APPREHENSION OVER COST OF FUNDS AS CBN REVS UP LIQUIDITY MOP UP
The interbank money market is enveloped by apprehension over direction of cost of funds this week following the resurgence of liquidity mop by the CBN last week which occasioned the first weekly decline in cost of funds in four weeks.
Last week, the CBN sold N424.75 billion worth of OMO (Open Market Operations) treasury bills in a bid to address excess liquidity in the interbank money market. In addition to this, the apex bank, on behalf of the Debt Management Office (DMO) sold fresh TBs worth N136.31 billion. These in addition to N75 billion to fund Dollar purchases resulted into outflow of N636.06 billion from the market last week.
The huge outflow cancelled out the effect of N376.88 billion inflow from matured TBs, prompting scarcity of funds in the market. Consequently, cost of funds which had been on the downward trend and in single digit for three weeks, rose and entered double digit at the close of business last week.
Data from FMDQ showed that the interest rate on Collateralised (Open Buy Back, OBB) lending rose by 784 basis points (bpts) to 10.67 percent last week from 2.83 percent the previous week. Similarly, interest rate on overnight lending rose by 858 bpts to 12 percent last week from 3.42 percent the previous week.
Analysts opined that the CBN might continue its aggressive liquidity mop up as recorded last week, hence possibility that cost of funds will maintain upward trend this week. In their projections for the week, analysts at Lagos based Cowry Asset Management Limited stated: “This week, T-bills worth N232.37 billion will mature via the primary and secondary market which will more than offset T-bills worth N182.14 billion to be auctioned by CBN via the primary market; viz: 91-day bills worth N5.39 billion, 182-day bills worth N8.39 billion and 364-day bills worth N168.36 billion. Hence, we expect liquidity ease in the financial system to be sustained with resultant moderation in interbank rates, if CBN does not aggressively mop up liquidity via OMO sales.”
Analysts at Lagos based Zedcrest Capital also stated: “We expect rates to remain slightly pressured going into the new week, with the CBN expected to maintain its pace of OMO and forex interventions in the market.” Analysts at Afrinvest also projected: “In the coming week, we anticipate that OMO maturity of N218.6 billion will hit the system; this will likely have mild impact on liquidity and may keep OBB and Overnight rates at high levels.” Naira depreciates as external reserves fall to $45.2bn the Naira last week depreciated in the parallel market and in the Investors and Exporters (I&E) window even as the nation’s external reserves decreased for the 10th consecutive week.
According to the CBN, the external reserves fell by $281 million to $45.228 billion last week Thursday from $45.509 billion Thursday the previous week. Financial Vanguard analysis revealed that the reserves have been falling since Thursday July 5th when it peaked at $47.798 million.
Since then the reserves have declined by $2.57 billion or 5.3 percent, occasioned by increased foreign exchange intervention by the CBN in its bid to forestall depreciation of the naira in the face of increased dollar demand by foreign portfolio investors exiting the nation’s debt market.
The increased demand for dollars worsened last week leading to depreciation of the naira in the two major segments of the foreign exchange market. Financial Vanguard analysis showed that the naira depreciated by 30 kobo in the parallel market and by 40 kobo in the I&E window. According to naijabdcs.com, the live exchange rate platform of the Association of Bureaux De Change Operators of Nigeria (ABCON), the parallel market exchange rate rose to N359.3 per dollar last week from N359 per dollar the previous week. Data from FMDQ showed that the indicative exchange rate for the I&E rose for the third consecutive weeks to N363.18 last week from N362.78 per dollar the previous week, indicating 40 kobo depreciation for the naira.