Nigeria’s Monetary Policy Committe High Stakes, Tough Choices …

LAGOS, Nigeria, Capital Markets in Africa — The Nigerian Monetary Policy Committee (MPC) will be sitting for its 6th and last session for the year from 23rd and 24th of November 2015. The meeting is coming against the backdrop of concerns surrounding FX rate amid calls for further devaluation of the local unit, slow GDP growth, unrelenting inflationary pressure, robust liquidity levels in the financial system as well as the increasing expectation for a FED rate hike in December 2015.

The National Bureau of Statistics (NBS) recently released the GDP figures for Q3:2015. GDP was reported to have expanded 2.8% Y-o-Y (to N18.0tn) in Q3:2015, 0.5% higher than 2.4% recorded in Q2:2015 but 3.4% lower than 6.2% recorded in the prior year. The marginal improvement observed in Q3:2015 was attributed mainly to the increased oil production in the quarter, which resulted in a rebound in oil sector growth. Non-Oil GDP growth has however continued to soften, with Y-o-Y growth in Q3:2015 declining to 3.1% due to the weak performance of the manufacturing sector which has now contracted for three consecutive quarters.

In a related development, Inflation rate eased marginally to 9.3% in October after creeping from 7.0% to 9.4% in between January and September. The moderation was bolstered by a slower pace of growth in the food sub-index and the core index which eased to 10.1% and 8.7% from 10.2% and 8.9% respectively. In the money market, the Open Buy Back and Overnight Rate reached year lows of 0.5% and 1.0% respectively due to high financial system liquidity. The resolution to reduce the Cash Reserve Requirement (CRR) for DMBs from 31% to 27% at the last MPC meeting in order to reduce the strain faced by the DMBs following the full implementation of the Treasury Single Account resulted in a surge in liquidity levels in the financial system. The apex bank’s decision to halt liquidity mop ups through the use of OMO auctions, a sort of monetary easing which is expected to spur banks to lend to the real sector also further bolstered liquidity levels — which has averaged at over N600.0bn in the last 2 months. Credit to Private and Government have grown 0.5% and 0.9% M-o-M in September to N18.7tn and N2.8tn. Nevertheless, the high level of excess reserves still held by banks and increased domestic participation in the in the fixed income space (as yields across all tenors fell to year lows) suggests DMBs are still reluctant to lend to the real sector given the current macroeconomic challenges. On the other end of the capital market, the equities market has not benefitted from the huge level of liquidity in the system as YtD returns stand at -18.8%. The negative sentiments towards the Nigerian Bourse have been driven by FX uncertainties and depressed economic fundamentals – seen in the poor 9M: 2015 results of many counters in the market.

On the Forex scene, pressures on the naira have persisted despite the administrative measures taken by the CBN to curb speculative actions against the naira. The FX intervention rate has settled at N197.00/US$1.00 at the Apex Bank while it steadied at N199.10/US$1.00 at the interbank market. In a sharp contrast, at the parallel market the naira traded for as high as N232.00/US$1.00 following the full implementation of the BVN policy which mandates a provision of the verification number in order to execute any Forex transactions at the Bank or BDC. Subsequently, demand for the naira at the BDC has reduced due to customers turning to the parallel market to execute forex transactions given the reluctance to provide their BVN to carry out Forex transactions at the BDC for fear of the safety of their accounts.

On the global scene, the expectation of a FED rate hike has been heightened based on the recent guidance of the FOMC which suggests that a rate hike is very likely before the end of the year. Although we believe the effects have been partly priced in, emerging markets could further experience some level of financial market volatility as global fund managers rebalance the portfolio.

Going by the aforementioned, the committee is expected to deliberate on policy options to stimulate the flagging economic growth without creating further pressure on financial stability and also to restore confidence in the financial market to attract private capital and shore up the external reserves. The committee would likely appraise the current liquidity boosting policy of the CBN vis-à-vis the expansionary policy tone of fiscal authorities in 2016 As a result, the possible scenarios that can play out upon on conclusion of the meeting come in a threefold; committee may:

• Reduce MPR to further lower market and lending rates and fuel credit expansion by banks
• Leave all policy rates unchanged with the furtherance of administrative measures to manage FX rates (and conserve external reserves) while also keeping the financial system liquid to stimulate lending and growth

Despite calls for devaluation, we do not expect a lessening of exchange rate restriction (which are majorly administrative) at the next MPC meeting judging by the past statements credited to both the CBN and Presidency whilst fiscal 2016 funding and expenditure frameworks are not yet certain. Committee members are also not likely to lower MPR as market rates have already converged to benchmark rate based on current liquidity level. An expansionary fiscal 2016 (which is still uncertain) and a lower MPR rate will also conflict with the objective of price and exchange rate stability. Hence, we place a higher weighting on the 2nd scenario with an 80% probability relative to relative to scenario 1 with a probability of 20%. Nevertheless, we expect the MPC to push for more policy coordination and urge more actions from the fiscal arm in order to foster growth in the economy.

Source: Afrinvest (West Africa) Limited Research Team