June 18, 2021/CSL Research
Based on financial data from the Central Bank of Nigeria (CBN), the total system liquidity in the economy remains in deficit, averaging N64.1bn over the last month.
The tightened system liquidity can closely be linked to;
- the persistent CRR debits by the CBN, excess of which are re-issued as special bills and
- a significant decline in the volume of OMO maturities.
Specifically, OMO maturities in Q2 2021 was 1.48trn, 60% lower than the first quarter. As such, this has increased activities at the standing lending facility (SLF) window, with transaction volume settling at 4.0x the normal level and this explains the recently elevated money market rates (1-month average: OVN – 15.5% and OBB – 15.1%).
Furthermore, the hawkish stance of the CBN to curb excess liquidity in the economy is reflected in the broad money supply (M3), which is up marginally by 0.4% ytd. While we believe this is aimed at curbing inflationary pressures, we maintain our view that inflation remains supply-driven and largely influenced by structural challenges, thus, undermining the impact of the money supply. Although OMO maturities in Q3 (N1.7trn) and Q4 (N3.5trn) are likely to support the system liquidity in the near term, the CBN will likely intensify CRR debits to avoid inflation resurgence.
Market Implication
Bearish sentiments are likely to persist in the fixed income market, as the tight liquidity will continue to reduce buying interest. Beyond this, the elevated FGN fiscal deficit continues to support the prognosis for higher yield. Between January and May of 2021, we estimate that the government has raised a total of N1.08trn through local bond issuances. This implies 50% of the government’s planned borrowing of N2.14trillion from the domestic market (This excludes the domestic borrowings for the recently approved supplementary budget).
