•End to monetary tightening, pro-growth policy recommended
•Economic expansion persists for 10 consecutive months
•Default on credit card/overdraft loan rises in Q1’18
•Foreign investors inject $15bn via I&E in Q1’18
By Babajide Komolafe and Adaeze Okechukwu
AS the newly constituted Monetary Policy Committee (MPR) of the Central Bank of Nigeria (CBN) begins its first meeting tomorrow to decide on monetary policy direction for the next two months, financial market analysts have listed compelling reasons for the committee to end the two years old monetary tightening regime and lower the Monetary Policy Rate, MPR, to boost lending and enhance economic growth.
Their recommendations were coming as the apex bank’s Purchasing Managers Index (PMI) report for March 2018 indicated 10th consecutive month of expansion in activities in both the manufacturing and non-manufacturing sectors. However, default on households’ unsecured loans via credit card and Overdraft loans rose in the first quarter of 2018 (Q1’18), reflecting banks’ increasing struggle with bad loans.
Road to monetary tightening
Financial Vanguard’s inquiries indicated that at the centre of issues on the table of the meeting would be interest rate regime review. The MPC commenced a monetary tightening regime in March 2016, in order to contain inflation which rose to 12.77 percent from 9.62 in January of the same year. As a result the committee raised the MPR to 12 percent from 11 percent. It also raised banks’ Cash Reserve Ratio, CRR, from to 22.5 percent from 20 percent.
This was followed by another MPR hike to 14 percent in July, when the inflation rate rose for the ninth consecutive month to 17.13 percent. But the inflation have been on a downward trend since January last year, after it peaked at 18.72 percent. The inflation rate has declined by 4.39 percentage points to 14.33 percent in February 2018.
Analysts argue that the persistent decline in inflation rate as well as the steady growth in the nation’s foreign reserve to $46.2 billion last month from below $25 billion in 2016, make a compelling case for the reconstituted MPC to end the monetary tightening regime. They further argued that the fragile nature of the nation’s recovery from economic recession, and the continued vulnerability of the economy to oil price shock, necessitates policy decisions that enhance growth especially in the non-oil sectors of the economy.
But while most analysts projected the MPC, through this meeting, will commence downward adjustment of the MPR, some projected that the committee will likely wait till its next meeting in May before making any adjustments to its policy stance.
According to Johnson Chukwu, Managing Director/Chief Executive Officer, Cowry Asset Management Limited, “I think they will hold rates at current levels.” Responding to Financial Vanguard’s questions on the issues involved, he stated: “The simple reason why you will have that is because they are having new members, who will want to settle in and understand the dynamics before they began to toggle with the rates.
“Not that there are no compelling reasons to adjust rates now but for the fact that most of the MPC members are coming in for the first time, they will not likely take any action that will alter the macroeconomic variables. So I suspect they will hold rates at their first meeting and review rate at their subsequent meeting.
“At their subsequent meeting they will adjust the rates downwards. We have seen inflation coming down to 14.33 percent, which is just about the same level with the MPR. And if you recall the MPR was set at 14 percent even when inflation rate was between 18 and 19 percent at the peak of the inflation rate in January 2017. Today, the economy is only growing at 1.4 percent, there is a compelling need to raise economic growth rate.
“Even to the large extent that we have stepped down inflation, and, we have a reasonable and robust foreign reserve. So the concerns about foreign reserves and inflation have to a large extent been moderated. So the next compelling need is to drive economic growth, and to do that you need to bring down the interest rate, or at the minimum adjust the cash reserve ratio to give banks more liquidity for lending purposes.
“So at the next meeting, not at this current meeting, but at the subsequent one, they are likely either going to adjust the Cash Reserve Ratio, which will have more impact on liquidity and rates. But for the first meeting, they are going to err on the side of caution to understand the macroeconomic conditions appropriately before they began to play with the rates.”
However, Mr. Bismarck Rewane, Managing Director/Chief Executive of Financial Derivatives Company Limited, projected that the reconstituted MPC will commence the adjustment at its meeting this week, by reducing the MPR to 13.75 percent. He told Financial Vanguard, “We are expecting that they will bring down interest rate. We are expecting that, since they have already brought down the treasury bills rate.
“We are expecting that they shift the asymmetric corridor, that is, instead of MPR plus two percent and MPR minus five percent, they will shift to MPR plus five percent and MPR minus five percent. In other words if you are borrowing from CBN, you will borrow at 14 plus five percent, which is 19 percent, and if you are placing money with CBN, you will get 14 minus five percent, which is nine percent. We expect they will bring down the MPR by 25 basis points, just symbolically.”
Also projecting commencement of monetary easing by the MPC this week, analysts at FSDH Merchant Bank said: “The short-term outlook of the Nigerian economy favours monetary policy easing in order to stimulate credit creation and economic growth. The easing may be in the form of an adjustment to the Monetary Policy Rate (MPR) or an adjustment to the Cash Reserve Requirement (CRR).”
Making a compelling case for monetary easing, they said: “Although the GDP growth rate in Nigeria improved further in Q4 2017 at 1.92 percent from 1.40 percent in Q3 2017, the recovery is still very fragile. Thus additional monetary policies are required to stimulate a broad-based growth. Analysis of the growth pattern in 2017 shows that two sectors, Agriculture and, Mining and Quarrying were the major drivers of growth. Other leading sectors which are Trade, Information and Communication, Manufacturing, and Real Estate all contracted. Thus, the need for monetary policy easing.
