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N261bn inflow to stabilise interbank interest rates - VANGUARD

NOVEMBER 13, 2017

Analysts fault budget 2018 assumptions

By Babajide Komolafe

THE interbank money market will this week receive inflow of N261 billion which will enhancing stability of cost of funds in the market. Last week, cost of funds fell sharply due to inflow of N233.8 billion on Thursday from matured treasury bills (TBs).

Prior to the inflow, the market was gripped by severe scarcity of funds aggravated by liquidity mop efforts of the Central Bank of Nigeria (CBN) through issuance of TBs.

This caused market liquidity to fall to minus N82 billion from N140.71 billion the previous week. Financial Vanguard analysis revealed that the apex bank issued N440 billion worth of TBs which was undersubscribed by 41 percent as total public subscription and amount sold stood at N259.2 billion. The N233.8 billion inflow on Thursday, however, brought relief to the market, prompting market liquidity to rise to N71.6 billion on Friday.

As a result, average short term interest rate fell by 3005 basis points (bpts) compared to level in previous week. Data from the Financial Market Dealers Quote (FMDQ) revealed that interest rate on Open Buy Back (OBB) fell by 2921 bpts to 7.17 percent on Friday from 36.33 percent the previous week. Similarly, interest rate on Overnight lending dropped by 3172 bpts to 7.26 percent from 39.48 percent.

This week, cost of funds is expected to either stabilise or further moderate downwards in response to expected inflow of N261 billion from maturing TBs, which will more than offset impact of expected TBs issuance of N119.9 billion. According to analysts at Lagos based Cowry Asset Management Plc, “This week, CBN will auction treasury bills worth N119.94 billion, viz: 91-day bills worth N32.44 billion, 182-day bills worth N22.82 billion, and 364-day bills worth N64.68 billion respectively.

We expect a moderation in stop rates in line with declining inflationary trend and improving economic outlook. The auctions will be more than offset by T-bill maturities, we expect boost in financial system liquidity and resultant moderation in interbank rates.”  

Naira stable as I&E transactions rise 19% to $682m The stability of naira in the foreign exchange market persisted last week while transactions in the Investors and Exporters (I&E) window rose by 19 percent. At the parallel market, the naira exchange rate remained N363 per dollar for the third consecutive week, due to weak dollar demand.

At the I&E window, the naira appreciated marginally by four kobo due to increased dollar supply. Data from FMDQ showed that the indicative exchange rate for the window etched down to N360.4 per dollar on Friday from N360.11 per dollar the previous week.

Further analysis also revealed that dollar supply into the window rose by 19.2 per cent to $682.9 million last week from $527.8 million the previous week. This indicates increased confidence in the window created by the CBN on April 21st2017.

According to the apex bank, the window has attracted over $10 billion since its inception. At the official segment, the CBN sustained its intervention in the foreign exchange market injecting $195 million into the interbank foreign exchange market on Tuesday.

According to Acting Director, Corporate Communications Department, CBN, Mr. Isaac Okoroafor, “the apex bank offered $100 million to the Wholesale segment, while the Small and Medium Enterprises (SMEs) segment received $50 million.

The invisibles segment comprising tuition, medical payments and Basic Travel Allowance (BTA) received $45 million.” Analysts faults budget 2018 assumptions  Last week the Federal Government proposed an N8.6 trillion budget for 2018.

The budget assumptions include: Exchange rate of N305 per dollar; Crude oil price of $45 per barrel; Crude oil production of 2.3 million barrels per day; Non-oil revenue of N4.16 trillion; and oil revenue of N2.4 trillion.

However, analysts at Cowry Asset Management Plc and Afrinvest West Africa faulted the N4.2 trillion non-oil revenue as ‘ambitious’ and ‘wishful’.

According to Afrinvest analysts, “Although we think the oil revenue assumptions seem conservative in light of the reality of domestic production and the upbeat performance of the global oil prices, we perceive non-oil revenue prospects for the fiscal year as somewhat wishful given that the effort of government to diversify her revenue through various tax reforms is yet to yield the desired optimal fruits.”

Cowry Assets analysts also stated: “We opine that the 2.3 million barrels per day assumption, although within reach, looks rather ambitious given threats of insecurity due to unresolved issues in the Niger Delta region.

The benchmark crude oil price of $45 a barrel is quite modest given that international crude oil prices are currently trending above USD60 a barrel, howbeit, relative high prices appear sustainable only within the short to medium term. Furthermore, non-oil revenue assumption appears to be a tall order as it anticipates a 40 per cent year-on-year increase despite underperformance for 2017.”

Afrinvest analysts also faulted the N305 exchange rate, saying it is not in line with market realities. They stated:“While the budget assumes variables which are not far off from current realities save for the projected exchange rate of N305/$1.00, we are of the view that for the economy to move past its current state, a truly market determined rate needs to be adopted. “The current FX regime suggests an FX rate of N360.00/$1.00 – N370.00/$1.00 at the Investors and Exporters’ (I&E) FX window.

Hence, a projected exchange rate of N305/$1.00 for 2018 seems like a far cry from the reality more so that the government could have taken advantage of the market rate to increase the collectible fiscal revenue on behalf of the Sub-National governments who keep struggling to meet up with wage bill amid the dwindling oil revenue.”

Read more at: https://www.vanguardngr.com/2017/11/n261bn-inflow-stabilise-interbank-interest-rates/

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