27 January 2014

Nigeria: Cost of Funds Rise Over CRR Hike

The Nigerian Interbank Offered Rates (NIBOR) increased last week in response to the 75 per cent Cash Reserve Requirement imposed on public sector funds in banks. Accordingly, 90-day, 180-day and 365-day tenors all edged north as they closed at 12.04 per cent, 12.33 per cent and 12.62 per cent respectively from an average of 11 plus per cent in the previous week.

The NIBOR is used to benchmark the cost of borrowing among deposit money banks. > Indications had emerged that the new monetary tightening measures was causing anxiety in the industry. THISDAY also learnt that banks are also working out strategies to cover their position in view of the anticipated temporary liquidity squeeze in the industry.

Analysts had predicted that the NIBOR would sustain its upward trend until February 4, when the CBN would sterilise the fund. The central bank's Monetary Policy Committee (MPC) had at the end of its meeting last Tuesday raised banks' CRR on public sector deposits from 50 per cent to 75 per cent. It, however, left the CRR on private deposits unchanged at 12 per cent. The MPC had listed the increasing divergence between the official and Bureau De Change exchange rates, inflationary threats, depletion of fiscal buffers, leakages, as well as declining foreign portfolio inflows as the reasons for its stance. Other key policy rates, however, were kept unchanged, with the Monetary Policy Rate (MPR), the benchmark for interest rates, maintained at 12 per cent, while the liquidity ratio was held at 30 per cent. Therefore, as a result of the CRR hike, the market anticipates that about N750 billion would be withdrawn from the system. Consequently, data from the FMDQ OTC showed that save for the Call and 7-day tenors that did not respond to the monetary policy measures, other tenors of the NIBOR increased.

For instance, it showed that while the Call tenor dropped to 10.50 per cent on Friday, from 10.58 per cent the preceding Friday, the 7-day tenor remained unchanged. However, whereas the 30-day tenor jumped to 11.46 per cent on Friday, from 11.08 per cent the preceding Friday, the 60-day tenor also climbed to 11.79 per cent on Friday, from 11.37 per cent the preceding Friday.

In addition, the 90-day, 180-day and 365-day tenors all edged northward as they closed at 12.04 per cent, 12.33 per cent and 12.62 per cent respectively.

However, this was in spite of inflows which came through N310.71 billion worth of matured treasury bills. The matured bills comprised of 52-day bills worth N7.3 billion; 55-day bills worth N11.15 billion; 56-day bills worth N23.25 billion; 84-day bills worth N6.5 billion; 90-day bills worth N65.63 billion; 91-day bills worth N32.89 billion; 98-day bills worth N34.01 billion; 182-day bills worth N30 billion; and 364-day bills worth N100 billion. But there was no treasury bills sale through the Open Market Operations (OMO) last week. Treasury bills worth N163.31 billion are expected to mature on Thursday. The maturing bills would consist of 64-day bills worth N22.51 billion; 65-day bills worth N18.45 billion; 209-day bills worth N29.90 billion; 210-day bills worth N92.46 billion. "Howbeit, we anticipate pressure build up and further increase in interest rates at the interbank money market as deposit money banks gradually adjust to the new monetary policy measure," analysts at Cowry Asset Management Limited stated.

On his part, the Managing Director/Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane said: "We expect an initial spike of approximately 400 basis points before settling to a 1.5 per cent increase in the effective cost of funds for the banking system. Banking net interest margins and profitability will be affected whilst their liquidity will remain unimpaired," adding that "The federal and state governments will face some difficulty in extracting commissions from bankers."

Foreign Market The CBN offered a total of $800 million at the Retail Dutch Auction System (RDAS) last week. At the Monday and Wednesday RDAS, $400 million was offered apiece while a total of $349.9 million and $390 million were sold at both auctions respectively. The marginal rate at both auctions was N155.74/$1 N155.75/$1 respectively. However, rates at the BDC and Parallel market segments closed at N173.0 and N172.0 respectively as demand for the green back persisted.

According to analysts at Afrinvest Securities Limited, "the recent increase in the CBN dollar sales at the RDAS (weekly offer has been effectively increased from $600m to $800m) could indicate that the apex bank is gradually accommodating the increasing dollar demand at the parallel market in a bid to tame the huge spread (about N13.00) between the interbank and parallel market rates."

Similarly, in an apparent move aimed at bridging the widening gap in the value of the naira between the RDAS, the Bureau De Change (BDC) and parallel markets, the CBN at the weekend announced the removal of the limit of the amount of forex sales to BDCs. Previously, BDCs were subjected to a limit of $250 million weekly.

The central bank in a circular explained that the policy was aimed at shoring up liquidity in the BDC segment of the foreign exchange market. It added: "Consequently, the limit of $250 million as the weekly forex sales to a BDC is hereby removed in order to shore up liquidity in that segment of the foreign exchange market. "Authourised dealers are therefore free to sell to BDCs subject to compliance with the provisions of the extant AML/FT laws and regulations in the disbursement of forex."

However, the central bank warned that all transactions between authorised dealers and BDCs as well as the latter and end-users must be supported with appropriate documentation. In addition, it insisted that authorised dealers and BDC operators should continue to render weekly returns on their transactions to the central bank and other regulatory agencies, failing which appropriate sanctions, including revocation of operating licence would be imposed.

The bond market was fairly liquid last week as fresh portfolio investments drove bond yields and treasury bills rates south. Average yield on the liquid FGN Bonds declined by 0.06 per cent to close the week at 13.02 per cent. A total of 2,000 units of FGN bonds (valued at N2.1million) were traded on the Nigerian Stock Exchange last week in 20 deals. This was a five per cent week-on-week decline compared to the 2,800 units (valued at N2.6 million) traded the preceding week in 10 deals, according to Afrinvest Securities. The 15.1% APR2017 and 16.00% JUN2019 were the most active last week. "We expect yields to remain sub 14 per cent in the near term pending any major policy or market displacement," the firm added.

However, there were indications last week that the size of the proposed $100 million Diaspora Bond (as approved in the medium term (2012 to 2014) external borrowing plan) would be increased to $300 million. This was contained in a letter the President wrote to the National Assembly last Tuesday requesting the approval of a $200 million. The proceeds from the bond issuance is expected to be channelled to development projects in priority sectors of the economy, particularly agriculture, transportation and power.

N220bn MSMEDF The CBN last week sensitised stakeholders in Oyo state on how to access the N220 billion micro, small and medium enterprises development fund (MSMEDF). Deputy-Director, Development Finance Department of the CBN, Mr. Musa Uji Amedu, who tutored the participants on the thrust of the fund and all the conditions therein for the fund to be accessed, said the central bank was encouraging eligible Nigerians to avail themselves of the opportunity to jointly grow the economy.

The central bank official however informed those willing to access the fund not to see it as a 'national cake', saying every amount accessed should be repaid with its corresponding interest rate.

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