It has been a few weeks since the Central Bank of Nigeria released a series of circulars that turned the securities market on its head. If you recall the central bank announced restrictions on who could or could not purchase its CBN bills in both the primary and secondary markets. Banks and foreign portfolio funds were allowed while non-bank corporates and individuals were banned. Notably, pension funds who had previously been a big buyer of CBN Bills were booted out of the market. No real explanation was given for the sudden change in policy besides the generic “we are doing this to stimulate lending to the real sector” line. My words, not theirs.
Of course, the CBN has the right to decide who can or cannot buy its own instruments but it does not have the right to determine who can or cannot buy national treasury bills and federal government bond. In summary, the market for risk-free short-term securities were effectively split into two with one set of securities sold to the CBN favoured buyers and the other a free for all. I predicted in my earlier column from a while ago that this would result in two different prices for essentially the same risk-free securities. Indeed, the interest rates on national treasury bills, the security that everyone can buy, has collapsed. The interest rates on similar CBN bills have remained stubbornly high. But you already knew this.
What is new is the continuing signal of a flood of liquidity looking for parking spots. Since the CBN announced its change in policy the demand for its CBN bills has dried up with the CBN not able to sell all it wanted at almost all of its auctions. On the other hand, the demand for treasury bills has been immense even at the low rates. Treasury bill auctions have been over-subscribed at levels not seen for a very long time. What this means is people have cash to buy treasury bills but cannot because the debt management office is not willing to divert from its debt strategy. People would like to buy CBN bills but the CBN is not budging.
There was some hope that people would turn to the Nigerian Stock Exchange and jump into the equities market. Despite a very short lived and small rally the NSE has not been the safe haven. It seems like buyers are not too keen given the harsh realities in the Nigerian economy and the lack of confidence in many companies on the board. Even despite their alleged “undervaluation”. No one really wants to lose money after all.
Another option would have been for these buyers to take advantage of banks and just park the money there. Typically, if all else fails then a fixed deposit account should provide some modest return and still be relatively safe. Rumours are however rife that banks do not really want that money. Fixed deposit rates have allegedly fallen so low that it essentially identical to saying, “do not bring your money here”. This is probably due to the minimum loan to deposit ratio policy with banks set to be penalized at the end of December if they do not hit the 65 percent target. And the punishment increases with deposits.
What this all means is there looks to be a build-up of liquidity with no obvious place for it to go. If you add the context that inflation is currently looking like it will hit 12 percent early next year then all the liquidity is a problem. Where will it go? There is one asset that excess liquidity tends to chase when times are tough, and people don’t know what to buy. In deo speramus. But does the CBN really want that? I guess we will have to wait and see.
In unrelated news, has anyone heard from the economic advisory council? Should we declare them missing and put out an APB alert? Just asking for a friend.
NONSO OBIKILI
Dr. Nonso Obikili is chief economist at BusinessDay.
