade properly within those rules and guidelines you have set, the penalties will take place and they will be sanctioned.

That framework is in place and market sensitisation is going on to let people know that these are the infractions that are being monitored. Hopefully, by next month, you will start seeing what penalties and sanctions go to the members. So, the way you see the league table of turnover today is the same way we are going to give you the league table of infractions.

People want to see on our website, the different institutions and the sort of infractions they have. This year is about increasing investors’ confidence, so, we are going to do a lot of sensitisations and encourage clients/investors to speak to FMDQ in case there are issues. The sanctions we are putting in place today are on relationship among dealing members, what you are supposed to do, are you doing it?

We will like clients to report if there is any unfair treatment they have experienced or a disappointing level of service and we will attend to that. But, again, when you are developing, you take things in stages; you don’t bite too much at a time.

We are also working now on a whistle blowing policy that we expect to be fully robust where you can report to us when you have issues in the market place between the members, between the clients and members so that there is a way to following up on issues that you see coming up in the market place and we will take that seriously as to how we resolve those issues to help build investors’ confidence.

How will the political climate affect FMDQ business in 2015?

We can’t see any negative impact for now. The fact is the market is still very active and liquid, nothing has changed, irrespective of whether there is electioneering or not and we expect that to continue into the year. What we will likely see is that rate may increase, but we don’t foresee liquidity dropping because the peple that are trading in this market have a lot of stake invested it .

It is part of their job to trade and by the time we bring in the non-bank dealing members to also trade in this same market, we will see increased liquidity. So, for te political climate, I don’t think it will have much impact in terms of liquidity of the market. And of course, as FMDQ continues to strive to provide more transparency, we believe this will influence the market more than what the political climate is dictating.

We are hoping that the elections will come and go very smoothly and there will be no war. If anything is going to affect the market, it will be a force-majeure caused by man not God this time, but otherwise, we will see a very active market. The only major changes we will see will be in pricing. But that the market will be illiquid or shut down, we don’t envisage that.

What is the impact of volatility in FX on the OTC Market?

I think we need to understand this market a bit and it is a bit different from equity market. If equity market is coming down, at times, people run away from the market, they don’t want to invest in it, but there is a natural flow of money to this market. If banks have liquidity, where will they put them, treasury bills or Federal Government Bonds, that is one.

Two, the federal government has also put a sweetener, all their coupons and income made on these treasury bills or FGN bonds are tax exempt. So, when you go to your bank and say ‘am no longer into equity, I sell my equity and take money to my bank’, this market gets more liquidity because the bank has to invest that money. A Bank does not keep the money, it is either it takes it to central bank, buys treasury bills or FGN bonds.