The Nigerian interbank market is in turmoil after the Central Bank increased the cash reserve requirement for public sector funds to 50% from 12% . That is banks are now required to hold 50% of public sector funds in liquid assets (cash, treasury bills etc.). This has clearly destabilized the money markets as many banks are now scampering around to bring their reserve ratios into compliance.
The 7 days Nigeria Interbank Offer Rate (NIBOR) was at 12.6% at the beginning of September but has now risen to a massive 42% and has averaged 36% in the last 3 days. Something is definitely brewing.
The Naira has also come under pressure as a result of the gradual exit of a large number of foreign portfolio speculators from our bond and capital markets. Foreign speculators have been exiting emerging and frontier markets in the last few months in anticipation of a decrease in Quantitative Easing by the US Fed. The Fed announced today that it would not immediately begin the tapering due to continued weakness in some key areas of the US economy and the potential showdown between congress and the executive branch on the debt ceiling. This decision sent stocks soaring in the US. How will that affect our market?
I do not expect any significant move in the stock market in the next week or two in view of the huge pressure on interbank rates, which is a strong signal of a very tight money market. However, I expect the interbank rates to begin to ease in the next few days, otherwise, the Central Bank will be forced to intervene to calm the markets.
In the meantime, I advice investors to stock up on cash and watch out for bargains in the stock market. There will definitely be opportunities to strike at attractive valuations in the weeks to come as the panic reaches a crescendo.