FSDH forecasts over N2 trillion liquidity flow this month

The financial system may experience increased flow of money in circulation to N2.33 trillion this month, courtesy of maturing government securities and distributions from Federal Accounts and Allocations Committee.

Out of the expected amount, an estimated total outflow of approximately N644 billion from the various sources, will lead to a net inflow of about N1.68 trillion in February, a research by FSDH Merchant Bank Limited has stated.

The development will necessitate the continued issuance of Open Market Operations by the apex bank and other debt management authorities to mop-up the liquidity in the system and at higher rates, to contain its effect on inflation.

The nation’s general elections will kick off in the next five days, a period characterised by high-level monetisation of voters’ interest by politicians, which creates additional money supply in the system.

Consequently, the apex bank will have much to contend with this month, as inflation has remained on the upward trend, while it has resisted attempts on rate hike.

The Head of Research at FSDH Merchant Bank, Ayodele Akinwunmi, while presenting February Economic and Market Outlook, in Lagos, said CBN continued its tight monetary policy stance throughout January 2019 through regular mop up of excess liquidity, inline with the bank’s expectations.

While noting that the goal was to curb inflation and maintain stability in the foreign exchange market, the approach, he said, “led to an increase in the yields on Nigerian Treasury Bills (NTBs) in January 2019,” compared with NTBs in December 2018.

According to him, “We believe the yields on the NTBs may increase further, particularly on the long end from the current levels. NTB yields are likely to be influenced largely by the level of liquidity in the banking system, the short-term borrowing needs of the government, the need to maintain price stability and election considerations, Traders in the Treasury Bill market may adopt a strategy that will allow them to shift from one tenor to another in order to take advantage of movements in yields.”

Meanwhile, the research has pointed out that observed downward movement in the external reserves in early February may be a pointer to demand pressure at the foreign exchange market, which may lead to depreciation in the value of the Naira in the short-term.

But he added: “The current position of external reserves continues to provide short-term stability for the value of the Naira. However, the medium-term stability in the foreign exchange market will depend on the country’s foreign exchange receipts from both crude oil and non-oil products.

“The 30-Day moving average external reserves increased by 0.13 per cent, from $43.12 billion at the end of December to $43.17 billion at the end of January 2019.”

He however noted that there was a significant increase in capital importation through Foreign Portfolio Investors (FPI) in the Investors’ and Exporters’ Foreign Exchange Window in January 2019.

Specifically, FPI contribution in January stood at $1.32 billion in January, accounting for 51.34 per cent of total inflows, the highest contribution since April 2018, according to data obtained on January 4, 2019, from the FMDQ OTC Securities Exchange.

He added that the development may have been a reflection of foreign investors taking advantage of higher yields on fixed income securities.