Cheaper funds for firms as interbank rate falls sharply

Nigeria’s interbank rate has declined by over 1,000 basis points in less than a month following increased naira liquidity in the financial market, paving the way for businesses to access cheaper funding.

The opening balance of commercial banks and merchant banks as of July 13, 2023 was N688.06 billion, representing a 299.76 percent increase over N172.11 billion a month ago, data from the Central Bank of Nigeria (CBN) showed.

“There is high naira liquidity in the market at the moment. And some companies are able to access cheaper funding as a result,” said Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited.

“I believe this will be temporary because of the current and expected high inflation rate in the country which will require monetary policy tightening,” he added.

According to analysts, the liquidity emanated from the Cash Reserve Ratio refund to banks by the CBN and the N786.16 billion allocated by the Federal Account Allocation Committee to the federal, states and local governments in May.

Also, the cap on interbank fund lending and borrowing was removed before the end of last month, allowing for actual liquidity conditions to control the rates, according to Marvellous Adiele, senior associate at Parthian Partners.

Adiele said that on the back of the significant increase in liquidity, the fixed income market has recorded notable buying activities across the curve with yields declining across board. Treasury bill papers have dipped to 6 percent levels while bond yields have dipped by over 60-70 basis points, especially on the longer tenor bonds, she added.

The overnight rate dropped to 1.25 percent as of Tuesday from 11.90 percent on June 22, 2023, data from the daily market report of FSDH Research showed.

The overnight rate is the interest rate that banks charge each other for overnight lending. Also the Open Repo Rate (OPR) declined by 10.64 basis points to 0.86 percent as of Tuesday from 11.50 percent on June 22, 2023, the report indicated.

OPR rate is a short-term agreement to sell securities in order to buy them back at a slightly higher price. As of July 12, the overnight rate increased by 0.08 percent to close at 1.33 percent as against the previous close of 1.25 percent on Monday, and the OPR increased by 0.07 percent to close at 0.93 percent compared to 0.86 percent on the previous day, FSDH report stated.

Parthian Partners said in its report that the treasury bills market traded with calm sentiments on Wednesday as attention tilted to the primary market auction, with few activities seen on the June bills. At the auction, the Debt Management Office offered and sold a total of N141.77 billion across the standard tenors, from a subscription of N691.86 billion.

“We witnessed a decline in stop rates across board; the 91-day, 182-day and 364-day tenors declined by 1bp, 87bps and 29bps to close at 2.86 percent, 3.5 percent and 5.94 percent respectively. We expect an active market on Thursday as market participants seek to fill the unmet demand from the auction,” analysts at Parthian Partners said.

The FSDH report noted that the Federal Government of Nigeria (FGN) bonds secondary market closed on a positive note on Wednesday, as the average bond yield across the curve cleared lower by 25 bps to close at 12.95 percent from 13.20 percent on the previous day. Average yields across the short tenor and long tenor of the curve decreased by 1 basis point and 44 bps, respectively.

However, the average yield across the medium tenor of the curve remained unchanged. The March 27, 2035 maturity bond was the best performer with a decrease in the yield of 96 bps, while the April 18, 2037 maturity bond was the worst performer with an increase in the yield of 5 bps.

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The DMO has released its FGN Bonds offer circular for July 2023 Primary Market Auction, indicating plans to offer FGN bonds worth N360 billion through the re-opening of 10-year FGN APR 2029 (N90 billion), 10-year FGN JUN 2033 (N90 billion), 15-year FGN JUN 2038 (N90 billion), and 30-year FGN JUN 2053 (N90 billion) tenors. The bond auction is scheduled to be held on July 17, with settlement on July 19, 2023.

The CBN, in its last Monetary Policy Committee meeting on May 24, 2023, raised its benchmark interest rate, known as the monetary policy rate, by 50 basis points to 18.5 percent, the seventh straight time in one year, to tame rising inflation.

The Bank of America said last month that aggressive interest rate hikes were unlikely, while predicting that Nigeria’s inflation would rise to 30 percent in the first quarter of 2023.

Nigeria’s annual inflation rate accelerated to 22.41 per cent in May from 22.22 per cent in the previous month, according to the National Bureau of Statistics.