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Monday, January 20, 2020 / 01:15
PM / ARM Research / Header Image Credit: Live Trading News
Over H2 2019, the monetary authority maintained its drive to spur
economic growth while keeping FX stability at the fore front of its activities.
To start with, following a rate cut in March 2019, the monetary authority kept
its benchmark rates unchanged all through the second half, reflecting the need
to balance the trend between growth and inflation. Meanwhile, in a bid to
support FX inflows, stop rates at the OMO auctions (CBN's preferred monetary
policy tool) were hiked in August and has remained at almost the same level
since then. In a separate move, non-bank locals (individuals and corporates)
were barred from participating in CBN's auctions in October. Elsewhere, upon
seeing the gains realized from its initial directive of a minimum loan to funding
requirement of 60% for DMBs, the CBN revised it higher to 65% effective from
Dec 31st, 2019.
Looking ahead, anticipated maturities is expected to come in at N15.6
trillion over 2020 split into N13.0 trillion OMO bills and N2.6 trillion of
T-Bills. More worrisome is the fact that about N3.6 trillion of OMO maturities
would certainly hit the system due to exclusion of non-bank locals from
participating in OMO auctions. Though the apex bank might have expressed more
fondness to supporting growth in the real sector in recent time, we can't
ignore its major concern - maintaining FX stability. Hence, we believe FX
stability will continue to be a major focus area for the CBN in 2020. It is
therefore pertinent to adjudge what CBN's reserve position would be over 2020.
We see the FX reserve ending H1 2020 lower at $34 billion against the backdrop
of slow inflows and continued intervention to meet FX demands. Hence, we think
the CBN has enough ammunition to continue its growth drive in the interim.
In our view, we think as long as FPI are satisfied, the CBN will give
less thought to the impeding liquidity - stemming from the exclusion of
non-banks in OMO auctions. Nonetheless, we believe the CBN would continue to
enforce its loan to funding requirement in a bid to manage liquidity, while
maintaining its regular OMO auctions. On the former, excess liquidity in the
system is given out as loans. In addition, any shortfall is duly charged to the
DMBs as CRR, thus reducing liquidity as well.
CBN caressing both FPIs and Economic Growth
Over H2 2019, the monetary authority maintained its drive to spur
economic growth while keeping FX stability at the fore front of its activities.
To start with, following a rate cut in March 2019, the monetary authority kept
its benchmark rates unchanged all through the second half, reflecting the need
to balance the trend in economic growth and inflation. However, in our view, we
see the MPR as a symbolic tool given its ineffective transmission to other
major rates. Meanwhile, in a bid to support FX inflows, stop rates at the OMO
auctions (CBN's preferred monetary policy tool) were hiked in August and has
remained at almost the same level since then.
In a separate move, non-bank locals (individuals and corporates) were
barred from participating in CBN's auctions in October. We think the rationale
behind the exclusion of non-banks locals from participating in CBN's auctions
is to reduce the cost of financing these maturing bills, which is far higher
than the yield on its interest earning assets. For context, outstanding bills
have increased from just N4.3 trillion in 2015 to record level of N17.0
trillion in 2018. Similarly, the cost of financing these bills have risen
rapidly as the CBN have hiked the OMO rates at specifics periods just to keep
FPIs. We estimate an annual average cost of N1.9 trillion over the past three
years in servicing the maturing OMO bills.
The direct impact of this has seen excess
funds in the system chase other riskless investment options such as T-bills and
fixed deposits with banks. Due to the relatively smaller markets of these
instruments, rates have crashed significantly. In turn, T-Bills secondary rates
declined significantly by 742bps to 4.7% over H2 19 mirroring
increased demand from free liquidity created at the OMO window. Similarly,
average prime lending rate moderated by 83 bps to 15.27%.
In addition, we think the CBN has successfully disintegrated the
transmission between the OMO rates and T-Bills rate and thus, bifurcated the
fixed income market. While keeping OMO rates elevated for FPIs, the CBN has
indirectly forced domestic rates lower even below headline inflation, to support
growth.
Elsewhere, upon seeing the gains realized from its initial direction,
the CBN revised the minimum loan to funding ratio for DMB's from 60% to 65%
effective from December 31st, 2019. In addition, the apex bank instructed banks
to prevent customers with outstanding loans and recipients of intervention
funds from investing in T-Bills or OMOs.
In our view, we believe the revised loan to funding requirement was
against the backdrop of gains recorded after the initial directive. For
emphasis, total net credit to the private sector by DMBs increased by N1.2
trillion over H2 2019 (H1 2019: N22.7 billion).
