Market liquidity may be threatened this week following plans by the Central Bank of Nigeria (CBN) to implement its 75 per cent hike in Cash Reserve Ratio (CRR) on public sector deposits tomorrow. COLLINS NWEZE writes on key market developments and impact of the policy on the financial sector.
The inter-bank rate, which remained steady last week, and continued to reflect improved market liquidity, may be affected by the Central Bank of Nigeria’s (CBN) plan to withdraw N750 billion from the financial system.
The fund represents about 5.09 per cent of money supply, and will be removed based on CBN’s Cash Reserve Ratio (CRR) policy in which banks must keep 75 per cent of their public sector deposits with the apex bank.
The CBN at the last Monetary Policy Committee (MPC) meeting raised the CRR on public sector deposits from 50 per cent to 75 per cent. That was after initial increase from 12 per cent to 50 per cent in July last year.
Last week, the call/overnight and seven-day money market rates were at an average of 10.5 per cent and 10.8 per cent, throughout last week. The three-month Nigeria Interbank Offered Rate (NIBOR) was also steady on 12 per cent, though fewer activities are done on the tenor. The inter-bank secured lending (Open Buy Back) was also broadly steady on 10.2 per cent on January 30.
Meanwhile, the CBN liquidity management remained active, supported by the change to CRR on public sector deposits on January 21, 2014.
The naira strengthened 0.3 per cent against the dollar in the Inter-bank but has lost 1.3 per cent of its value on January 30.
Recent stability was partly driven by CBN’s direct intervention, and to a lesser extent, improved dollar supplies from its twice weekly Retail Dutch Auction System (RDAS) window. It closed at N162.4 to a dollar.
Meanwhile, the twice-weekly CBN’s RDAS continues to be influenced by 26 Sep circular regarding USD sales to small scale importers. The naira remains under pressure due to structural imbalance between dollar supply and demand; and lower US oil demand.
Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said the MPC left all other parameters including the Monetary Policy Rate un-changed at 12 per cent, with an asymmetrical corridor of plus or minus 200 basis points. The CRR on private sector deposit was retained at 12 per cent and the liquidity ratio was unchanged at 30 per cent.
Rewane said the global economic recovery and likely impact of tapering in the US on investment flows, shows some limited amount of vulnerability on the external sector of the economy.
He said impact of this decision on money markets will be a shock effect in the short run and a re-turn to equilibrium rates within six weeks. “The first time the MPC increased the CRR on public sector deposits in August 2013, an estimated N1 trillion or 6.84 per cent of money supply was debited. At that time, the impact was a spike in interbank rates of approximately 800bps to an average of 21 per cent. Also, it coincided with the failure of two discount houses, which exacerbated the situation,” he explained.
He said the key variable that drove this decision remains the protection of the value of the naira in the foreign exchange markets. “The CBN Governor expressed some concerns about the declining trend in foreign portfolio flows. This in addition to the leakages and falling fiscal buffers made the CBN take a more aggressive position to defend the naira,” he said.
According to Rewane, the divergence between the official and parallel markets had widened to N20 or 12 per cent of the official exchange rate adding that the Nigerian economy is more exchange rate than interest rate sensitive. This, he said, means that a depreciating currency will have a direct impact on inflation and could be counter-productive.
Head, African Research at Standard Chartered Bank, Razia Khan, said in view of increased market liquidity following the AMCON bond maturity in December, as well as an increased spread between the interbank foreign exchange rate and BDC rates, the move is not surprising.
“It is a clear demonstration of the CBN’s continued commitment to foreign exchange stability, even in a more difficult environment. Should the foreign exchange rate come under further pressure, key threats might be related to quantitative tapering, concern over the transition at the CBN, and ongoing concern about oil receipts as well as Nigeria’s political cycle – then more tightening cannot be ruled out,” she said.
Currencies analyst at Ecobank Nigeria, Olakunle Ezun, said by raising the public sector deposit CRR the CBN raised concerns about rising inter-bank liquidity and huge cost of monetary operations. “While there was no change to exchange rate policy, the CRR effect will be positive for the naira given the expected reduction in liquidity,” he said.
Ezun said there was no immediate impact of the policy in interbank rate, since market liquidity is still over N1 trillion. According to him, the short end of the curve remain attractive, as concerns over naira and inflation outlook continue to influence CBN’s monetary policy regime in short term.
GDP rebasing
Chief Economist, Renaissance Capital (RenCap), Charles Robertson, has said that Federal Government’s plan to rebase the Gross Domestic Product (GDP) by next month could raise this year’s budget deficit by N400 billion to N1.9 trillion.
In an emailed report, the economist said the GDP revision may affect the 2014 budget too. “It does nothing to improve budget revenues or expenditure. It does mean, however, that a nominal federal government budget deficit of N912 billion could be raised by about N400 billion to N1.3 trillion and still remain at 1.9 per cent of GDP, using the new 2014 GDP estimate we have. This may be very tempting to politicians in pre-election mode,” he said.
Robertson said the wider budget deficit would then require additional borrowing, via either Eurobonds which Nigeria’s debt office is trying to move towards, or domestic debt. Higher supply might offset the benefit to debt holders of the improved debt ratios and a possible rating upgrade.
