Worried by inconsistency usually associated with government policies in Nigeria, the Association of Securities Dealing Houses of Nigeria’s (ASHON’s) Chairman, Chief Oyinyechukwu Ezeagu, has urged the federal government to sustain the current policy on Open Market Operations (OMO) for enhanced attractive investment in the capital market.
At the weekend, the All-share Index (ASI), a measure of corporate gains increased by 37.55 absolute points on The Nigerian Stock Exchange, representing a growth of 0.13 percent to close at 29,628.84 points. Also, the Market Capitalization, value of listed securities was up by N19.34 billion, a growth of 0.13 percent to hit 15.26 trillion. Generally, investors have been smiling to their banks as the market has largely been on bullish run since the beginning of the month.
The apex bank recently announced the exclusion of non-bank locals (individuals and corporate) from participation in OMO at both the primary and secondary markets, implying that only Deposit Money Banks (DMBs) and Foreign Portfolio Investors can participate in this juicy financial instruments.
The new policy which crashed interest rate on Treasury Bill and trimmed yields on bond has prompted investors and fund managers to shift focus from the money market, staged a comeback to the capital with massive demand for shares in an atmosphere of Santa Claus rally.
Commenting on the development, Chief Ezeagu explained that the new policy on OMO had been very beneficial to the stock market. He noted that the fall in interest rate created opportunities for higher Return On Equity (ROE) and the investors are taking advantage of the inverse relationship between the money market and capital market.
Ezeagu, however expressed concerns on sustainability of OMO policy going by uncertainties that usually characterize government policies in Nigeria. He argued that the government might decide to reverse OMO policy if banks mount pressure that it is hurting their profit margin or the CBN perceives a need to top up the nation’s external reserve. According to him, it is too early to celebrate that the current rally because of sustainability.
“Our concern is always policy uncertainty and consistency in Nigeria. This has been a major drag to the growth and development of the economy and by implication, the capital market. The new policy on OMO is making investment in the market more attractive but the question is sustainability. We operate in an unpredictable environment where there can be policy somersault at the least expected time.”, Ezeagu said.
Corroborating Ezeagu, market watchers expressed fears that devaluation of the Naira was still on the front burner in view of the current rising inflation rate in Nigeria. The Central Bank‘s Governor, Mr Godwin Emefiele had last year openly denied plans to devalue the Naira but tactically maintained that this could be an option if the crude oil drops between $50 and $45 per barrel. It is currently $58.58 as at this morning. The technocrat also mildly posited that Naira devaluation might be the last option if the external reserve shrinks between $30 billion and $25. billion respectively. It is $38,684 billion as at last month.
Last week, the apex bank’s Monetary Policy Committee (MPC) increased Cash Reserve Ratio (CRR) by 500 basis points from 22.5 percent to 27.5 percent, apparently to hedge against upsurge in inflation rate which is at 11.98 percent as at December last year. The upward movement of CRR is to mop up excess liquidity in the system. However, Monetary Policy Rate (MPR) was retained at 13.5 percent, Liquidity Rate, 30 percent and Asymmetric Window at +200 and -500 basis points.
The OMO policy did not come from the blues. It is part of CBN’s financial engineering tactics to ensure that Deposit Money Banks channel credit to the real sector, to reduce crowding-out of the private sector in the area of credit.
“ Banks should lend money to the real sector to enhance economic growth and development. Banks are currently awashed with liquidity and this should be channeled to the real sector.” Ezeagu said.
With a real GDP growth at 2.10, 2.12 and 2.38 percent in Q1, Q2 and Q3 in 2019 while the population growth is at 2.6 percent, Nigeria’s economy is struggling to find its bearing. The sluggish economic growth is further compounded by its debt burden, infrastructure deficit, acute security challenges with concomitant effects on lives and properties as well as food production. Yet, the economy dictates the tune for the capital market.