There may not be any major policy changes on the prevailing value of the naira at the Monetary Policy Committee (MPC) meeting, which holds between today and tomorrow, according to analysts in securities and investment segment of the financial services sector.
The MPC will be sitting for its fifth session this year to review developments in the global and domestic economy, together with the financial market since its last meeting in July 2015.
It is expected that deliberation at the meeting will centre on the slowing domestic growth, persistent exchange rate uncertainty, increasing risk perception in the local market in the light of the JP Morgan’s planned phase out of Nigeria from the EM Index, financial system illiquidity and global economic fragility, Ayodeji Ebo, head of investment research, and his teal of analysts at Afrinvest Securities Limited stated in a report.
Meanwhile, the naira has within the foreign exchange market continues to witness volatility in the parallel market. Demand management policies by the apex bank have redirected demand for the greenback to the parallel market to a great extent. The intervention rate remains N197/$ at the Central Bank of Nigeria (CBN), while the interbank market rate steadied at N199.10/$; on the other hand the parallel market rate trades at a spread of more than N20 settling at N224/$1.
Thus, JP Morgan’s decision to gradually phase out Nigerian bond instruments from its GBI-EM Index was necessitated, which has increased concerns on the absence of a fiscal economic direction and heightened expectations that ratings agencies may downgrade Nigeria’s sovereign ratings.
“Nevertheless, we believe the planned phase out by JP Morgan has very little impact on liquidity of Nigeria’s bond market which is majorly dominated by domestic institutional investors. In addition, the concerns that an increase in interest rate by the US Fed may spark further capital outflows from emerging and frontier markets may have eased given FOMC’s decision yesterday to keep the interest rate unchanged,” the analysts said.
The money market was awash with liquidity at the start of last week, following increased inflow, as liquidity opening balance opened at N376.8 billion relative to N184.8 billion in the previous session. Open Buy Back (OBB) and Overnight rate (O/N) thus opened the week at single digit but fell 67bps to 6.3 percent (OBB) and 58bps to 6.9 percent (O/N) at the close of trade on Monday.
On Tuesday, however, there was a massive spike in money market rates, as OBB and O/N surged to 49.2 percent and 50.9 percent as DMBs scrambled for liquidity to meet up with the deadline for full implementation of the TSA, which was due on September 15, 2015. On Wednesday, rates moderated to 15.2 percent for the OBB and 15.6 percent for the O/N as DMBs resorted to N130.3 billion Standing Lending Facility, a fallout from the TSA implementation in the previous day.
Liquidity level on Thursday opened at N251.8 billion as money market rates further declined to 15 percent and 15.2 percent for the OBB and the O/N, respectively, following T-bills maturities worth N76.6 billion injected into the system.
On Friday, rates fell slightly to 14.5 percent (OBB) and 15 percent (O/N) despite the Bond Auction debiting due for Friday. Average OBB and O/N rate grew 12.5 percent apiece to 20 percent and 20.7 percent W-o-W, respectively.
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