12 November 2012

Nigeria: CBN Begins Tactical Withdrawal From Forex Market

Perhaps, with its ear leaned towards international advisers, the Central Bank of Nigeria (CBN) may have began a tactical retreat from its domineering interventions at the foreign exchange (forex) market, slicing its supply to the market by a whopping 27.2 percent. The amount sold reduced even further with about 28.6 percent last month.

The Financial Market Dealers Association (FMDA) of Nigeria said the wholesale market for foreign exchange fell markedly in market demand compared to the previous month. According to it, the apex bank offered $1.250 billion and sold $1.10 billion in relation to $1.590 billion offered and $1.54 billion sold in September 2012, reflecting a decrease of 27.2 per cent and 28.6 per cent respectively.

The money market association attributed the southward trend of demand from the WDAS window to the progressive dollar inflow from energy giants estimated at $796.50 million and the August 1st 2012 policy which had helped to limit speculative activities.

"We hope to see this trend maintained in the coming months following the CBN's price stability policy and the relative depth of the Nigerian Foreign exchange and Debt markets in the month under review", said FMDA.

But Razia Khan, Regional Head of Research, Africa Global Research, Standard Chartered Bank, London quoting the S&P report said, "monetary policy is seen as "constrained by Nigeria's managed exchange rate regime and relatively less developed domestic bond markets".

She thus expects that gradual moves to lessen the role of the CBN in the determination of the forex rate (which are already underway), will help bolster Nigeria's forex reserves and external strength.

"We note that the US dollar (USD) sales at recent official wholesale Dutch auctions (WDAS) have totalled $50 million at each auction, compared with an average of $300 million for much of last year", said Khan.

Thus the Whole Sale Dutch Auction System (WDAS) Forwards Market was visibly inactive in the month under review as no transaction took place in this segment of the foreign exchange market.

Based on the supply by the energy firms and the relaxation of restriction of foreign participation in the market, the value of the naira against the dollar appreciated in all the four segments of the markets recording an average of three kobo at CBN, 25 kobo at Interbank, 100 kobo at the Bureau De Change (BDC) and 100 kobo at the parallel market relative to September's average rate.

The FSDH Monthly report for October also said the foreign exchange gain could be hinged on the recent review of the foreign exchange management policy with increased complementary dollar sales from energy companies.

The United States dollars traded between N155.75/$ - N155.78/$ at WDAS, N157.04/$ - N157.20/$ at Interbank, N158.00/$ - N159.00/$ at BDC and N159.00/$ - N159.50/$ at parallel market. The range widened more for the BDC and parallel markets in the month under review.

Further analysis on month-on-month revealed an opening figure of $1/ N155.7800 for selling rate at the first working day at the WDAS, and closed the month at $1/ N155.7600 against the closing rate of $1/ N155.7800 in September 2012. At the Inter-bank market, Naira-Dollar relationship opened at $1/N157.2000 for Offer rate and closed at $1/ N157.1325 against the closing rate of $1/ N157.3000 in September 2012. The BDC and parallel markets closed the month at $1/ N158.0000 and $1/ N159.0000 respectively.

The premium between CBN and Parallel market as at end-October lowered to 2.08 percent from 2.32 percent recorded at the end of September 2012. The above premium is 292 BASIS POINTS (bps) below the international benchmark of five percent which has demonstrated the CBN's capacity to tame further volatility in the bud and to avoid speculators from having a field day as well as the possibility of a dollarised economy consequent upon the MPC communiqué resolution end-July.

Analysts say the slow down on forex supply by the central bank ensured actively traded rates in the interbank Naira market were steady in most parts of the month reflecting the ongoing liquidity management efforts of the monetary authority.

Rates at the Nigerian Inter-Bank Offer Rate (NIBOR) fell by 20-40 bps in the first week via net inflow of N266.89 billion from maturing bills despite WDAS debit of N27.72 billion and the Open Market Operations (OMO) funding of N438.71 billion to close the week at (10.33 percent, 10.75 percent and 12.20 percent) for call, 7 days and 30 days respectively.

Rates rose in the second week precipitated by the WDAS debit of N35.02 billion and Primary Market Auction (PMA) sales of N171.83 billion despite a net inflow of N232.12 billion from maturing bill to close the week at (11.45 percent, 12.25 percent and 13.66 percent).

Meanwhile, rates was mixed in the third week on NNPC Withdrawal of N113.00 billion, WDAS Debits ofN48.62 billion, FGN Bond and OMO auction sales totalling N75.00 billion and N273.82 billion respectively but Federation Account Allocation Committee (FAAC) injection of N277.40 billion ensured that rates closed the week at (10.37 percent, 11.04 percent and 12.33 percent) for Call, 7 days and 30 days respectively.

The fourth week saw cost of funds headed northwards by 180-190 bps and closed at (12.20 percent, 12.87 percent and 13.91 percent) for Call, 7 days and 30 days respectively on the back of OMO withdrawals and WDAS Debits worth N45.63 billion.

Month-on-month, rates fell 200-400bp below CBN standing lending rate facility (SLR) reflecting the relative liquidity status during the period under review.

The Open Buy Back (OBB) opened 360 bps below standing lending facility on the back of consistent liquidity injections recorded the previous month-end.

The first week of the month recorded the lowest rates of 10.19 percent for Deposit Money Banks (DMBs) and 10.25 per cent the Discount Houses (DHs) this year.

Month-on month average, the OBB closed at 12.12 per cent for the DMBs and 12.00 per cent for the Discount Houses, reflecting over 150 bps above previous month as liquidity eased end-month.

The Deposit taking and lending rate of Deposit Money Banks (DMBs) in the month under review mirrored the rates reported in the preceding month.

Savings figures averaged 2.0408 percent; while tenured funds ranged between 3.9917 percent for overnight to 364 days money. For the lending rates, prime structured loan stood at monthly average of 18.08156 per cent same as September rate; similarly, the normal structured loan 22.1563 per cent.

The spread between the deposit and lending rates widened moderately in the preceding month following the increase in the CRR by 400 bps in July by the central bank. Rates retained their previous values as key policy drivers' remains the same as that of September. Interest rates are expected to inch up further as liquidity is majorly deployed to fund government securities by market operators.

For the government securities like treasury bills and OMO, the rate of return in the primary Market Auction rallied on average in the month under review when compared with the average rate of the previous month in order to attract sufficient inflow to support the domestic currency and simultaneously mop up excess liquidity in the system. Meanwhile, central bank allotted N283.10 billion against September 2012.

Subscription in the month relative to N889.95 billion in the first and second auction in the month 91 days stop rates averaged 12.94 12.78 percent last month; 182 days averaged 13.29 percent relative to 13.13 percent in September which was also traded in two auctions averaged 13.33 percent when juxtaposed with 13.46 percent of preceding month.

Available data revealed that an OMO auction session was conducted in the month to mop excess liquidity created by the maturities consequently. Thus; the CBN offered N950.00 billion and sold OMO sales recorded N882 billion. The surge in OMO sales recorded was on the back of availability of investible funds in the system accompanied by relatively attractive stop rate.

A quick summation of (PMA & OMO) showed that the month recorded N1. 233 trillion (N950.00 billion OMO) against N1.17 trillion in September.

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