• Sunday, July 14, 2024
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CBN’s tight monetary stance to sustain fixed income securities

Money supply declined by 0.56% in August – CBN

The outlook for fixed income market may be bright as analysts in the WSTC Financial Services expect yields to remain attractive in 2015.

Our position is informed by our expectation of aggressive government borrowing (on account of shrinking revenue) and maintenance of tight monetary stance by the CBN, according to them.

“We believe that the tight monetary stance of the CBN aimed at attracting foreign capital in the face of higher country risk premium (a fall out of weak macro fundamental and heightened political uncertainty) and market reaction to the normalisation of rates in the US will sustain high yields in fixed income securities,” the analysts said in a report.

Yield on the 10-year sovereign bond stood at 13.10 percent at the commencement of 2014, and surged by 217bps to close the year at 15.27 percent, as foreign investors repatriated capital and exited Nigerian assets amid weak macro-economic outlook and burgeoning political risks.

The analysts believe that the demand pressure in the FX market will be sustained by investors’ concern about sliding oil prices, low fiscal buffers and political uncertainties in the interim period after the general elections. “Also, we believe that the firming US economy and expectations of higher interest rates in the US still present capital reversal risks. On the basis of these, and given the need to forestall further haemorrhaging of foreign reserves, we expect a further adjustment of the midpoint of the value of the naira by the CBN after the general elections.

Read also: Mixed sentiment trials equities, fixed income markets

“We reckon that this will both engender reserve accretion and also boost government earnings from crude oil in naira terms,” WSTC report stated.

After multiple policies by the CBN, which altogether proved ineffective in curtailing the downward pressure on the naira and external reserves, the CBN resorted to devaluing the domestic currency by 8.4 percent and also increased the trading band around the naira from 3 percent to 5 percent. The naira depreciated by 7.9 percent and 15.4 percent at the official and inter-bank segments to close the year at N167.5/$ and N186.05/$, respectively.

The report looked at other regulations by the CBN that affected activities in the banking industry in 2014, such as exclusion of regulatory risk reserve and Other Comprehensive Income (OCI) reserve from the computation of Capital Adequacy Ratio (CAR).

In September, there was re-introduction of ATM charge of N65 from the fourth withdrawal in a month on Remote-on-Us transactions.

There was also full adoption of Basel II for CAR computations. Cap of 30 percent on dividend payout of banks with non-performing loan of above 5 percent and banks with above average composite risk rating.