13 March 2017

Nigeria: Cost of Funds to Rise As Govt Borrowing Pressures Financial Markets

Cost of fund is expected to rise this week in the interbank money market due to liquidity outflow for investment in government borrowing instruments.

Last week, average interbank interest rate dropped by 2.13 per cent to 14.88 per cent from the previous week. Interest rate on Collateralised borrowing (Open Buy Back, OBB) dropped by 217 basis points to 14.5 per cent from 16.67 per cent while interest rate on Overnight borrowing dropped by 208 basis points to 15.25 per cent from 17.33 per cent the previous week.

The decline in cost of funds was prompted by increased market liquidity, which rose from deficit of N2.3 billion the previous week to N9 billion last week Friday, due to inflow from matured treasury bills worth N70 billion on Thursday and from statutory allocation funds.

Market analysts however projected that this decline in cost of funds will be reversed this week due to outflow to fund investment in treasury bills and FGN Savings Bond.

Specifically, the Central bank of Nigeria (CBN) will this week sell Primary market treasury bills worth N213.8 billion to mop up idle cash from the money market. This comprise 91 days bills worth N39 billion, 182 days bills worth 48 billion and 364 days bills worth N126 billion.

The treasury bills sale will offset the inflow of N170.5 billion through matured bills payment during the week, leading to net investment of N43.3 billion.

This outflow will be aggravated by outflow through investment in the newly introduced Federal Government Savings bonds to be issued by the Debt Management Office (DMO).

FGN Savings Bond

According to the DMO: "The FGN Savings Bond is a retail savings product accessible to all income groups". It stated that the purpose of the bond is to: Deepen the national savings culture; Diversify funding sources for the Government; Provide opportunity to all citizens irrespective of income level to contribute to National Development; Enable all citizens participate in and benefit from the favourable returns available in the capital market".

The benefits of investing in the bond includes: "Interest income is paid quarterly directly into bond holder's account; The Bond is acceptable as collateral for loans by banks and can be sold for cash in the secondary market before maturity; Good for savings towards retirement, marriage, school fees, house projects.

On the features of the FGN Savings Bond, the DMO stated: "The product will be issued monthly in tenors of 2 and 3 years; Interest will be paid quarterly to investors; The FGNSB will be offered to investors through Offer for; subscription at an interest rate to be announced by the DMO. There will be no fees or charges for subscriptions; The offer for subscription will be open for 5 days from the date of announcement; Minimum subscription amount is N5,000.00 with additions in multiples of N1,000.00, subject to a maximum of N50 million; Central Securities Clearing System (CSCS) Accounts of investors will be credited and text alerts will be sent to investors on Settlement Day; Listed on The Nigerian Stock Exchange; The Bond is backed by the full faith and credit of the Federal Government of Nigeria."

External reserve maintain upward trend beyond $30bn

The nation's external reserve last week maintained its upward trend last rising beyond $30 billion for the first time in 15 months.

According to the CBN the external reserve rose to $30.04 billion on Thursday last week, from $ 29.79 billion the previous week, indicating $250 million increase. Consequently, the external reserve has risen by $4.4 billion since the beginning of the year, and by $6.4 billion since October 19th, 2016 when it commenced its upward trend.

Naira appreciates as CBN sustains intervention

The naira last week appreciated against the dollar in the parallel market due to sustained intervention of the CBN in the foreign exchange market.

Market intelligence revealed that the parallel market exchange rate closed at N463 per dollar down from N465 per dollar the previous week.

The appreciation was driven by further injected of $662 million into the foreign exchange market by the CBN.

On Monday the apex bank injected $367 million comprise the sum of $144.1 million for 45 days forwards and $223.1 million for 60 days.

This was followed with injection of $100 million on Tuesday, and another $170 million on Thursday comprising $100 million for wholesale intervention and $70 million to meet requests for Business/Personal Travel Allowances.

Since Monday February 20th 2017, when it announced new measures to boost dollar supply and forestall the declining fortunes of the naira in the parallel market, the CBN has injected $1.3 billion dollars by intervening in the forex market seven times as follows: Tuesday February 21st, $417 million; Thursday February 23rd, $231 million; Monday February 27th, $180 million; Friday March 3, $350 million; Monday March 6, N367 million; Tuesday march 7, $100 million and on Thursday March 9, $195 million.

Also during the week, the CBN increased weekly dollar sales to Bureau De Change (BDCs) by increasing the number of BDCs that have access to the dollar sales to 3,114 from about 2000.

Analysts projects that the appreciation of the naira in the parallel market will persist this week, as the apex bank has signalled its commitment to sustaining its intervention in the market.

According to the Acting Director, Corporate Communications Department, CBN, Mr. Isaac Okorafor, the CBN Bank remained resolute in ensuring that it supplies enough forex to genuine customers of Deposit Money Banks and increase liquidity in the market.

According to him, the uniqueness of the Wholesale Forwards was that banks are allowed to use their winnings from auctions to fund matured obligations to meet Letters of Credit remittances, extinguish bills for collection and other forex demands. With this development, importers who had hitherto been using bills for collection will now experience relief instead of having to patronize other more expensive sources.

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