CBN measures can’t affect bond market, say experts
he recent actions by the Central Bank of Nigeria (CBN) on forex trading would hardly have any negative effects on the country’s bond market as speculated by the JP Morgan Chase, a US leading global financial services said in its index last week.
Speaking in a separate chat with Daily Trust, some analysts said the CBN measures are mainly to protect the Naira which has come under pressure due to fall in oil prices.
The JP Morgan last week placed six FG Bonds on a negative index watch list on its Emerging Market Government Bond Index (GBI-EM), owing to alleged lack of liquidity in the local forex and bond markets, according to the financial analysts contacted.
A source at the Debt Management Office Abuja, who doesn’t want to be named, said “This Negative Watch placed by the JP Morgan on the six (6) FGN Bonds in the Index do not in any way affect the quality of our bonds. They remain a high grade investment instrument backed by the full faith and credit of the Federal Government of Nigeria.”
The source said it is widely believed that JPMorgan based its decision to place Nigerian bonds on negative watch on two circulars released in Dec 2014 by the Central Bank of Nigeria (CBN).
These circulars were the Foreign Exchange Trading Position of Banks at the close of each Business Day (TED/FEM/FPC/GEN/01/026) & the Utilization of Funds Purchased From the interbank Foreign Exchange Market (TED/FEM/FPC/ GEN/01/028).
As a result of these rules, the FX market effectively stopped trading on a two way quote basis, which led to incoherent price discovery process with the exchange rate hovering all over the place, making it very difficult for banks to fulfill large client orders.
Daily Trust learnt that the CBN measures were quickly modified on January 16th (through circular number: ED/FEM/FPC/ GEN/01/001 when it became apparent that there may be some negative consequences on the smooth operations of the Bond market. The new circular revised the Daily Foreign Currency Trading positions from Zero percent to 0.1 percent of shareholders’ funds unimpaired by losses and increased the timeline for utilization of funds to 72 hours.
The utilization deadline was moved so that rather than commencing from the date of purchase it now commences from the value date. “This effectively removes all barriers to trading Forwards, Swaps and other derivative products and we consider it a positive change,” Stanbic IBTC Bank said in a note to its customers dated January 15.
Vincent Emmanuel, an Abuja financial consultant, said the JP Morgan index can be regarded as over exaggerated, although looking at the conditions in the market the CBN was forced to embarked on such measures initially in order to save the naira.
CBN has since denied lack of liquidity in the bond market. And the modified measures introduced will go a long way to make traders carry out their transactions without hurdles; conditions which will make the JP Morgan remove Nigeria from watch list negative.