Analysts expect the Central Bank of Nigeria to stabilize declining treasury yields during the second half (H2) of the year in a bid to prevent continued capital flight and restrict inflationary pressure.
This may be achieved by stabilizing the open market operation (OMO) stop rates which began declining in July last year.
ARM Securities analysts say that they do not envisage any further downtrend in OMO stop rates as the CBN will try to maintain current monetary and exchange rate stability than undertaking risk that may lead to possible negative outcomes.
Abimbola Omotola, fixed income and currency research specialist, Ecobank, asserted that “Central Bank will continue to use OMO policy instrument to keep system liquidity tight to prevent any major exchange rate fluctuation because Nigeria has some structural liquidity issues based on flat capital inflows that come in every month which could cause a bit of imbalance in the foreign exchange market if not mopped up by the CBN.”
“Since around May when the capital flight began, we have been seeing a steepening of the yield curve due to political risk that Nigeria is facing as election approaches and also the broad based weak sentiment for emerging and frontier market assets; with portfolio managers trying to reduce their duration position therefore CBN will try to maintain OMO stop rates,” he also added.
Nigeria’s capital markets have seen high NGN liquidity in the banking system in recent weeks, driven by lower inflation rate, the redemption of T-Bills (N26.6bn of 364-day T-Bills redeemed on 21 June 2018) by the Debt Management Office (DMO), maturing OMO Bills amid relatively less aggressive mop-up and the statutory inflow from the Federation Account Allocation Committee (FAAC).
Analysts estimated system liquidity at N180bn last week and expect it will likely rise further as about N28bn matures in OMO Bills this week. These explain the downward shift in the T-Bills yield curve in recent weeks with average yield on FMDQ-quoted T-Bills falling by 106bps to 11.83 percent.
Dolapo Ashiru, a Lagos based investment analyst told BusinessDay via phone that he expects the CBN to use the open market mechanism to stabilize inflation rate if possible bring it down further during the second half of the year. OMO is an important mechanism in stabilizing rates in the economy.
Ashiru explained that investors who sought to sell off their investments would have done so since the first half of the year so the stabilization of OMO rate will affect more inflation rates than preventing capital flight.
He also added “that there is possibility of CBN achieving the single digit OMO rates, as the lower the rate the better for the economy even as the government seeks debt financing of capital projects.”
DAVID IBIDAPO & EMEKA UCHEAGA
