Nigeria’s monetary authorities have gone far and beyond to address the country’s inflation and foreign exchange problems and, thankfully, positive results have started to show. The Monetary Policy Rate (MPR) has been pushed up a whole 875 basis points since the start of 2024 along with many complementing measures that have been instituted to support its efficacy. The Electronic Foreign Exchange Matching System (EFEMS) has gone a long way in addressing currency concerns by revealing the demand deficit for legitimate transactions. Although many segments of the market fear that EFEMS impact may not be felt much in the unofficial markets, we are of the view that with sustained EFEMS transparency, the improved rates will be felt in the unofficial markets.
The Nigerian Foreign Exchange Market closed the week at $/₦1,540 with a Volume Weighted Average Rate of $/₦1,533.2747 while the unofficial markets were reported to have traded at $/₦1,650 on Friday. OPR AND O/N rates closed the week at 32.54% and 32.92% respectively as interbank liquidity averaged ₦62 billion throughout the week.
At the beginning of the week, the CBN set the pace for the market by offering ₦300 billion each for a November and a December 2025 OMO bill. A little more than ₦489 billion of a 351-day paper maturing 25th November 2025 was issued at 23.95% discount, while a total in excess of ₦1 trillion was issued of a paper maturing 9th December 2025 at a discount of 23.98%. Going by the fundamental interbank system illiquidity, it is widely believed that a significant chunk of sales were geared towards Foreign Portfolio Investors, (FPIs). Both bond and T-bill markets traded with some bearish sentiment, although auctioned papers traded sub-auction levels within the week.
The OMO auction last week was indicative of CBN’s strong determination to crush inflation and exchange rate challenges. The NTB auction was a confirmation of fiscal alignment with monetary policy objectives. From all indications, the DMO is prepared to borrow at whatever cost the market dictates at the moment. It is this recent trend that has led to a bearish sentiment on bonds into the last auction for the year.
TENOR | AUCTION DATE | OFFER (₦’ B) | BIDS (₦’ B) | RANGE OF BIDS (%) | STOP RATES (%) | PREVIOUS STOP RATES (%) | TOTAL SALE (₦’ B) |
351-DAY | 09-12-2024 | 300.00 | 489.37 | 23.7200-23.9500 | 23.9500 | NIL | 489.37 |
365-DAY | 09-12-2024 | 300.00 | 1,070.58 | 23.7000-23.9800 | 23.9800 | 23.9800 | 1,070.58 |
The OMO auction conducted on Monday was oversubscribed despite the liquidity deficit in the interbank system. The 351-day paper maturing 25th November 2025 was 1.63x oversubscribed while the 365-day paper maturing 9th December 2025 was issued at a bid-offer ratio of 1:3.57. Given the liquidity constraints in the banking system, there is a consensus view across the industry that most of the demand at this auction was from FPIs. As a market analyst put it, ‘the local appetite was just too weak for us to see such volumes from the banks.’ It is very likely that the OMO was specifically conducted to create additional outlets from FX inflows.
AUCTION DATE | 11-12-2024 | 11-12-2024 | 11-12-2024 |
ALLOTMENT DATE | 12-12-2024 | 12-12-2024 | 12-12-2024 |
MATURITY DATE | 13-03-2025 | 12-06-2025 | 11-12-2025 |
TENOR | 91-DAY | 182-DAY | 364-DAY |
OFFER (₦) | 10,841,303,000 | 8,360,125,000 | 256,511,159,000 |
SUBSCRIPTION (₦) | 8,804,041,000 | 10,613,263,000 | 888,433,638,000 |
ALLOTMENT (₦) | 8,804,041,000 | 7,033,263,000 | 512,003,775,000 |
STOP RATES (%) | 18.0000 | 18.5000 | 22.8000 |
PREVIOUS STOP RATES (%) | 18.0000 | 18.5000 | 22.9300 |
The 364-day bill was the focal point of the NTB auction as usual. The bill was 3.46x oversubscribed and only 58% of the bids were allotted. The data is reflective of DMO’s capacity to issue more than offered, but with caution.
In the views of a few speculators, there is no doubt about the fact that EFEMS has exhibited the power of transparency. The fact that upon inception, most market speculators scrambled to exit FX holdings is a categorical sign that a proportion of the demand may be speculative and ingenuine. Prior to now, there had been a lot of hoarding across the FX space, but somehow with high interest rates that compensate for inflation, an efficient and transparent mechanism poised to match real demand with real supply is working well to establish market equilibrium.
On the flip side, there is a cross-section of pessimists who feel the downtrend in exchange rates is not sustainable because nothing has changed structurally. They argue that the appreciation of the Naira will be short-lived, and at best, limited to the official window. It makes logical sense to adduce, however, that with a sustained decline in the exchange rates at the official window, it is only a matter of time before the supply trickles into the unofficial window. The Naira pressure issue might after all be not more than a confidence issue. Nigeria’s boosted external reserve position ($34.19 billion at the end of June to $40.53 billion as of 12th December 2024) should at least go some length to restore confidence.
Although the markets closed on a bearish tone ahead of today’s bond auction, we are not optimistic that yields will inch higher than the last auction and our projection is based largely on year-end sentiment and the liquidity injections expected before the end of the year. We suspect that some portfolio managers may go ahead of liquidity to bid with aggression at the December bond auction. Furthermore, it is tenable that fiscal and monetary alignment makes sense at the short end of the curve (where there is FPI interest at the moment), but quite frankly, issuances at further elevated yields may be unjustified without corresponding FX inflows. The DMO is expected to be cautious with its signal at this auction in view of its borrowing plans for 2025.
Despite the overall consensus by many global analysts who expect the US Federal Reserve to cut interest rates at its meeting this week based on the tone at its September meeting, we are not so hopeful about a cut this week because inflation has both moved in a manner that would necessitate some serious caution with cutting further. A pause would be ideal and we are particularly astonished that most markets seem to have priced in a cut. We foresee some bubble correction in the days ahead.