“We must emphasise that while per capita GDP would appear to rise from around $1,700 to $2,400, in fact the National Bureau of Statistics (NBS) is just doing a better job in measuring the output that is already happening. No one in Nigeria should suddenly find 53 per cent more naira in their pocket,” he said.
Forex market
The maximum weekly forex sales to Bureau De Change (BDC) operators were, removed by the Central Bank of Nigeria (CBN). The action, contained in circular to Authorised Dealers and BDC operators said the action was meant to shore up liquidity in the forex market. Dollar scarcity in the market had affected naira exchange rate in recent months, hence, the policy review.
The circular, signed by CBN Director, Trade and Exchange, Batari Musa, said the policy review followed the circular of September 26, last year in which a limit of $250,000 was put in place.
“All authorised dealers are hereby informed that the provisions of paragraph (1) of the circular under reference have been reviewed with immediate effect. Consequently, the limit of $250,000 as the maximum weekly forex sales to BDC is hereby removed to shore up liquidity in that segment of the foreign exchange market,” he said
Henceforth, authorised dealers are free to sell forex to BDCs subject to compliance with the provisions of extant Anti-Money Laundering/Financing Terrorism laws and regulations in the disbursement of forex. “Furthermore, all transactions between authorised dealers and BDCs as well as the latter and end-users must be supported with appropriate documentation,” he said.
Musa said authorised dealers and BDC operators are to continue to render weekly returns on their transactions to the CBN and other relevant regulatory agencies, failing which appropriate sanctions, including revocation of operating license shall be imposed.
Finance Houses
New guidelines for Finance Houses (FCs) operations said operators in the sub sector are allowed to raise funds from foreign investors or parties for recapitalisation of their entities, but such funds are subject to CBN’s approval.
The draft guideline obtained exclusively by The Nation at the weekend, said the FCs were envisioned to operate within the middle tier of the financial system, with a focus on the Micro, Small and Medium Enterprises (MSMEs) segment.
The sub-sector was to play complementary roles to banks, bridging financing gaps and meeting the financial needs of its target customers. However, Finance Companies have not demonstrated the necessary capability to thrive in this space, which has resulted in a largely under-performing sub-sector – a situation of concern to the CBN and other key industry stakeholders.
It said as part of the initiatives to establish financial stability within the financial eervices industry and the Finance Company sub-sector in particular, the CBN undertook a review of the Guidelines for Finance Companies. These Revised Guidelines are issued by the CBN in exercise of the powers conferred on it by the CBN Act of 2007 and the Banks and Other Financial Institutions Act of 2004 (BOFIA).
The Revised Guidelines are to regulate the establishment, operations and other activities of Finance companies. It said the Revised Guidelines replace the existing Guidelines for Finance Companies and should be read in conjunction with the provisions of the CBN Act, the BOFIA, as well as written directions, notices, circulars and guidelines that the CBN may issue from time to time.
Agric credit
The Federal Government plans to double agriculture’s share of banks’ credit to 10 per cent in two years as it seeks to cut food imports, Agriculture Minister Akinwunmi Adesina said.
“We made a fundamental shift that agriculture is not a developmental activity, agriculture is a business. And so it shifted the mind-set of the banks. It’s a new agriculture sector in which they can actually invest money and make money,” Adesina said in a report.
Loans to agriculture as a share of total credit rose to N320 billion ($2 billion), or five per cent, at the end of last year from less than one per cent in 2011, Adesina said.
He said the Agriculture Ministry is partnering the Nigeria Incentive-Based Risk-Sharing System for Agricultural Lending (NIRSAL), a unit of the CBN to provide credit guarantees to enable banks lend to farmers.
Nigeria, he said, is trying to reverse decades of neglect of its farming industry and push agriculture as its “new frontier for growth” because it can no longer depend on oil to drive its economy, President Goodluck Jonathan said in July.
The government’s efforts to boost food supply by 20 million metric tons from 2011 to 2015 has seen the country’s food import bill drop by more than half to $5 billion from $11 billion two years ago, Adesina said.
Bank to bank report
FBN Holdings Plc has unveiled a refreshed corporate identity for the group, including all its subsidiaries.
Designed to reflect the company’s strategic direction and position it to meet the future needs of the market, the identity will be rolled out across all the group’s operations, including First Bank of Nigeria Limited.
Speaking at the event, the Chief Executive Officer, FBN Holdings, Bello Maccido, said the business environment is getting tougher and there is need to review the brand in line with realities.
He said refreshed identity will preserve the lender’s heritage as a leading player in the financial services sector, which also plays major role in the retail market segment.
United Bank for Africa Plc (UBA) has extended $700 million (about N113 billion) in funding to different investors towards the acquisition of power assets in Nigeria’s recently privatised power sector.
The bank’s Group Managing Director and Chief Executive Officer, Phillips Oduoza, made this known this at the sidelines of this year’s World Economic Forum (WEF) in Davos, Switzerland.
“It is a growth sector we are playing very big” said Oduoza. Besides power, he said UBA is also heavily involved in Nigeria’s telecommunications sector where the bank has taken part in most of the major big ticket transactions.
‘’On agriculture, the UBA Chief Executive said the bank has continued to channel resources to the sector, given that it remains the mainstay of most economies in Africa.”
