Banks prefer CBN’s SDF window over OMO auctions
Traders say they expect an agile session today as market players look to fill unmet bids at the primary market auction. Investors await Wednesday’s Treasury-bills auction results where the DMO offered a sum of 515 billion naira. Meanwhile the CBN’s Standing Deposit Facility rose to 360 billion naira. In a trend that surfaced late last year, banks are now participating more at the CBN’s SDF window compared to the OMO auctions, driven by the attractive rates at the window. Bankole Odusanya, the Chief Dealer at Polaris Bank, joins CNBC Africa to discuss sentiments that will shape the fixed income and FX markets this year.
Thu, 09 Jan 2025 14:27:05 GMT
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AI Generated Summary
- Increased participation of banks in CBN's SDF window over OMO auctions driven by attractive rates and liquidity preferences
- Expectations for inflation control, borrowing activities, and monetary policy adjustments in Q1
- Anticipated stability in exchange rates, funding strategies for the 2025 budget, and growth prospects in corporate bond and state bond markets
In a recent CNBC Africa interview, Bankole Odusanya, the Chief Dealer at Polaris Bank, shared key insights into the sentiments shaping the fixed income and FX markets in Nigeria. Traders are expecting an agile session driven by unmet bids at the primary market auction and await the results of the Treasury bills auction where the Debt Management Office offered 515 billion naira. A notable trend that emerged towards the end of last year is the increased participation of banks in the Central Bank of Nigeria's Standing Deposit Facility (SDF) window over Open Market Operations (OMO) auctions.
Odusanya highlighted that the current system liquidity in Nigeria has increased due to factors such as devaluation, improved money supply, marginal GDP growth, and attractive rates at the SDF window. Banks are opting for SDF loans over OMO instruments due to the higher yields available on loans and short-term placements with other banks. The liquidity preference for SDF loans is also driven by the liquidity constraints of non-bank financial institutions, which are not allowed to participate in OMO auctions.
Looking ahead to the first quarter of the year, Odusanya discussed expectations regarding DMO activities, mopping up operations by the CBN, and projected rates for bonds and Treasury bills. With Nigeria's proposed budget for 2025 set at 47 trillion naira, a moderate increase in borrowing is anticipated alongside a focus on inflation control in the first quarter. The possibility of adjustments to the monetary policy rate post-Q1 was also mentioned.
Discussing inflation, Odusanya predicted a marginal decline influenced by base year effects rather than a significant drop in prices. He emphasized the impact of factors like increased money supply, rising costs due to subsidy removals, and higher demands from both public and private sectors on pricing dynamics. While a gradual decrease in inflation could lead to a potential reduction in interest rates post-Q1, Odusanya cautioned against expecting a quick decline.
On the exchange rate front, Odusanya expressed optimism about stability at around 1.5 in the official market for the year. He credited the e-firms initiative by the CBN for enhancing transparency and stability, allowing businesses to plan with more certainty. Anticipated convergence between the official and parallel markets was also discussed, with expectations of reduced exchange rate differentials.
Odusanya also shared insights on global market dynamics, including the US Federal Reserve's plan to gradually reduce rates throughout the year. He assessed potential impacts of Trump administration policies on inflation and oil prices, highlighting the need for careful monitoring given their implications on Nigeria's revenue projections and budget performance.
Looking at funding strategies for the audacious 2025 budget, Odusanya discussed a mix of revenue improvements, borrowing measures through bonds and bills, and potential Eurobond issuances in the latter part of the year. He underscored the importance of managing interest rates to balance inflation concerns and fiscal support while avoiding crowding out the private sector.
In the corporate bonds market, Odusanya anticipated greater issuance of commercial papers by corporates seeking shorter-term and cost-effective funding alternatives. He also expected state governments to tap into the bond market for infrastructure projects, alongside continued regulatory efforts by SEC to enhance market integrity.
Addressing the persistent challenge of food inflation, Odusanya acknowledged the need for sustained efforts to address structural issues and food security concerns. He highlighted improvements in security and infrastructure as key drivers for easing food price pressures and projected a marginal GDP growth trajectory in light of global oil price dynamics.
As the week progresses, activities are expected to center around NTB markets, with interbank rates likely to trend upwards as federal allocations wane. The looming bond auctions for the first quarter will further shape market dynamics, with a focus on balancing liquidity demands and investment opportunities. Overall, the year ahead presents a mix of challenges and opportunities for Nigeria's financial markets, requiring a nuanced approach to navigate evolving economic landscapes.