It is no longer news that the Central Bank of Nigeria (CBN) has restricted individuals and Nigeria’s corporates from participating in both primary and secondary markets of its Open Market Operation (OMO) window, as it continues in its quest to boost credit flow to the real sector of the Nigerian economy.
Based on the new directive which came amid several guidelines issued recently by the apex bank, the OMO market would only be accessible to deposit money banks (DMBs) and foreign investors going forward.
The move is part of efforts by the CBN to curb investment in high-yielding risk-free government securities which the apex bank says is hampering credit to the real sector and inhibiting economic growth.
The impact of the policy has been immediate. Secondary market trading in one of the most vibrant and liquid asset classes in Nigeria’s capital market slowed to a trickle on Friday, October 25, as Treasury bills worth N43 billion were traded. That’s down 90 percent from an average daily trade of N424 billion in September, according to data by trading platform, FMDQ.
In the whole of September, Treasury bills worth a total of N8.49 trillion were traded in 20 trading days, according to FMDQ data.
Traders say activity has slumped due to the lack of natural counterparties in the market following the CBN’s directive limiting trading activity in OMO bills to foreign investors and banks.
That’s because the individual and local corporates who usually serve as counterparties are no longer able to access the primary or secondary market.
The CBN’s OMO restriction has some implications for investors and the economy.
One implication is lower borrowing costs for corporates and the Federal Government, as yields are likely to moderate in the near term.
Discount rates on benchmark T-bills declined by 4bps to 12.21 percent Monday.
Lower yields mean both corporates and the Federal Government can borrow (through debt securities) from local investors in the T-bills and bond markets as well as through commercial papers at cheaper rates.
A second implication is that the clear delineation of OMO from other money market instruments also allows the CBN to attract FPIs with higher rates (for currency management) at a lower cost as the OMO sales are likely to reduce with the restriction placed on domestic non-bank investors.
Another possible implication of the restriction of key corporates, such as PFAs and insurance companies, from participation in OMO is that it is likely to free up excess investable cash for allocation to assets beyond fixed income alternatives.
Analysts at Lagos-based investment bank Cardinal Stone Partners see legroom for some flows into fundamentally strong equity names as treasury yields moderate.
“Our view is also buttressed by the high earnings and dividend yields in the equity market space,” the Cardinal Stone team, which includes Michael Nwakalor and Jerry Nnebue, noted.
For context, while some select names (especially within the tier-1 banking space) boast earnings yield in excess of 30 percent, the yield on the one-year T-bills is at 13.37 percent.
In addition to this, tier-1 banks are averaging dividend yields of 10.9 percent.
High dividend yields are likely to attract institutional investors such as PFAs, as the potential for capital gains in fundamentally sound stocks further enhances the appeal of the equity market.
Also, the development could lead to an increase in dollar demand pressures as locals may increasingly source forex to take advantage of the likely higher rates at the primary and secondary OMO markets by disguising as foreign investors, according to Cardinal Stone.
Furthermore, the exit of local players who account for more than one-quarter of outstanding bills would reduce the liquidity in the OMO market which could be a source of worry for foreign portfolio investors.
OMO is a liquidity management tool used by the CBN to control the volume of money in circulation.
A central bank injects or withdraws liquidity in its currency through the banks by buying or selling bills.
The tenor of OMO bills, which are traditionally designed to mature within 14 to 66 days, has been extended in recent years up to a year maturity period with interests coming at extra costs to the CBN.
Checks by BusinessDay show the CBN has issued more OMO bills since 2017 than it issued in the preceding decade.
The size of T-bills in circulation (OMO bills inclusive) has risen more than four times to N17.78 trillion in August 2019 from N3.7 trillion in 2014.
The frequent OMO auctions by the CBN have led to a record high of its OMO book and the industry regulator is spending over N2 trillion on interest payments for OMO issuance. This compares with an interest expense of N1.3 trillion in 2017 and N459.3 billion in 2016.
“The recent measure is an attempt to shrink the ballooning balance sheet, or at least slow the pace of expansion, without spooking foreign portfolio investors and roiling the FX market,” analysts at Chapel Hill Denham said in a note to clients.
According to data obtained from CBN, outstanding OMO bills stood at N13.8 trillion as at August 2019.
Foreign portfolio investors held N6.1 trillion, while banks held about N3.9 trillion, leaving an estimated N3.7 trillion of OMO bills held by domestic corporates and individuals which cannot be rolled over the next one year following the restrictive policy.
LOLADE AKINMURELE, ENDURANCE OKAFOR & OLUWASEGUN OLAKOYENIKAN