“The increase in the crude oil price and favourable crude oil production in Nigeria have increased capital inflows and also led to favourable trade balance. Consequently, the country’s external reserves (30-Day Moving Average) increased substantially in the last five months, growing to $46.04bn as at March 26, 2018. This provides additional short-term stability for the value of Naira. FSDH Research, however, recognises the vulnerabilities of the Nigerian economy to the adverse movements in the crude oil prices. Thus the need to stimulate other non-oil sectors to reduce these vulnerabilities.
“The growth in money supply as at December 2017 was lower than the CBN’s target for the year. The broad money (M2) grew by 2.62 percent, lower than the target of 10.29 percent. The net domestic credit contracted by 2.95 percent as against the target of 17.93 percent. The net credit to the private sector grew marginally by 1.40 percent, lower than the target of 14.88 percent.
“The need to curb high inflation rate and maintain stability in the foreign exchange market were the main reasons for the contractionary monetary policy. FSDH Research believes the inflation rate may drop to single digit mid-year, while the exchange rate should remain stable in the short-term. Therefore, there is a need for monetary policy easing to boost credit creation and stimulate economic growth. Looking at the short-term outlook of the Nigerian economy, FSDH Research believes the MPC should begin monetary policy easing to signal the end of its monetary policy tightening cycle.”
Economic expansion persist
Meanwhile, expansion in economic activities persisted for the 10th consecutive month in March, 2018 as indicated by the Purchasing Managers Index (PMI) report for the manufacturing and non-manufacturing sectors released by CBN at the weekend.
According to the report, the manufacturing sector PMI for March stood at 56.7 percent, while the non-manufacturing sector PMI stood at 57.2 percent. The report showed that out of the 30 subsectors surveyed during the month, 25 subsectors recorded expansion while five subsectors recorded contraction.
The CBN report stated: “The Manufacturing PMI in the month of March stood at 56.7 index points, indicating expansion in the manufacturing sector for the twelfth consecutive month. The index however grew at a faster rate, when compared to the index in the previous month. Of the 14 subsectors surveyed, 11 reported growth in the review month in the following order: electrical equipment; cement; petroleum and coal products; food, beverage and tobacco products; chemical and pharmaceutical products; fabricated metal products; paper products; transportation equipment; plastics and rubber products; textile, apparel, leather and footwear and primary metal. The remaining three subsectors contracted in the following order: non-metallic mineral products; furniture and related products and printing and related support activities.
Loan default rises in Q1’18
But contrary to expectations banks have reported increased default on credit card and overdraft loans by households in Q1’2018. This was the highlight of the Credit Condition Survey report for Q1’18 released by the apex bank last week. Many analysts had attributed loan defaults to adverse economic conditions that have made activities in the commercial sector to wane while depressing income of the consumers.
However, the report stated. “Secured loan performance, as measured by default rates, worsened in Q1 2018 but is expected to improve in Q2 2018. Similarly, loss given default worsened in the current quarter and it is expected to improve in the next quarter
“Lenders experienced higher default rates on credit card and overdrafts/personal lending to households in the current quarter. They, however, expect improvement in default rates in the next quarter. Losses given default on total unsecured loans to households improved in Q1 2018, and also expected to improve in the next quarter. Corporate loan performance improved across all sizes of firms in the current quarter, except for small businesses. Lenders generally expect lower default in the current quarter”.
Among other things, the report indicated that banks increased availability of secured loans to households, small businesses and corporates but reduced availability of unsecured loans.
It stated: “The availability of secured credit to households increased in Q1 2018 and was expected to increase in the next quarter. Favorable economic outlook was the major factor for the increase in the secured credit. Lenders reported that the availability of unsecured credit to households increased in Q1 2018, and this is also expected in Q2 2018. Most lenders adduced favorable economic outlook to this increase.
“The overall availability of credit to the corporate sector increased in Q1 2018 and was expected to increase in the next quarter. Favourable economic outlook was the major factor contributing to the increase. Demand for secured lending for house purchase decreased in Q1 2018. However, more lenders expect demand for secured lending to increase in the next quarter. The proportion of loan applications approved increased despite lenders’ tightening of credit scoring criteria.
“Lenders reported increased demand for corporate credit across all firm sizes in Q1 2018. This is also expected across all firm sizes in the next quarter.”
Foreign investors inject $15bn via I&E in Q1’18
At the backdrop of the developments, foreign investors injected $15.1 billion into the Nigerian economy through the Investors and Exporters (I&E) window in the Q1’18. Financial Vanguard analysis of daily turnover (dollars traded) in the I&E window, in Q1’ 2018 showed that foreign investors injected $6.52 billion January, $4.09 billion in February and $4.49 billion in March.
Should this trend persist for the rest of the year, the window will record annual turnover of about $60 billion, 131 percent higher than the $26 billion recorded in 2017. Turnover in the window last week rose by 12 percent to $1.22 billion from $1.09 billion the previous week.
Though the naira remained stable as N362 per dollar in the parallel market last week, it however depreciated by 20 kobo in the window as the indicative exchange rate rose to N360.20 per dollar from N360 per dollar the previous week. Meanwhile, the CBN sustained its weekly intervention in the foreign exchange market, injecting $210 million via the interbank on Tuesday.