Treasury Single Account - The Likely Effects on the Nigerian Stock Exchange
Yesterday, the Federal Government of Nigeria (FGN) announced that it has ordered all MDAs (Ministries, Departments and Agencies to start operating a Treasury Single Account (TSA). How is this likely to affect the Nigerian Stock Exchange (NSE)? For the most part, this looks like a negative news in the short term.
Prior to this announcements, the MDAs had fragmented bank accounts with commercial banks in Nigeria and in other countries. This actually reduced accountability as it became almost impossible to track how much these MDAs were earning. It actually provided a loophole and a source of cheap funding for commercial banks. With this new policy in place, all the FGN agencies will now operate a single account that is domiciled with the Central Bank of Nigeria (CBN). In the strict sense, they may not operate one bank account with a single bank account, but all the bank accounts that will now be domiciled with the CBN will be linked to a single account that can be viewed by the Presidency.
The implication of this policy is that banks would have to transfer these funds to designated accounts by the CBN. Banks will no longer be able to recognize these funds as part of their asset base. In order to meet up with the obligation of returning these funds, the banks would have to sell of some of the securities they held. Nigerian banks generally hold Treasury Bills and Bonds. As they sell off these assets, prices will drop and yields will rise.
As at today yields have crossed 15%.
With such high yields available in the market, no right thinking portfolio manager would be willing to overweight allocation to equities. In the short term, at least over the next few weeks, the NSE Index is expected to take some beating.
Although the Index gained 0.01%, I will be very careful with investing in the exchange for now.
