How Will The CBN’s OMO Restrictions Impact Markets?

Recently, the Central Bank of Nigeria (CBN) in a bid to cut borrowing cost and spur real sector investment barred non-banking financial institutions and public (save local banks and foreign investors) from participating in the primary and secondary OMO market.

Notably, OMO bills are discretionary liquidity and FX management instrument of the CBN, different from FGN’s T-Bills which are for managing budgeted recurrent spending.
In our view, with the size of OMO maturity in the books of the non-banking Corporates, i.e. 23.5 percent of the OMO Bills outstanding as of Aug-19, investors are compelled to look for alternative assets (majorly FGN instruments, Real Estate, Commodities, and Equities), or demand for more FX, in a bid to reinvest an estimated N2.5 trillion maturing OMO bills, from now till Dec-19.
Going forward, we expect a lower yield environment. While the supply of FGN instrument is unlikely to change, the huge OMO maturities will drive up demand for FGN instruments. Thus, stop rates at primary market auctions will fall.
Meanwhile, this should encourage corporate issuers who can now issue/rollover at cheaper rates. Also, fixed-term deposit rates could be lower, since banks can arm-twist their big depositors who would probably be more desperate for yields in the absence of the OMO option.
Finally, OMO rate may stay elevated, as the CBN attempt to keep FX stable via sales to FPIs, however, the market for OMO bills will be less liquid.