CBN's policies annul the maturity effect
At the early part of the second half, supported by lower maturities and
moderating inflation, the CBN cut the one-year OMO stop rate by 64 bps MoM to
11.84% in July. However, the month of August ushered a different outcome as the
CBN was embattled with a fast pace of FPI outflow (+68% MoM to $3.2 billion)
following a widespread risk that triggered across emerging markets. Eventually,
the CBN was forced to raise OMO rate twice to limit the rate of foreign
investors repatriation. Over the latter part of the year (Q4 19) where we
expected higher maturities, to dictate higher stop rates, the CBN recorded
significant demand at its October auctions (2.5x) with the apex bank having
enough bargaining power. Consequently, OMO rates were left almost unchanged
over October, declining from 13.5% in September to 13.3% in October.
Subsequently, OMO rates has trended at circa 13.3% reflecting elevated demand
at the auctions. In addition, the trend in stop rate seem to conform with CBN's
stance on reducing its cost of liquidity management.
An impending liquidity... what happens?
Looking ahead, anticipated maturities is expected to come in at N15.6
trillion over 2020 split into N13.0 trillion1 OMO bills and N2.6 trillion of
treasury papers. More worrisome is the fact that about N3.6 trillion of OMO
maturities would certainly hit the system due to exclusion of non-bank locals
from participating in OMO auctions. Though the apex bank might have expressed
more fondness to supporting growth in the real sector in recent time, we can't
ignore its major concern - maintaining FX stability.
As mentioned earlier, while average T-Bills rates nose-dived to single
digits, the apex bank has kept OMO rates at c.13% levels just to keep the
foreign portfolio inflows. In turn, the flows have continued to provide support
to the FX reserves. Hence, we believe FX stability will continue to be a major
focus area for the CBN in 2020. It is therefore pertinent to adjudge what CBN's
reserve position would be over 2020.
For us, we see the FX reserve ending H1 2020 lower at $34 billion
against the backdrop of slow inflows and continued CBN intervention to meet the
FX demand (FPI repatriation, increased services deficit and imports). This
excludes a possible Eurobond issuance in H1 2019. Hence, with FX reserve above
$30 billion, we believe the CBN has sufficient ammunition to support the naira
at different FX windows. For context, after being a net buyer ($6.0 billion) at
the IEW for six consecutive months, the CBN has been non-hesitant in
aggressively supplying ($4.7 billion) same window since July 2019.
Having highlighted the above, we think the CBN has
enough ammunition to continue its growth drive in the interim (over H1 2020).
In our view, we think as long as FPI are satisfied, the CBN would not give much
of a thought to the impeding liquidity from the exclusion on non-banks in OMO
auctions. As a matter of fact, while liquidity from PFAs cannot chase dollar,
liquidity from other non-banks (ex PFAs) is just about N1 trillion, which
should not be a concern. Nonetheless, as a means of managing the impending
liquidity, we believe the CBN would continue to enforce its loan to funding requirement while
maintaining its regular OMO auctions. On the former, excess liquidity in the
system are given out as loans. In addition, any shortfall is duly charged to
the DMBs as CRR, thus reducing liquidity as well. We also see possibility of a
review in the loan to funding requirement upwards to 70%.
Irrespective, we see limited upside for OMO rates over H1 2020 as this
would nullify CBN's drive on trimming its cost of financial system liquidity
management. More importantly, we believe CBN's FX reserve position over H1 2020
should give it enough bargaining power to keep OMO rate at current level over
H1 2020. However, beyond H1 2020, should FPI flows and oil price remain
depressed, we could see more profounding pressure on the CBN as the FX reserve
draw close to its $30 billion comfort level. As a result, we do not rule out a
possibility of higher OMO rate just to keep FPIs. That said, due to the
ineffective transmission of the MPR, we do not anticipate a change in the MPR
over H1 2020.
While some banks are currently taking placements from non-banks and
placing same funds in the OMO market, we do not think this can be sustained.
Our justification is because most banks would have a limit on its OMO
investment hinged on the need to comply with CBN's loan to funding requirement.
That said, we highlight events that could likely occur in the coming months: (i) Non-banks placing excess funds with DMBs money market, who in turn place same funds at CBN OMO auctions (ii) Given that the CBN has been funding the FG for some months now, the FG could as well increase their treasury bills issuance which would also mop up liquidity. However, we note both actions could negate CBN's initial drive on improving credit to the real sector.
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Research 234 (1)
2701653 research@armsecurities.com.ng
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from ARM's H2 2018 Nigeria Strategy Report
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3. NSR H2 2018 (13) - Monetary
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