The Central Bank of Nigeria (CBN) recently announced the exclusion of non-bank locals (individuals and corporates) from participation in its Open Market Operations (OMO) at both the primary and secondary market. The exclusion implies that only Deposit Money Banks (DMBs) and Foreign Portfolio Investors (FPIs) can participate in OMOs, while everyone else, including non-bank financial institutions, will have to shift focus to T-bills and other investment options. We believe the CBN’s policy is largely in line with its drive to divert liquidity away from risk-free instruments to the real sector. Prior to the current move, the apex bank instructed banks to prevent customers with outstanding loans and recipients of intervention funds from investing in T-Bills or OMOs. Restricted from participation in OMO transactions, retail and institutional actors will have to seek alternative destinations for their funds, creating extra liquidity in other assets. Below are the likely implications of the restrictions on a fixed income, equity markets and the macro economy.
The most suitable alternative for OMO bills will be an investment in government T-Bills as they are similar in tenor and have been largely interchangeable in recent years. We, therefore, expect to see increased demand in the bills market and at subsequent NTB auctions through the year, given that c.27.7% of total OMO maturities (c.N1.2 trillion in November and December alone) due to non-bank locals cannot be rolled over in coming months. This, together with NTB maturities and other autonomous inflows, is expected to drive yields lower at the secondary market (both the bond and money market). On average, yields declined by 15bps across the bills curve and 4ps in the bond market yesterday, the first trading session since the release of the circular.
Figure 1: Breakdown of the outstanding balance in OMO bills
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