Fixed Income, Currency Turnover Tumbles 24% in July

• FX, TBills major drivers of FIC market at 74.26%
Bamidele Famoofo

An unprecedented disruption was recorded in the activities of the Fixed Income and Currency (FIC) market in the month of July as month-on-month turnover plunged about 24 per cent.

Turnover for the period ended July 31, 2018 as reported by FMDQ OTC Securities stood at N13.09trillion compared to N17.23trillion in June, representing a 23.99 percent or N4.13trillion month-on-month (MoM) decline. Notwithstanding the sharp drop, activities in the market remained upbeat as 13.53 per cent (N1.56trillion) increase on year-on-year (YoY) basis was recorded in the review period.

Month on month, turnover largely declined across all segments of the FIC market, excluding the repurchase agreement/buy-backs market which recorded a 5.22 percent (N0.12trn) MoM increase in July.

Reacting to the situation in the market, a Lagos-based economist and former banker, Dr. Boniface Chizea, said, “If turnover drops to the extent of 23 per cent between the month of June and end of July, one month duration, the there is cause to worry.” What this translates to automatically is that effective demand has dropped substantially. Without knowing if this decline in turnover is due to reduced appetite in a particular area or whether it is due to decline in appetite in either intermediate or final products, this must only be due to sharp decline in purchasing power due to inflation or rising unemployment.

The treasury bills (T.bills) and foreign exchange (FX) segments remained the major drivers of turnover in the FIC market, jointly accounting for 74.26 per cent of total turnover in July, although there were 5.09 percentage points (ppts) decline from their levels of contribution in June.

Total FX market turnover in July was $12.61billion, a 36.31 per cent ($7.19billion) decline from the turnover recorded in June ($19.80billion). Turnover at the Investors & Exporters (I&E) FX Window in July was $3.39billion, representing a 13.74 percent ($0.54billion) MoM decline from the value recorded in June ($3.93billion).

Despite the MoM decline in turnover at the I&E FX Window, its contribution to total FX market turnover increased from 19.85 per cent in June to 26.88 per cent in July, bringing the total year to date (YTD) turnover at the I&E FX Window to $33.67billion.

Analysis of FX turnover by trade type showed a similar MoM trend to the total FX Market turnover in July, with Member-CBN trades recording the highest MoM Percentage decline of 38.11 percent ($2.14billion), while Member-Clients trades recorded the highest MoM decline in value of $4.06billion from $11.21billion in June to $7.16billion in July.

Analysis of contribution to total FX turnover by trade type indicated Member-Client and Member-CBN trades remained the major drivers of turnover. However, the contribution of Member-CBN trades declined marginally by 0.76ppts to 27.52 percent, while the contribution of Inter-Member and Member-Client trades to total FX turnover increased marginally by 0.73ppts and 0.16ppts to 15.78 per cent and 56.78 per cent respectively.

In line with the MoM trend in the FX market, analysis by product type showed that turnover in FX Spot and Derivatives declined MoM by 35.01 per cent ($4.25billion) and 41.85 percent ($2.78billion) respectively.

A review of activities in July showed that the 25th Naira-settled OTC FX Futures contract (NGUS JUL 25, 2018) with a total open contract size of $405.66million, matured and was settled on FMDQ, whilst a new 12-month open contract (NGUS JUL 24, 2019) for $1.00billion at $/N363.58 was introduced by the CBN to replace the matured contracts.

In July, the USD/NGN rate in the parallel market appreciated by $/N2.00 to close the month at $/N360.00 (from $/N362.00 as at June 29, 2018), while the Naira depreciated at the I&E FX Window, losing $/N1.08 to close the month at $/N362.40 (from $/N361.22 as at June 29, 2018), resulting in the closing USD/NGN rate at the parallel market being N2.40 lower than the USD/NGN rate at the I&E FX Window for the first time in 2018.

Similarly, the CBN Official Spot rate also depreciated in July, losing $/N0.15 to close at $/N305.90 (from $/N305.75 as at June 29, 2018 Fixed Income Market (T.bills and FGN6 bonds).

In July, the total turnover in the fixed income (FI) market was N6.16trillion, representing a 21.54per cent (N1.69trillion) MoM decline from the turnover reported in June. Turnover in the T.bills market recorded a MoM decline of 21.06 percent (N1.40trn) while turnover in the FGN Bonds market declined MoM by 24.28 percent (0.29trn.)

Total T.bills outstanding as at July 31, 2018, stood at N13.47tillion, representing a 2.13 percent (N0.29trn) MoM decline, driven by the continued redemption of T.bills in the month of July. Conversely, total FGN Bonds outstanding increased marginally by 0.86 percent (N0.07trn) MoM to close at N7.90trillion evidencing the FGN’s continued stance to refinance some of its short-term obligations with longer term instruments.

Monthly Trading Intensity in the T.bills and FGN Bonds markets declined from 0.48 and 0.15 in June, to 0.39 and 0.11 in July respectively. T.bills within the 3-6 months maturity bracket remained the most actively traded, accounting for 31.92 per cent of the total FI market turnover in July.

Weighted average yields across the short and long-term maturities on the sovereign yield curve both increased by 1.08ppts, 0.05ppts respectively, while the weighted average yield across the medium-term maturity declined by and 0.05ppts respectively. Yield spread between the 3-month T.bills and the 10-year FGN Bond increased by 193bps to close at a 3.25 percent in July.

Meanwhile, turnover recorded in the Unsecured Money Market (i.e. Repos/Buy-Backs) was N2.44trillion for July, representing a 5.22 per cent (N0.12trillion) MoM increase from the value recorded in June (N2.32trn) and a 94.62 per cent YoY increase on the turnover recorded in July 2017.

Besides the demand factor, Chizea said the sharp drop recorded in July could also be attributed to the instability arising from the killings in some states in the country as well as the forthcoming general elections. “Also, the federal budget, which helps to boost demand as allocations are released is comatose as politics seems to have trumped economics,” he added.