• Interbank Rates Rise on Cash Shortage

The Nigerian Inter-Bank Offered Rate (NIBOR) climbed by about 20 percentage points on Friday after the Central Bank of Nigeria’s (CBN’s) sale of dollar forwards to offset a backlog of forex obligations drained cash from the money market.

The overnight lending rate stood at 50 per cent on Friday, as against the 29.33 per cent the previous day as commercial lenders scrambled for cash to pay for dollar purchase at a central bank foreign exchange intervention auction targeting certain sectors, Reuters disclosed.

Specifically, the central bank injected a total of $380 million into various sectors of the market and also commenced its weekly $20,000 sale to licenced Bureaux De Change (BDC) operators. A breakdown of this showed that the CBN offered dollars to authorised dealers through 7-45 days wholesale forwards, Basic Travel Allowance, Personal Travel Allowance, medical bills, tuition and Small and Medium Enterprises (SMEs).

The central bank has been intervening on the official market to try to narrow the currency’s spread with the black market rate and this has also put pressure on naira liquidity in the money market causing cost of borrowing among banks to jump.

The lending rate among commercial lenders opened at 70 per cent last Tuesday, but fell to around 29.33 per cent on Thursday after the injection of cash from matured treasury bills repayment by the central bank boosted liquidity.

Traders said market liquidity had opened at N206.96 billion deficit on Friday, compared with a deficit of N239.53 billion last week, putting the money market under pressure to seek funds to finance their forex and treasury bill purchases from the central bank.

“The money market is in repo because of the sales of open market operations treasury bills and funding for special foreign exchange auctions by the central bank, putting the market in a tight position,” one senior currency trader said.

Traders said the cost of borrowing in the interbank money market was likely to fall this week because of expected cash injections from the next round of monthly budgetary allocations to government agencies and repayment of matured treasury bills.

Meanwhile, analysts at Afrinvest Securities Limited have stated that the tight financial system liquidity during the week was evident in the open market operations (OMO) auctions floated by the CBN as the auctions were undersubscribed despite the attractive stop rates. Only N446.7 million was allotted at last Tuesday’s OMO auction, relative to N15 billion offered, while only N223.4 million was allotted at Thursday’s auction, relative to N15 billion offered amount.

Also, in the treasury bills market, performance was bearish on account of tight system liquidity as rates trended upward on three of four trading days. The week opened with average benchmark treasury bills yield inching 64 basis points higher than last week’s close (18.0%).

According to Afrinvest, sentiment remained bearish in the market during the week with minimal trades recorded; hence average yield on treasury bills closed at 18.4 per cent, up 40 basis points week-on-week.

On the primary market, the CBN offered N36.8 billion, N35 billion and N95.7 billion worth of treasury bills respectively for 91-day, 182-day and 364-day maturities on Wednesday as a rollover of the net N167.5 billion scheduled to mature the next day.

“Investors continued to show preference for longer-dated bills as the 364-day instrument was oversubscribed, similar to previous auctions. However, the auction was under allotted as only N12.3 billion, N25.5 billion and N51.8 billion respectively of the 91-day, 182-day and 364-day instruments were allotted at stop rates of 13.6 per cent, 17.4 per cent and 18.9 per cent.

“In the week ahead, we expect system liquidity to remain tight at the start of the week but improve towards the end due to scheduled OMO maturity of N53 billion and bond maturity of N480.4 billion. The CBN is likely to conduct several OMO auctions to mop-up liquidity but we still expect rates to trend lower,” Afrinvest added.

Forex Market

In a bid to ease demand pressure in the unofficial segment of the FX market and deepen access to FX for small and medium scale enterprises (SMEs) and retail businesses which may have been crowded out by larger companies during FX wholesale auctions, the CBN recently introduced a new window for sales of FX to SMEs for visible imports up to US$20,000/quarter. Accessing this window will require the use of the newly introduced Form Q as well as basic documentations (application letter, beneficiary invoice and bank wire transfer details). The apex bank also continued its Special Wholesale Forwards Intervention during the week by offering US$100.0m on Tuesday for trade backed demand with about US$69.5m successful bids recorded.

