Cost of funds to remain low level as excess liquidity persists

Cost of funds is expected to remain in the lower single digit level while the Central Bank of Nigeria (CBN) is expected to sustain liquidity mop through sale of OMO (Open Market Operation) treasury bills.

This was as a result of excess liquidity in the interbank money market, courtesy of inflow of about N1.7 trillion.

Last week, the market recorded N627.2 billion inflow from matured OMO bills. The inflow, which cancelled the impact of N299.9 billion outflow through sales of OMO bills caused market liquidity to close at N778.5 billion on Friday, up from N482 billion at the beginning of the week.

As a result, cost of funds remained stable below five percent throughout the week, though average short term interbank interest rate rose marginally by 54 basis points week-on-week.

Analysts expect cost of funds to remain at this level this week, due to inflow of N1.7 trillion expected this week, namely, N950 billion from maturing OMO bills, N111.18 billion from maturing Nigeria Treasury Bills (NTBs), and statutory allocation from the N677.3 trillion to be released by the Federal Accounts Allocation Committee (FAAN) this week.

According to analysts at Lagos based investment firm, Cordros Capital, “We expect the Overnight rate to remain depressed in the coming week, supported by a significant boost to system liquidity from OMO inflows worth NGN927.75 billion on Thursday.”

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Similarly, analysts at Afrinvest Limited stated: “In the coming week, we expect inflows of N927.8 billion from OMO maturities and we believe the CBN to conduct OMO auction. We believed increased liquidity resulting from the huge inflows from OMO maturities will pressure yields in the secondary treasury bills market.”

The inflow of N1.7 trillion is also expected to increase demand for FGN bonds this week and hence further appreciation in bond prices.

In the same vein, analysts at Cowry Asset Management Limited, said: “In the new week, we expect OTC bond prices to appreciate (and yields to moderate) against the backdrop of expected boost in financial system liquidity.”

Making a similar projection, analysts at Cordros Capital stated: “We expect sustained demand next week across the bond yield curve, as market players seek to re-invest excess liquidity from incoming maturities.”

The naira appreciated in the parallel market and in the Investors and Exporters (I&E) window last week even as the CBN sustained its weekly dollar injection of $210 in the interbank foreign exchange market.

The naira appreciated by 50 kobo in the I&E window as the indicative exchange rate dropped to N364.26 per dollar last week from N364.76 per dollar the previous week.

Similarly the naira appreciated by 20 kobo in the parallel market as the exchange rate of the market dropped to N358 per dollar last week from N358.2 per dollar the previous week.

Analysts at Cordros Capital however warned that efforts of the CBN to defend the naira cannot be sustained beyond the first half of the year (H1’20).

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