CBN ban of locals from OMO wrongheaded, distorts market

• Serious concerns over preference for foreign investors
• CBN still fixated with FX accretion
• Policy worrying, say fixed income traders

Financial market analysts warned over the weekend that the decision by the Central Bank of Nigeria (CBN), to ban local corporates and individuals from investing in its Open Market Operation (OMO) treasury bills trading represents a major distortion of the markets and described it as a wrongheaded move by the apex bank.

They said it continues to show a CBN with a fixated pursuit of foreign capital inflows to boost foreign reserves accretion often used as psychological ego massaging tool when announcing growth in the country’s reserves position.

This preference continues to trump proper liquidity management in the policy permutation of the CBN, a few of them told business a.m.

The CBN has made liquidity management its main objective under governor Godwin Emefiele, which has brought inflation down from above 20 percent to 11.94 percent as at September 2019.

Last week, banks across the country were given a directive from the CBN, barring individuals and local non-financial firms from buying high-yielding central bank bonds, largely meaning that only banks and foreign investors will participate at the auctions.

Also, in recent weeks, the Nigerian bond market, which was once seen by investors as a huge investment opportunity compared to its peers, has been experiencing high levels of retraction from foreign investors despite the very attractive yield.

Igho Alonge, an investment adviser, criticized the apex bank’s action, questioning how a policy could come from the apex bank allowing only foreigners to invest and access the OMO bills.

Alonge said, “The Central Bank of Nigeria [CBN] has hit again. The CBN has banned individuals and local corporates from investing in its OMO bills, so only foreigners would be able to access OMO bills, which by

design is a liquidity management tool and shouldn’t be offered to foreigners in the first place.

“Looking at the bigger picture, the federal government just shut the borders, this on its own will see inflation skyrocket, and now we are seeing the CBN banning local investors from a mechanism that will help keep inflation in check, I want to believe that things might be changing,” he said.

Omotola Abimbola, an analyst with Chapel Hill Denham Securities Ltd. stated that recently, the CBN has been very uncomfortable with the exceedingly high level of demands at the OMO and are trying to curb it, adding that the OMO’s biggest customers are local investors and this will mean that the CBN is restricting local patronage at OMO.

Abimbola said, “The Central Bank has been uncomfortable with the level of demand at the OMO auctions recently and clearly they’re trying to reduce it, but this measure won’t go that far because they still have access to the secondary market.

“OMOs, which typically have maturities of less than a year, were originally used by the central bank to control liquidity and mainly bought by local lenders. But they have been opened up to others in the past two years and have become the main instrument for foreign carry traders, with this directive, it seems the Central Bank of Nigeria is looking to garner the attention of more foreign investors,” he said.

While other analysts remain coy over the move of the

CBN and what it stands to achieve and as such, continue to await the next line of actions from the apex bank, some other analysts opine that the move may not be unrelated to the CBN’s recent efforts to promote lending to the real sector by commercial banks.

The CBN had in July 2019 sent a circular to all Deposit Money Banks (DMBs) mandating that they maintain a minimum Loan to Deposit Ratio (LDR) of 60 percent by September 2019 subject to a quarterly review.

Barely three months after the first circular, the apex bank raised the bar, mandating banks to now maintain a minimum LDR of 65 percent by December 2019. The punitive measure for non-compliance by DMBs is a levy of additional Cash Reserve Requirement (CRR) equal to 50 percent of the lending shortfall of the target LDR and some banks were debited in September 2019 for failure to meet the 60 percent minimum.

Ngozi Ezegha, fixed income trader said, “Forcing banks to lend under the current macro-economic situation, with stringent capital and cash reserve requirements will only result in banks resorting to ingenious ways to meet these requirements and this may be the reason behind CBN’s new directive.”

“While the objective of the CBN is clear in terms of improving the flow of credit to the private sector to stimulate growth, there are concerns that these unorthodox methods being deployed to achieve this aim may have many unintended negative effects. I am also not certain how CBN intends to monitor compliance,” she said.

Analysts at Lagos-based Cowry Asset Management said, “We believe the CBN is trying to drive foreign inflows by restricting individuals and local corporate, leaving only the banks and foreign investors to participate at the auction. This will have a significant impact on the secondary market, driving yields significantly lower as individuals will have no option but to invest in the secondary market.

“Our major concern, however, remains the seeming unclear direction of the CBN with regards to monetary policy. Whether this is a move aimed at protecting the Naira, checking the excesses of banks or managing its OMO issuance cost— the move would certainly engender some level of uncertainty which markets do not like,” they warned.