Thursday, July 29, 2021

    Investors Lend More Money to Government amid Rising Interest Rate in May 2021…

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    Naija247news is an investigative news platform that tracks news on Nigerian Economy, Business, Politics, Financial and Africa and Global Economy.

    In the just concluded week, Central Bank of Nigeria (CBN) released its depository
    corporations survey which showed a 2.38%
    month-on-month (m-o-m) rise in Broad Money
    Supply (M3 money) to N40.01 trillion in May 2021.

    This resulted from a 1.11% increase in Net Domestic Assets (NDA) to N32.66 trillion and a 8.47% rise in Net Foreign Assets (NFA) to N7.36 trillion.

    On domestic asset creation, the increase in NDA was chiefly driven by a 1.46 m-o-m increase in Net Domestic Credit (NDC) to N44.71 trillion.

    Further breakdown of the NDC showed a 2.87% m-o-m increase in Credit to the Government to N12.51 trillion and a 0.93% rise in Credit to the Private sector to N32.19 trillion in the review period – faster growth in credit to government was partly due to the jump in stop rate as investors got relatively attractive returns on investment; albeit, it was negative real returns as inflation stood well above stop rate.

    On the liabilities side, the 2.38% m-o- m increase in M3 Money was partly driven by the 69.06% rise in treasury bills to N1.16 trillion, which was accompanied by a 1.19% m-o-m increase in M2 Money to N38.85 trillion.

    The increase in M2 was driven by a 0.78% rise in Quasi Money (near maturing short term financial instruments) to N16.28 trillion, as Narrow Money (M1) rose by 1.75% to N16.28 trillion (of which Demand Deposits increased by 2.05% to N13.97 trillion and currency outside banks which rose marginally by 0.02% to N2.30 trillion).

    Reserve Money (Base Money) declined m-o-m by 1.05% to N13.06 trillion as Bank reserves decreased m-o-m by 1.28% to N10.27 trillion and currency in circulation rose by 0.20% to N2.79 trillion.

    In another development, as part of efforts to deepen the Nigerian capital market by providing alternative products optionality for investors, the Nigerian Exchange Limited (NGX or The Exchange) recently received approval for seven derivatives contracts from the Securities and Exchange Commission (SEC).

    The approved contracts include Access Bank Plc Stock Futures, Dangote Cement Plc Stock Futures, Guaranty Trust Bank Plc Stock Futures, MTN Nigeria Communications Plc Stock Futures, Zenith Bank Plc Stock Futures, NGX 30 Index Futures, and NGX Pension Index Futures.

    According to NGX, the launch of the derivatives market aligns with its commitment to build a market that thrives on innovation and responds to the needs of stakeholders in accessing and using capital.

    Hence, The Exchange drifts closer to its goal of deepening Nigeria’s position in the global financial markets through Exchange Traded Derivatives (ETDs), as well as enhancing liquidity and mitigating against price, duration, and other financial risks that may arise from sophisticated financial transactional activities.

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset or group of assets. Its common underlying instruments usually include bonds, commodities, currencies, interest rates, and stocks.

    Notably, the benefits of derivatives include: using it as a tool for Portfolio diversification; short-selling, which allows investors benefits from downward price movements; and it is a capital-efficient way to gain exposure to underlying assets.

    The marginal rise in credit to private sector, despite the expansionary stance of the monetary authority, was amid the rise in stop rates at primary market auctions; which unfortunately affected banks’ liquidity and ability to lend to the real sector as their cash were trapped in depreciated fixed income assets.

    This should be ameliorated with the recent reversal in stop rates which could reduce potential losses faced by the banks, and thus egg increased real sector lending.

    Meanwhile, the introduction of derivatives products on NGX is a watershed moment for Nigeria and its extended application to and adoption by the real sector should stimulate greater economic growth.

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