- CBN’s tightening policy triggers investors’ appetite
Nigeria’s base lending rate otherwise referred to as Monetary Policy Rate currently stands at 26.75 percent while inflation as of July 2024 is 33.4 percent. While both economic indices are considered a disincentive to investment in the capital market with the All Share Index and return on investment declining, investors in the money market are relishing the moment as their appetite for investment has been boosted, seeing turnover in the Fixed Income and Currencies market rising by about 8 percent to N30.63 trillion in July. BAMIDELE FAMOOFO reports.
Investment in the Fixed Income and Currencies market on the platform of the FMDQ Exchange increased by N2.21 trillion month-on-month, rising to N30.63 trillion in July. On a year-on-year basis, that is between August last year and August 2024, investment in the market increased by N10.71 trillion, reflecting a favourable climate for investors.
On the contrary, the equities market during the review period recorded a declining performance as investors lost about N1 trillion of their money in July.
Market capitalization which measures the financial depth of the market dropped from N56.6 trillion at the close of June to N55.61 trillion as of the last trading day in July. Investors have continued to count their losses in the market as the market cap further lost about N1.62 trillion as of August 22, 2024 as the market cap dropped to N54.98 trillion from N56.6 trillion as of June end.
Preceding the downturn that kicked off in the second half of the year to date, the NGX performed better than several of its peers in H1 2024, recovering from its second position in Q4 2023.
PricewaterhouseCoopers in a report published in July noted that, “The Nigerian equities market (NGX) ranked 1st in the African stock market with a 35.17% increase in H1 2024 relative to Q4 2023. The NGX capitalisation increased by 38.33% in H1 2024 (to N56.602 trillion) compared to Q4 2023 (N40.918 trillion), driven by new listings, significant acquisitions, and an increase in share prices.”
On Thursday, the Nigerian equities market extended its bearish trajectory, with the All-Share Index slipping by 12 basis points to close at 95,718.05 points.
“The major drivers of turnover in the FIC market in the review period are foreign exchange and money market instruments as activities in both segments of the market accounted for 77.54 percent of the total secondary market turnover in July 2024”
Forex and money market drive investment in FMDQ
Meanwhile, the major drivers of turnover in the FIC market in the review period are foreign exchange and money market instruments as activities in both segments of the market accounted for 77.54 percent of the total secondary market turnover in July 2024.
Foreign Exchange (FX) and Money Market (MM) transactions dominated secondary market activity, jointly accounting for 77.54% of the total secondary market turnover in July 2024.
Total spot market turnover for all products traded in the secondary market in July 2024 was N27.66 trillion, representing an MoM increase of 6.64 percent (N1.72trn) from June 2024 figures.
According to FMDQ, “The MoM increase in total spot market turnover was driven by the increase in turnover across the FX and MM turnover by 14.72% (N1.47trn) and 13.32% (N1.09trn), respectively, offsetting the 10.93% (N0.84trn) decline in FI turnover. The increase in MM turnover was driven by the MoM increase in Repos/Buy-backs despite the decrease in Unsecured Placement/Takings transactions. Meanwhile, the decline in FI turnover was solely driven by the decrease in OMO Bills, offsetting the increase in other FI product categories, whilst CBN Special Bills remained inactive.”
The financial markets monthly report for July showed that Spot FX market turnover was $7.39 billion (N11.48trn) in July 2024, representing a 10.02 percent ($0.67bn) MoM increase from the turnover recorded in June 2024 ($6.72bn).
Notably, in the FX Market, the Naira depreciated against the US Dollar, with the spot exchange rate ($/N) increasing by 4.88 percent ($/N72.58) to close at an average of $/N1, 560.32 in July 2024 from $/N 1,487.74 recorded in June 2024. Further, exchange rate volatility increased in July 2024 as the Naira traded within an exchange rate range of $/N1, 500.32 – $/N1, 621.12 compared to $/N1, 473.66 – $/N1, 510.10 recorded in June 2024.
FX derivatives market
Total turnover in the FX derivatives segment in July 2024 was $1.91 billion (N2.97trn), representing a MoM increase of 13.81 percent ($0.23bn) from the June 2024 figures ($1.68bn). The MoM increase in the FX derivatives turnover was driven by the 16.47 percent ($0.26bn) increase in FX Swaps offsetting the 33.15 percent ($0.03bn) decline in FX Forwards transactions, whilst the FX Futures market remained inactive during the review period.
