CBN trying to lure FPIs to rollover maturing holdings at the expense of foreign reserves
OCTOBER SAW THE NIGE RIAN foreign reserve drop by $2.2 billion, the largest monthly slump since 2015.
This has raised concerns but experts say the CBN is not bordered about the falling foreign reserve instead are looking for foreign investors to rollover maturing holdings.
The CBN has iterated its preference of exchange rate stability over external reserves growth. Hence, it is expected that the currency to remain relatively stable in 2018 as confirmed by Godwin Emefiele, CBN governor in the last IMF annual meeting in Bali.
The price paid for a stable naira is the falling reserves and higher bond yields needed to prop up the currency and attract portfolio investors. Since peaking in mid-May, foreign-exchange reserves have dropped by $5.9 billion, or 12 percent, to $42 billion.
Yields on the government’s one-year naira bills have soared more than 450 basis points in that time to 16.6 percent, the highest lev- el the large, this The foreign Bank year. and truth analysts reserves Group remains Ltd. at are Standard that still estimates equate to that almost the 13 reserves months of imports, which is much higher than the IMF’s recommendation of at least three months’ worth of cover. The central bank might get nervous if they dip below $40 billion, especially with investors getting jittery about February’s elections. Standard Group analysts said, “Falling reserves is the price we have to pay to keep the currency stable.
The effective yield on the 1-year T-bill is now about 17 percent. With elections just around the corner, we might just need as much as 20 percent to convince fixed-income investors to roll over.”
This was also echoed by analysts at United Capital, who said: “despite the FX reserves down for the fourth month in a row, we think CBN will try to lure the FPIs to rollover maturing holdings.”
At the OMO auction last week, the central bank intended to mop up N1 trillion from the system, but could only raise N517.62 billion from the market.
The 182D and 364D bills printed at 13.5% and 14.4% stop rates respectively, effectively yielding 14.5% and 17% respectively, leaving money market rate relatively unchanged as inflow from OMO maturities subdued the outflows from OMO sales.