Concerns are brewing in the minds of investors on the likely implications awaiting Africa’s biggest economy if foreign portfolio investors decide not to roll over their stock of maturing open market operations (OMO) bills sold by the Central Bank of Nigeria (CBN).
“For us, our concern is the risk involved when we do not see a reinvestment of flows in the OMO market by foreign portfolios given that yields have come up high from where they were previously,” said Razia Khan, Africa chief economist at Standard Chartered Bank.
“The near term effect of this would be pressure on the external reserves that might happen in the wake of falling oil prices,” Khan said in a media parley at the bank’s headquarters in Lagos.
Sources told BusinessDay the CBN may look to enter into swap arrangements in which dollars are exchanged for OMO bills if a large chunk of foreign investors choose not to roll over their positions.
Foreign portfolio investors and commercial banks are the sole players in the CBN’s short-term bills, after the apex bank in October last year barred local institutional investors from accessing the market.
While the move has helped in moving liquidity to various asset classes particularly the equity market, analysts fear of a possible downside risk of a carry trade when central banks in the advanced economies make a U-turn from their dovish stance.
As of August, the share of foreign portfolio investors in the CBN’s OMO market stood at N6.2 trillion ($17.1 billion), about 44.3 percent of the total N14 trillion worth of bills, according to latest CBN data. Average one year yields of the short-term bills stood at 15 percent, CBN data show.
The CBN’s stock of reserve has fallen by over $8 billion to $37 billion, as it continues to wage off any external risk from affecting the naira which has been pegged at N305 against the dollar.
Brent crude which stands as the international benchmark for oil prices traded as low as $55 per barrel, as concern mounts over how much impact the deadly coronavirus would have on the global economy.
Analysts say an oil price at $55 doesn’t sit well for Africa’s largest economy which depends on the commodity to get over 85 percent of its revenue and which has its benchmark oil budget pegged at $63 per barrel.
“There is always that risk on FX stability in the domestic economy when there is a tightening of external financing conditions or a severe tightening of the risk curve in the global environment, especially given the fact that foreign portfolio investors hold a larger chunk of your securities,” Omotola Abimbola, a macro and fixed income analyst at Chapel Hill Denham, told BusinessDay.
Since the decision to bar local institutional investors from its OMO market, there has been a rush into FG Treasury bills, making yields in short-term Federal Government securities average about 6 percent based on FMDQ data.
Inflation rose to 11.98 percent, its highest jump since April 2018, with the CBN fearing the excess liquidity might further push up commodity prices.
In its last monetary policy meeting and the first for the year, the CBN while holding other key parameters constant raised commercial banks’ Credit Reserve Ratio (CRR) from 22.5 percent to 27.5 percent, in what it said would help in cushioning inflationary pressure that might arise from the excess liquidity.
Although the CBN has allayed fears of a possible devaluation, saying it sees no “currency devaluation in sight except otherwise crude oil falls below $45 per barrel and the foreign reserve goes below the $30 billion mark”, analysts say a devaluation may likely occur in the near time in the wake of falling crude prices.
The CBN could devalue the naira between 5-10 percent in 2020, analysts at EFG Hermes said in January.
Global rating agency Fitch in a December note where it downgraded Nigeria’s outlook to negative said that the CBN’s incentives to non-resident investments in its short-term Open Market Operations (OMO) bill have increased the country’s susceptibility to portfolio inflows.
According to Fitch, the revision reflects the increasing vulnerability from the current macro policy setting that is raising risks of disruptive macroeconomic adjustment in the medium term amid continued real appreciation of the naira.