Cleared Naira-settled non-deliverable forwards
In the Cleared Naira-Settled (USD/NGN) Non-Deliverable Forwards market, the near month contract (NGUS JUL 31, 2024) expired and open positions with a total notional value (NV) of $0.04bn were settled.
However, no new month (60M) contract was introduced in the Cleared Naira-Settled Non-Deliverable Forwards market in the review period, continuing the trend since August 2023.
Consequently, the TTM of the farthest open contract is forty-nine (49) months (i.e., NGUS AUG 30, 2028 contract) As a result, the cumulative NV of open Cleared Naira-Settled Non-Deliverable Forwards contracts, continued its downward trend as it decreased to $0.13bn as at July 31, 2024, representing a MoM and YoY decrease of 23.53 percent ($0.04bn) and 97.92% ($6.13bn), respectively.
The average modeled forward rates for the long-term (i.e., 37M – 60M) Cleared USD/NGN Non-Deliverable Forwards contracts in July 2024 were higher than the rates for June 2024 across all tenors, mainly as a result of the MoM depreciation of the Nigerian Naira against the US Dollar in the spot market. Likewise, the indicative rates for short-term (i.e., ≤12M) Non-Deliverable FX Forwards contracts in July 2024 were higher than indicative rates for June 2024 across all tenors.
Money Market
Total turnover in the MM segment increased MoM by 13.32 percent (N1.09trn) to N9.31trn in July 2024. The MoM increase was driven by the 13.49 percent (N1.10trn) increase in Repos/Buy-backs, offsetting the 2.85 percent (N0.01trn) decrease in Unsecured Placement/Takings transactions. The average O/N rate and OPR rate (secured lending rate) increased MoM by 3.10ppts and 3.14ppts respectively, to close at an average of 30.59 percent and 29.99 percent in July 2024.
Fixed income
Fixed income market turnover in July 2024 was N6.88 trillion, representing a MoM decrease of 10.93 percent (N0.84trn) from the turnover recorded in June 2024 (N7.72trn). The MoM decrease in turnover was driven by the 40.61 percent (N1.85trn) decrease in OMO Bills turnover, offsetting the 52.85 percent (N0.90trn), 24.55 percent (N0.01trn) and 6.93 percent (N0.10trn) increase in T .bills, Other Bonds and FGN Bonds transactions, respectively.
The trading intensity (TI) for T.bills and FGN Bonds increased MoM by 0.07bps and 0.01bps to 0.21 and to 0.06, respectively. T.bills with term-to-maturity (TTM) between >6M – 12M and FGN Bonds with TTM between >5Y – 10Y, were the most traded sovereign FI securities, accounting for 56.59 percent (N2.32trn) and 20.24 percent (N0.83trn) of the secondary market turnover for sovereign FI securities in the spot market, respectively.
The sovereign yield curve experienced a 1.77ppts MoM increase in yield spread1 to -2.53ppts in July 2024, as the yield curve remained inverted. Real (inflation-adjusted) yields remained negative across the yield curve, despite the decrease in inflation in July 2024.
The DMO sold T.bills valued at N277.96 billion across its auctions in July 2024, representing a 55.02 percent (N339.95bn) MoM decrease on the value of T-bills sold across its auctions in June 2024 (N617.92bn). Similarly, the DMO sold FGN Bonds worth N225.71 billion in July 2024.
This represented a 24.00 percent (N71.29bn) MoM decrease on the amount sold in June 2024 (N297.01bn). Sovereign securities offered by the DMO in its T.bills auctions achieved full subscriptions. In contrast, only 75.24 percent of FGN Bonds were sold, indicating a 24.76 percent under subscription. In July 2024, the CBN did not conduct any public OMO Bills auction in the primary market, compared to N1, 773.16bn worth of OMO Bills sold across its auctions in June 2024.
There were no new listings and redemptions of Non-Sovereign Bonds listed on the FMDQ Exchange in July 2024, as such the value of Non-Sovereign Bonds outstanding remained flat at N2, 192.02 billion. The total value of CPs quoted on the FMDQ Exchange in July 2024 was N17.79 billion, representing a MoM decrease of 80.78 percent (N74.75bn) from the value of CPs quoted in June 2024 (N92.54bn).
