Liquidity inflows halve as CBN tightening, lower government repayments keep money market under pressure

Liquidity inflows halve as CBN tightening, lower government repayments keep money market under pressure

Liquidity inflows into Nigeria’s financial system are expected to decline by more than half this week as the absence of Treasury bills (T-bills) maturities and Federation Account Allocation Committee (FAAC) disbursements compounds the impact of the Central Bank of Nigeria’s (CBN) liquidity tightening measures, according to the Financial Markets Dealers Association (FMDA).

The FMDA said estimated inflows into the financial system will fall to N2.562 trillion this week from N5.395 trillion in the previous week, representing a 52.5 percent decline.

The expected reduction follows a weakening in banking system liquidity last week, with average system liquidity declining by 18.41 percent to N3.78 trillion from N4.63 trillion. According to the FMDA, the decline largely reflected the impact of the CBN’s Cash Reserve Ratio (CRR) debits, a private Open Market Operation (OMO) auction and the Federal Government bond auction through which the Debt Management Office (DMO) allotted N929.32 billion.

The sharp drop in expected inflows is primarily due to the absence of N1.51 trillion in Treasury bills maturities and N1.50 trillion in FAAC allocations received in the previous week. There are also no corporate bond maturities scheduled this week, compared with N30 billion that matured last week.

Despite the overall decline, OMO maturities remain the largest source of liquidity this week at N2.186 trillion, marginally higher than N2.18 trillion in the previous week and accounting for about 85 percent of projected inflows.

Other expected inflows include N282.26 billion in Federal Government bond coupon payments, up from N154.04 billion last week, N84.87 billion in commercial paper maturities, compared with N8.06 billion previously, and N9.03 billion in corporate bond coupon payments, down from N13.22 billion.

The liquidity outlook comes as the CBN is scheduled to conduct a N700 billion Treasury bills auction this week, comprising N100 billion in 91-day bills, N100 billion in 182-day bills and N500 billion in 364-day bills. The auction is expected to absorb part of the liquidity returning to the market through OMO maturities.

Meanwhile, the DMO’s Federal Government bond auction recorded strong investor demand during the week, with total subscriptions reaching approximately N1.74 trillion against N1.20 trillion offered. The DMO allotted about N929.32 billion across three reopened instruments, with the 16.2499 percent FGN April 2037 reopening attracting the strongest investor interest.

According to the FMDA, the successful auction, together with the DMO’s revised third-quarter issuance calendar signalling lower planned bond supply for the remainder of the quarter, reinforced bullish sentiment in the secondary market and contributed to lower bond yields.

Reflecting the improved sentiment, average FGN bond yields declined by 37 basis points to 17.16 percent, while turnover in the secondary bond market surged by 149.51 percent to N1.98 trillion from N794.58 billion, driven by increased trading activity following the primary market auction. Treasury bills turnover, however, fell by 9.87 percent to N1.51 trillion from N1.67 trillion in the previous week.

On the external front, Nigeria’s foreign exchange reserves surpassed the $52 billion mark for the first time since January 2009, rising to $52.03 billion as sustained foreign exchange inflows continued to strengthen the country’s external position.

The FMDA also noted that renewed geopolitical tensions in the Middle East kept crude oil prices elevated, with average Brent crude prices rising 10.92 percent during the week to $94.35 per barrel.

Globally, sovereign bond yields moved broadly higher across the United States, United Kingdom, Japan, South Africa and Kenya as investors continued to expect major central banks to maintain a cautious monetary policy stance amid resilient economic activity and persistent inflation risks. In contrast, Nigeria’s 10-year sovereign yield eased marginally during the week.

The FMDA said the combination of lower autonomous liquidity inflows and continued CBN liquidity management suggests money market conditions are likely to remain tight in the near term, even as sizeable OMO maturities inject fresh funds into the financial system.