Markets Watch CBN for Direction as MPC Meets - Thisday

September 19, 2016
By Obinna Chima

As the Central Bank of Nigeria (CBN) commences its 252nd Monetary Policy Committee (MPC) meeting today, investors would been looking up to the committee for favourable rate decisions that would spur investments as well as stimulate the country's ailing economy.

The two-day meeting which would be the fifth to be held this year, holds in Abuja and members of the committee would determine whether or not to adjust upward or downward, the benchmark Monetary Policy Rate (MPR), which was raised to 14 per cent from 12 per cent, and the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) which were both retained at 22.50 per cent and 30 per cent respectively.

The Nigerian economy is in recession. The National Bureau of Statistics (NBS) recently revealed that the country's gross domestic product (GDP) contracted by 2.06 per cent in the second quarter of 2016, compared to the negative growth of 0.36 per cent recorded in the first quarter of 2016.

The country's external reserves stood at $24.880 billion as at last Thursday. The National Bureau of Statistics (NBS) last week revealed that the Consumer Price Index (CPI)increased to 17.6 per cent (year-on-year) in August, from the 17.1 per cent recorded in July.

Also, national unemployment rate rose to 13.3 per cent in the second quarter of 2016, from 12.1 in the first quarter of 2016.

Since the CBN introduced a flexible exchange rate regime to allow the currency to trade freely on the interbank forex market, dollar liquidity has remained a challenge. Owing to this, the central bank has remained the major supplier of forex in the market. The naira closed at N425 to the dollar on the parallel market on Friday, while on the interbank forex market, the spot rate of the naira closed at N308.69 to the dollar on Friday.

In the same vein, Standard & Poor's (S&P), one of the world's leading index providers and independent credit ratings has downgraded Nigeria's rating further from 'B+' to 'B/B'. The agency stated in its latest rating on the country that Nigeria's economy had weakened more than expected owing to a restrictive foreign exchange regime, a marked contraction in oil production, and delayed fiscal stimulus.

The Organisation of the Petroleum Exporting Countries (OPEC) asserted that the trend of the past years' moderate global growth was likely to continue in both 2016 and 2017. The OPEC Oil Market Report for September 2016 therefore revised down its 2016 global growth forecast to 2.9 per cent, from three per cent in the previous assessment.

Therefore, considering these economic data, analysts at FSDH Merchant Bank Limited, anticipated that the MPC members would resolve to hold rates.

They held the opinion that the current economic recession does not support an increase in rates, adding that instead it supports rate cut to boost output.

"On the other hand, the rising inflation rate and weak currency do not support rate cut but a rate increase. However, given the stagflation the country faces at the moment, maintaining rates at the current level may be the best option.

"We expect the MPC to continue to use the open market operations (OMO) to influence yields to achieve positive real yields on fixed income securities. The weak global economic growth outlook portends a downward pressure on oil prices, which will mean additional pressure on the value of the naira. Thus, a tight monetary policy is an appropriate response to mitigate the negative impact on the Nigerian economy," FSDH Merchant Bank analysts stated.

Also, Afrinvest West Africa Limited pointed out that with economic growth faltering, inflation spiking, forex rates diverging and increasing downside risk to financial stability, the challenge before monetary policy continues to be how to achieve a balancing act amongst competing policy objectives.

Afrinvest added: "Whilst we believe the current recessionary shock conventionally calls for a more accommodative fiscal and monetary policy alongside structural reforms to jumpstart growth, we think the MPC will likely not take this path given that fiscal, forex liquidity and terms of trade realities are constraining policy options.

"Also, by tightening at the last meeting, the MPC Crossed a Rubicon and to backtrack yet again will jeopardise efforts at ensuring policy consistency and restoring credibility. Thus, we expect the MPC to maintain status quo on policy rates and wait on impacts of fiscal stimulus, talks on reaching a detente with Niger-Delta militants and full implementation of recent forex reforms."

Also, commenting on the move by the federal government to raise $1 billion from Eurobonds by mid-December and also borrow externally, Johannesburg-based sub-Saharan Africa Economist at Renaissance Capital (RenCap), Yvonne Mhango stated in a note at the weekend, that she expect the impact of the foreign loans on the country's FX reserves (and by implication the naira) to be very small, probably negligible. However, she expects its impact on the government's capital expenditure spending, and by implication growth, to be more meaningful.

In addition, the presidency announced earlier this month that it had approved plans to borrow externally and the plan was awaiting parliamentary approval. The government plans to borrow from the World Bank, the African Development Bank, Japan International Co-operation Agency, and Export-Import Bank of China. Mhango explained: "When countries FX revenues fall substantially, they are inclined to raise external financing. Which does two things: it helps shore up forex reserves, and in some cases slow the depreciation of the currency; and it brings in funds to help a revenue-constrained government finance the budget deficit.

"The financing gap for the 2016 N6 trillion budget (which will be implemented until May 2017) is N2.2 trillion ($7 billion). The initial budget showed that the government planned for foreign borrowing of N984 billion, which is $3 billion at today's FX rate versus $5 billion at the FX rate when the initial budget was released in late 2015.

"When we met with the World Bank in May, we were told that the government was in talks with them and the AfDB for loans of $1.5 billion respectively. At the time, the $2 billion difference in external financing was expected to come from a combination of bilateral lenders and a Eurobond. As the 60 per cent depreciation of the naira, against the dollar, since June, has effectively reduced the foreign borrowing requirement in dollar terms, the loan amounts from the various creditors may have changed.

"Nigeria's debt/GDP ratio of about 14 per cent is very low when compared to its peers (versus 50%+ in Kenya). However, Nigeria's high debt service/revenue ratio of 35 per cent explains why the authorities will need to be cautious when increasing its borrowing requirement. Otherwise debt servicing will crowd out spending to priority sectors, including healthcare and education."

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Steven Rich
Sep 17, 2018:
Well done

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