At the Interbank market, the naira appreciated marginally from N306.05/$1 the preceding week and traded at N306/$1 on all trading days last week.

Similarly, exchange rate at the parallel market also appreciated to N385.00/$1 at the end of the week, from N410.00/$1 the preceding week, after the CBN increased the weekly FX sales to Bureau-De-Change operators to “US$20,000 twice a week” and also continued dollar sales to banks for FX demands for invisibles.

Similarly, two weeks after opening a special foreign exchange (FX) window for SMEs to enable operators import eligible finished and semi-finished items, the CBN on Friday established a fresh widow for investors and exporters tagged: “Investors’ & Exporters’ FX Window”. A circular issued by the CBN disclosed that the purpose of the window was to boost liquidity in the forex market and ensure timely execution and settlement for eligible transactions.

The circular signed by the Bank’s Director in charge of Financial Markets, Dr. Alvan Ikoku, listed eligible transactions under the new window to include invisible transactions such as loan repayments, loan interest payments, Dividends/Income Remittances, Capital Repatriation, Management Service Fees and Consultancy fees.

Also on the eligible list are Software subscription fees, technology transfer agreements, personal home remittances and any such other eligible transactions including ‘miscellaneous Payments’ as detailed under Memorandum 15 of the CBN Foreign Exchange Manual.

While explaining that the invisible transactions under this window excludes international airlines ticket sales’ remittances, the circular added that the window covered Bills of Collection and any other trade-related payment obligations, which are at the instance of the customer.

The circular further clarified that the permitted invisible transactions and Bills for Collection were eligible to purchase foreign currency sourced from the CBN Forex window limited to Secondary Market Intervention Sales (SMIS) Wholesale (Spot and Forwards) only.

According to the CBN, international airlines ticket sales’ remittances shall only be eligible to access the CBN FX window (SMIS-Retail and Wholesale; spot and forwards.

On participants in the new window, it disclosed that supply of foreign currency to the window shall be through portfolio investors, exporters, authorised dealers and other parties with foreign currency to exchange to naira. The CBN, it added, shall also be a market participant at the window to promote liquidity and professional market conduct.

However, at the FMDQ Naira-Settled OTC Futures market, trading was brought to a halt on all contracts last Wednesday, due to a suspension of CBN’s quotes. Trading is expected to resume this Wednesday.

“The cessation of trades due to the CBN’s suspension of quotes further highlighted the illiquidity in the Futures Market as the CBN remains the only counterparty willing to take a long position on the naira. Interestingly, the NG/US APR 2017 instrument will mature the same day trading is expected to resume. We expect the apex bank to settle the $965.29 million in open contracts and also replace the maturing instrument with an APR 2018 contract.

“In the week ahead, we expect trading activities to resume mid-week at the futures market, as guided by the FMDQ, whilst the apex bank will continue its dollar sales at special wholesale and retail FX intervention auctions for visible and invisibles as well as to BDCs. Hence, we expect the Naira to remain stable at the Interbank and parallel markets,” Afrinvest stated.

Bond Market Review

Despite the significant interest shown by investors in the April Bond auction the preceding week, activity in the secondary market was largely subdued last week owing to the series of Primary Market Auctions (Treasury Bills and OMO) as well as the Special FX interventions by the central bank which squeezed liquidity levels in the financial system.

Consequently, average yield rose four basis points last Tuesday to settle at 16.7 per cent and declined a marginal one basis point on Wednesday on the back of improved interest in short tenored instruments. Sentiment remained positive on Thursday as yields contracted six basis points on average but the trend was reversed on Friday as investors sold off across tenors, taking average yield across maturities to 16.8 per cent, up six basis points week-on-week.

“In the week ahead, we expect to see improved activity level within the bonds market due to scheduled maturity of the 5-year FGN APRIL 2017 bond worth N480.1 billion on 27th April, 2017. The bond maturity is expected to boost liquidity in the financial system with positive impact on trading sentiment as bondholders look to take new positions in the secondary market.”