Ensure there’s incentive to hold naira assets, expert tells CBN

The Central Bank of Nigeria (CBN), has been advised to ensure that a broadly attractive rate regime is maintained in the money market to attract portfolio inflows and ensure there is an incentive to hold naira denominated assets domestically.
A financial analyst and Emerging Markets Strategist at Standard Bank Plc, Samir Gadio gave this advice in a flash note made available to Daily Sun on Friday. His observation stems from the decision by the Monetary Policy Committee to raise to 50 per cent the Cash Reserve Ratio (CRR) on public sector funds.
The apex bank took the decision so as to address systemic inefficiencies in liquidity management. This measure was also aimed at reducing the banks’ ability to tap cheap government deposits in order to purchase higher yielding T-bills and Open Market Operation (OMOs).
But in Gadio’s words: “We’ll continue to recommend the 6- and 12-m carry trade, which certainly offers value. The CBN needs to maintain a broadly attractive rate regime to attract portfolio inflows and ensure there is an incentive to hold NGN assets domestically. This in itself makes unlikely any cut in the MPR (currently at 12 per cent) during the remainder of Governor Lamido Sanusi’s term or indeed that the CBN will allow a disorderly move down in market rates.
According to the economist, despite an initial rebound in T-bill rates, the CRR on public sector deposits has had a gentle inherent impact on the Nigerian yield curve in the absence of new OMOs.
“That said, we suspect another increase in the CRR on public sector funds will probably take place in coming months to squeeze fiscal liquidity further.
“Despite the sustained single-digit inflation environment (8.7 per cent y/y in July), Nigerian bonds have failed to rally, which reflects the increasingly uncertain global risk environment and limited foreign bid, but also the lack of domestic appetite for sub-13 per cent levels. We will continue to play a 13-13.8 per cent yield range in the short term,” he stated.
Gadio further observed that while the exchange rate has remained under pressure (N161.9 on 22 Aug), the naira has actually held up well relative to mainstream Emerging Market currencies. This he believes reflects the policy-determined nature of the dollar and naira.
“Given the country’s robust FX reserves, the elevated oil price and further likely squeeze in naira liquidity, we do not expect a qualitative shift up in the exchange rate,” he stated.