In July 2024, quoted CPs were majorly issued by institutions from the Financial Services (3) sector, jointly followed by the Manufacturing (1), Agriculture (1), Health (1), and Oil & Gas (1) sectors. As a result, the outstanding value for CPs decreased MoM by 8.71 percent (N85.24bn) to N893.28 billion in July 2024 offsetting the impact of the N103.03 billion worth of CPs that matured during the review period.
Analysts’ comments
Financial experts at Cardinal Stone Research noted that fixed-income yields are high but probably unsustainable as they noted that the government appears to be ahead of its 2024 borrowing plans.
“The exchange rate looks relatively stable vs Q1’24; and inflation looks set to dip on the impact of the high base effect starting from H2’24. A combination of these factors clearly favours a longer duration fixed income strategy and a careful watch on re-investment risks linked with currently attractive short-dated FI instruments.
“In a sense, fixed income investors may be mindful not to eat the future now by overly focusing on the allure of currently elevated effective yields on T-bills and commercial papers at the expense of locking down north of 21.0% annual interest rate on government bonds for a more extended period. On this basis, we recommend an increasing tilt towards long duration and a calculated gradual de-emphasizing of short duration.”
Analysts at Cordros Research anticipates that the system liquidity in the fixed income market will likely remain under pressure as the inflows from OMO maturities (NGN16.00 billion) will be insufficient to support the financial system. Thus, we expect an expansion in the OVN rate.
According to the experts, there is a possible liquidity deficit in the coming weeks.
“We expect yields in the Treasury bills secondary market to trend higher, as participants in the market look to fulfill their funding needs,” they said.
They envisaged that the trading pattern in the Treasury bonds secondary market will remain quiet as investors’ appetite for instruments remains low.
This expectation is due to the expected impacts of the (1) subdued liquidity in the system and (2) unattractive yields, especially on mid- to long-dated bonds.
Nonetheless, the experts maintain medium-term expectation of yields remaining elevated consequent to (1) anticipated monetary policy administration globally and domestically and (2) sustained imbalance in the demand and supply dynamics.
Meanwhile, the Federal Government’s fiscal deficit rose month-on-month by 0.1 per cent to N824.79bn in April from N823.91bn in March, the Central Bank of Nigeria disclosed in its April 2024 Monthly Economic Report.
A fiscal deficit is a shortfall in a government’s revenue compared with its expenditure.
The CBN report released on Thursday showed that the deficit was 7.92 per cent higher than the budgeted N764.19bn for the period.
The bank also said consumer credit outstanding declined significantly by 53.83 per cent to N3.8trn at the end of April 2024 from the level in the preceding month.
According to CBN, the expansion in deficit was due to a 0.55 per cent MoM decline in retained revenue to N419.91bn in April from N422.23bn in March.
It said the decline in revenue was a result of lower receipts from exchange gains.
“We expect yields in the Treasury bills secondary market to trend higher, as participants in the market look to fulfill their funding needs”
The report read, “The fiscal operations of the Federal Government of Nigeria, in April resulted in an expansion in the fiscal deficit.
“Provisional data showed that primary and overall deficits rose to N260.98bn and N824.79bn, respectively, from N249.43bn and N823.91bn in the preceding month. The expanded deficit reflected the sharper decline in retained revenue.
“FGN retained revenue also dipped in the review period due to lower receipts from exchange gains.
“Provisional data indicated that, at N419.9bn, FGN retained revenue fell relative to the level in March 2024 and the monthly benchmark by 0.55 and 74.29 per cent, respectively.”
Similarly, the apex bank noted that government expenditure for April declined MoM by 0.16 percent to N1.246trn from N1.244 trn in March due to reduced capital spending.
“The provisional data showed that aggregate expenditure of the FGN declined due to reduced capital spending.
“At N1, 244.71 billion, provisional data indicated that expenditure was 0.12 per cent below the level in the preceding month, and 48.10 per cent short of the projected spending of N2, 398.12 billion.
“The decline was attributed, largely, to a reduction in capital outlay in the review period. Further analysis showed that recurrent and capital accounted for 84.5 and 6.30 per cent, respectively, while transfer payments constituted 9.2 per cent.”
Meanwhile, customer credit outstanding reduced significantly by 53.83 per cent to N3.8trn due to low loan appetite by customers fuelled by the high interest rate.
The decline was on account of the 60.79 per cent fall in personal loans to N2.95trn. However, retail loans increased by 18.81 per cent to N856.77bn.
“A decomposition indicated that personal loans accounted for 77.48 per cent of the total consumer credit, while retail loans accounted for the balance,” The CBN said.
