*Govt, others to pay more for foreign debt — Afrinvest
21 December 2015, Sweetcrude, Lagos – Banks are desperately searching for how to invest the over N1 trillion of excess cash in their vaults. This desperation was reflected in trading for treasury bills (government securities) where banks and other investors demanded for 291 percent more bills than the amount offered for sale by the Central Bank of Nigeria (CBN). Trading results show that banks and other investors demanded for N791.42 billion worth of treasury bills but the CBN offered N202.4 billion.
Further analysis show that in the secondary market, where existing bills are sold, the CBN offered N50 billion worth bills (Open Market Operation, OMO) while investors demanded for N236.84 billion, out of which the apex bank accommodated N233.84 billion. At the Primary market, where fresh bills are sold, the CBN offered N152.4 worth of fresh bills, while investors demanded N554.58 billion, out of which the apex bank accommodated N155.4 billion.
Recall that the CBN on Tuesday November 24th, lowered interest rate it pays on bank’s excess cash deposited in its Standing Deposit Facility (SDF) to 4.0 percent from 11 percent. Since then banks have been battling with where to invest their excess cash. Investigation revealed that volume of excess cash in bank’s vaults rose during the week, due to reimbursement for unmet demand for foreign excess exchange, and payment of matured treasury bills.
From N665 billion on Monday, excess cash rose sharply by 84 percent to N1.19 trillion on Tuesday before dropping N262 billion on Wednesday. On Thursday excess cash rose again by 131 percent to N606 billion due to repayment for matured treasury bills. Consequently, cost of funds (interest rates) remained low in the interbank money market. According to Afrinvest Plc, “Money market rates stayed at low levels with the Overnight (O/N) lending and secured Open Buy Back (OBB) lending instruments closing at 0.5 percent and 1.0 percent respectively on Monday.
The level of liquidity remained robust at over N1 trillion mid-weeks as we saw additional inflows of N155.4 billion from maturing T-bills, hence money market rates recorded marginal changes. “However, we observed a moderate uptick on Thursday with the O/N and OBB rising to 1.0 percent and 1.4 percent respectively, majorly due to the T-bills Primary Market Auction (PMA) held the same day and provisions Banks made for CBN foreign exchange auctions.
The O/N and OBB rose 54 basis points (bps) and 42bps Week-on-week (W-o-W) to close at 1.0 percent and 1.4 percent respectively; while the NIBOR closed flat W-o-W. “Sentiment differed across tenors in the T-bills market as we saw bullish sentiment at the short end of the curve but selling activities was recorded at the longer end as dealers exited to take position at the T-bills PMA on Thursday. This dragged Average yields up by 42bps W-o-W to 4.4% on Friday.
At the PMA held, the 91, 182 and 364 Days tenured bills were issued at Stop Rates of 4.0 percent, 6.2 percent and 7.5 percent respectively, lower than 5.6 percent, 7.0 percent and 8.0 percent stop rates during the December 2nd 2015 PMA. “The lower rates at this week’s auction are due to the high level of liquidity.
We expect interbank money market rates to continue to trend at the current level against the backdrop of robust liquidity whilst we anticipate some level of profit-taking at the longer end of the curve. Tenured deposits rate might likely increase towards the end of the year as portfolio managers rebalance their portfolio towards equities.”
FG, others to pay more for foreign debt-Afrinvest
Meanwhile Afrinvest has predicted that the interest rate increase by the United States Federal Reserve’s will make the federal government and Nigerian companies to pay more as interest rates on foreign debt. On Wednesday, the Federal Reserve increase its policy rate to 0.25 percent from 0.05 percent, thus ending seven years of low interest rate regime in the world’s largest economy. This, according to Afrinvest will lead to further weakening of the naira, and increase cost of foreign debt.
It stated, “Prior to the Fed-Fund rate hike, restriction on foreign exchange by the Central Bank of Nigeria (CBN) has constrained market activities, fuelled higher inflation rate and depressed output growth in Nigeria. While official and interbank market rate steadied at N197.00/$ to N199.10/$, parallel market rate has depreciated to N280/$ in December 2015. Increased flow of fund towards the US economy due to higher rate environment points to a stronger dollar.
“Therefore, another scenario is a further loss in the value of the domestic currency (Naira) against the dollar. We perceive the stability portrayed by the Apex Bank in terms of the official rate which has been kept at N197 as contrived, given the significant N80/$ spread to parallel market rate of N280. Consequently, we expect the pressure on the CBN to devalue to intensify as dollar receipts to government treasury continue to shrink in Naira terms while current account deficit worsens.
“Finally, higher interest rate in the US and a stronger dollar will increase cost of foreign debt. The recently released Medium Term Expenditure Framework (MTEF) for 2016 shows that fiscal arm is budgeting an expansionary 2016 with a total budget of N6.08tn relative to N4.48tn in the 2015 budget. Consequently, the budget deficit is expected to rise from N1.04tn in 2015 to N2.19tn and foreign borrowing is budgeted to account for about 29.0% (N635.88bn) of the total financing for the deficit.
“Following the Fed decision, the cost of borrowing for the government, is expected to rise. Furthermore, the cost of servicing FGN and Corporate Eurobond worth US$6.2bn (US$2.5bn & US$3.7bn) is expected to hike as a result of stronger dollar and weaker naira.
Notwithstanding the anticipated impact as noted above, the short term impact in Nigeria is expected to stay muted given that macroeconomic concerns in the domestic economy had already forced market actors to adjust ahead of the announcement.”
*Babajide Komolafe – Vanguard