Analysts insist on naira adjustment before passing budget

Although arguments in favour of devaluation remain peak in foreign exchange (FX) analysis across the industry, official statements from fiscal and monetary authorities suggest an adjustment will not be made in the short term.

However, against the fiscal plan to borrow $3.5 billion from multi-lateral sources to finance the 2016 budget deficit, an adjustment will likely be made before the 2016 budget is passed for more flexibility in FX management, analysts at Afrinvest Securities Limited said.

Activities in the FX market last week were largely in sync with what transpired in the previous week. The naira/dollar exchange rate was stable at all segments of the market, with the CBN official rate and interbank rate flat at N197/$1 and N199.10/$1, respectively. The stability however remains contrived – attributable to administrative measures of the CBN at the official and interbank windows – as FX demand/supply mismatch remains evident.

Despite the N113.7 billion mopped up by the CBN from the financial system via an issuance of OMO bills on Monday – before banks submitted bids on Tuesday ahead of a CBN FX Intervention Auction – demand was still high as financial system liquidity fell by over N500 billion after banks submitted bids for the FX auction.

Against the scarcity of FX and the restrictions in the official and interbank segments, the spread between the interbank and the BDC/parallel segments of the FX markets has stayed high (N105.90 – N106.00) as the currency traded within a band of N305/$1 and N306/$1 at the BDC and parallel markets last week.

In the T-bills market, some sell pressures were observed in short- term maturities on Monday due to the OMO bills auctioned by the CBN, pushing average rate across tenors marginally higher to 6.1 percent.

However, due to tighter liquidity in the financial system, rates spiked up to an average of 6.5 percent by Wednesday. There was a T-bills auction of N242.5 billion on Wednesday, more than N192.2 billion that matured on Thursday. The T-bills auctioned were the 91-days, 182-days and 364-days tenors and were issued at stop rates of 5 percent, 8 percent and 9.5 percent, respectively.

Consequently, rates stayed high until Friday when refunds were made for unfulfilled bids at the currency auction, with average rates across tenors closing at 6.3 percent, up 36bps W-o-W.

“We expect that T-bills rates to gyrate to liquidity dynamics next week,” Ayodeji Ebo, head, investment research, and his team of analysts at Afrinvest, said in a report.

 

HOPE MOSES-ASHIKE