The Central Bank of Nigeria (CBN) has ordered lenders to stop participating in its Open Market Operations (OMO) auctions on behalf of local corporates and individuals, as the apex bank attempts demand management to reduce its OMO liabilities and return the liquidity management tool to traditional use.
In a circular released yesterday (Oct.23) with number FMD/DIR/GEN/OGC/14/009, titled ‘LETTER TO ALL BANKS’, the CBN said: “Effective today, October 23 2019, the Central Bank of Nigeria directs that individuals and local corporates are specifically excluded from investing in Open Market Operations (OMO) auctions. Therefore your participation at the auctions should be on propriety and non-proprietary basis, without these classes of investors.”
The new rule would not apply to foreign portfolio investors, because they hold a significant amount of OMO bills estimated at nearly $18billion, and a move to restrict them could impact the foreign exchange market, sources tell BusinessDay.
“The CBN is uncomfortable with the level of demand at OMO auctions recently and probably wants to reduce its ballooning OMO liabilities,” Omotola Abimbola, fixed income analyst at Lagos-based Chapel Hill Denham said.
OMO is a liquidity management tool used by the CBN to control the volume of money in circulation.
Typically a central bank injects or withdraws liquidity in its currency through the banks by buying or selling government bonds. In Nigeria, however, the OMO window has become another avenue for local investors and non-banks to benefit from attractive rates at OMO auctions.
This is because the CBN has been aggressive about liquidly management since 2016, which has seen the cost of managing OMO go up as the apex bank borrowed aggressively.
“OMO has given better yield than the debt management office’s primary auctions, and that has resulted in Investors’ preference for the CBN auctions,” said Oluwatosin Ayanfalu, an analyst at Lagos-based Zedcrest Capital. “It is an anomaly so CBN is reverting to the original purpose for OMO.”
The move is coming after the CBN had in a circular dated Oct 18, ordered banks to ensure that all demands at auctions be “fully backed by appropriate funding,” or risk sanctions after observing a high level of unfunded demand which unnecessarily results in higher cost of borrowing because of excessive demand.
Analysts say while the CBN has been rationing its bills lately and supplying little to the market, banks and dealing members in a move to access more bills might have been hiding behind corporates to bid, a suspicion that might have also informed the CBN’s new policy.
By restricting the local class of investors, demand pressure is expected to ease and rates on the instrument to decline subsequently.
“Limiting the window to banks is a step towards returning the instrument to its traditional role, but the CBN still has a step to go since foreign investors can access the window,” said Abimbola.
Despite restriction from primary OMO auctions individuals and corporates will still have access to the secondary market.
In the CBN’s OMO auction conducted on Monday, the 185-day instrument was oversubscribed by investors following more than N700 billion worth of OMO bids in the previous auction which led to increased system liquidity.
Investors’ bids were more than double as bid-to-cover ratio stood at 2.89x while 353-day had a bid to cover of 1x and 91-day stood at 1x.
Analysts at Chapel Hill Denham expects the CBN to float an OMO auction today to rollover maturing OMO bills (N349bn).
Total CBN securities are about N17trn, with about 34 percent currently held by foreign portfolio investors.
SEGUN ADAMS
