• Banks must manage reserves, interbank rates –Experts
•CBN to float N700bn NTBs auction this week
By Chinwendu Obienyi
Nigeria businesses are likely to face higher borrowing costs as banking system liquidity continues to tighten, with the de cit recently expanding to N1.7 trillion.
For context, it shows there is a shortage of available money in the banking system and the de cit has grown to N1.7 trillion, meaning banks have even less to work with.
Already, financial analysts are projecting that the crunch is expected to push interbank lending rates higher in the coming days.
This comes after rates closed on a mixed note last week as liquidity in the financial system further deteriorated beyond N1.7 trillion due to the absence of significant inflows to ease the pro- longed liquidity crunch.
Hence, this ongoing strain continue to impact market dynamics.
As a result, the Over- night Nigerian Interbank Offered Rate (NIBOR) rose marginally by 0.07 percentage points to close at 32.90 per cent, reflecting the persistent thinning of system liquidity.
Overnight NIBOR means the interest rate at which banks lend money to each other in Nigeria’s interbank market and the overnight clause means the loan is just for one day. It must be paid back the next working day.
Meanwhile, the 1-month, 3-month, and 6-month NIBOR rates de-clined as banks renegotiated funding obligations.
Although, the Nigerian Interbank Treasury Bills True Yield (NITTY) trended upwards as investors sought higher returns on their investments. Mar- ket sentiment remained strong following robust demand and high subscription levels at this week’s Nigerian Treasury Bills (NTB) auction.
According to analysts, this was accompanied by an upward movement in stop rates and expectations for the forthcoming Primary Market Auction (PMA) by the Central Bank of Nigeria (CBN) next week.
However, the secondary market for T-bills closed in bearish territory, as selling pressure across the mid- and long-term segments of the curve pushed the average market yield up by 21 basis points to 19.38 per cent.
Interbank rates have been trending upward due to the liquidity squeeze. Recently, the Open Repo (OPR) rate decreased slightly to 32.40 per cent while the Overnight (O/N) rate increased to 32.90 per cent.
These elevated rates reflect the challenges banks face in meeting their funding obligations.
Last week saw the CBN offering N800 billion worth of instruments across standard maturities but ultimately sold a total of N503.92 billion worth of the Federal Government’s money market instruments at NTB primary market auction.
Investor demand was robust, with total subscriptions reaching N902.04 billion, implying a bid-to-cover ratio of 1.79x. Stop rates rose across all maturities, with the 91-day bill increasing by 100 basis points to 18.00 per cent (vs. 17.00 per cent previously).
The 182-day and 364-day bills also saw upward adjustments of 71 basis points and 155 basis points, closing at 18.50 per cent and 19.94 per cent, respectively (vs. 17.79 per cent and 18.39 per cent previously).
Looking ahead, investor sentiment is expected to remain positive, with a gradual easing in average market yields. Additionally, a total of N1.18 trillion worth of Nigerian Treasury Bills will mature in the coming week, driving activity levels.
Meanwhile, the CBN is set to auction N700 billion worth of Nigerian Treasury Bills at the next PMA, distributed across standard maturities of 91 days, 182 days, and 364 days (N80 billion, N120 billion, and N500 billion, respectively).
Reacting to this development, economic experts said the ongoing liquidity crunch and higher interbank rates are likely to translate into increased borrowing costs for businesses.
Head, Research at FSL Securities, Victor Chiazor, explained that this could potentially limit access to credit for companies, especially small medium-size enterprises, increase the cost of financing for business operations and expansion and potentially slow down economic growth if sustained over a longer period.
He emphasized the need for careful liquidity management in this challenging environment. “Given the tight liquidity conditions, financial institutions need to optimize their reserve management to ensure they can meet their obligations without excessive reliance on expensive interbank borrowing.
Businesses may need to explore alternative funding options beyond traditional bank loans to mitigate the impact of higher borrowing costs”, he said.
For their part, analysts at Cowry Research, said, “Next week, we expect the still tight interbank liquidity to cause yields to slightly rise further in the secondary treasury bills market. Additionally, CBN is scheduled to conduct an NTB PMA next Wednesday (March 26), with N700.00 billion worth of maturing bills on offer”.