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Vanguard Economic Discourse: Impact of policies, analysts’ positions to drive conversations

By Emeka Anaeto, Business Editor
As the Vanguard Economic Discourse is set to roll out the trajectories and pitfalls of the Nigeria’s rebounding economic indicators as well as recommendations for a resetting, reactions in the different market segments appear diffused.

Also some analysts have given clue to why markets reactions would not sustain positive sentiments despite the heart-warming reports from the National Bureau of Statistics, NBS, and the Central Bank of Nigeria, CBN.

CBN released its Purchasing Managers’ Index (PMI) report for the month of March, showing sustained improvement in manufacturing and nonmanufacturing activities during the month. Specifically, both manufacturing and non-manufacturing PMIs expanded to 56.7 and 57.2 respectively, indicating faster pace of growth compared to the preceding month.

The latest data suggest positive output growth in the first quarter of 2018 (Q1-18), hence the likelihood of improved corporate performance in the three months to March.

The CBN’s Monetary Policy Committee (MPC) held its first meeting of the year last week. In line with expectation and consensus, the MPC again held the line across all its policy variables, retaining the Monetary Policy Rate (MPR) at 14.0%, Cash Reserve Requirement (CRR) at 22.5%, liquidity ratio at 30.0%, and the asymmetric corridor around the MPR at +200 and -500 basis points.

CBN Governor, Mr Godwin Emefiele, said the rates were retained because the economic recovery was still too fragile to support a downward review of the rates.

Analysts at Cordros Capital Limited, a Lagos based investment house stated: “We look for a stronger case for a rate cut in July, when headline inflation rate would have dropped at least 200 bps below the MPR.”

Capital Market Equities

At the backdrop of both actual and expected improvement in corporate performance, the equities market reverted to a loss this week, with all major sector indices closing in the red. This, according to analysts indicated that investors are not yet ready to bait on the expected improved corporate performance.

However, there seems to be optimism in the horizon as the analysts at Cordros Capital stated: “We reiterate our positive outlook for risky assets, on the backdrop of still-positive macroeconomic fundamentals; downtrend in yields on debt instruments; and lower stock prices, which is expected to drive bargain hunting ahead of Q1-18 corporate releases.”

Fixed Income and Money Market

In line with expectations, the overnight lending rate eased further to 4.00%, representing a 408 bps w/w contraction, against last week’s close of 8.08%. The system was awash with liquidity.

Analysts believe the overnight money market rate is likely to expand in the coming week, as outflows are likely to outweigh the inflow of maturing Open Market Operations (OMO) bills worth N476.21 billion

But activities in the Nigerian Treasury Bills (NTB) market were bullish, in line with analysts’ projections on the continuing surplus liquidity. Expectations of an interest rate cut by a few market players also stoked bullish sentiments.

However, yields are expected to be pressured due to anticipated squeeze in liquidity position next week

Similarly, trading in the bond market was bullish, amid the higher liquidity levels, as average yield contracted in all but one session of last week. Banks’ treasury executives expect reduced activity at the end of this week due to anticipated squeeze in liquidity position. A few of them however said they expect lower yields in the short to medium term, reflecting falling inflation rate, strengthening expectation of monetary easing, and the FGN’s new debt management strategy.

Foreign Exchange

The naira remained stable over the period since April 2018 despite the absence of the CBN’s conventional intervention. The USD/NGN exchange rate traded flat at NGN362 throughout the period in the parallel market, while it strengthened marginally by 0.01% to NGN360.01 in the I&E FX window.

Oil revenues continued to shore up the foreign reserves (+0.75% to USD46.55 billion), amidst continued stability in oil prices (currently USD68.14/barrel) and production.

Foreign exchange dealers in banks told Vanguard that they expect Naira to continue trading within current bands, as the healthy accretion to the reserves further supports the apex bank’s interventions in the forex market.

External Reserves.

Unlike the case in 2015 and 2016, wherein every headline about the reserves contained such words as “decline”, “drop”, “fall” etc., the situation thus far in 2018 has been underpinned by “steady accretion”. Earlier this week, the CBN spokesman, Isaac Okoroafor, added more colour to the picture, issuing a statement that the reserves had hit a 5-year high of USD46 billion as at the close of business on Friday, March 9, 2018.

But the veracity of the statement has became a subject of debate. It is safer to conclude that the reported figure refers to the actual number for the referenced date, hence the variation from the available data on the CBN’s website which captures the 30-day moving average of the reserves.

From whatever perspective, the external reserves is growing, due to the following factors: Rising oil earnings (higher oil prices and production volume have been supportive); Strengthening foreign portfolio inflows, catalyzed by the stable operations of the I&E FX window; Proceeds from external borrowings (recall the USD2.5 billion Eurobond that was issued last month; Slower pace of CBN intervention in the currency market (USD1.45 billion monthly average thus far this year, compared to USD2 billion monthly average within March-May 2017); The apex bank’s continued efforts at discouraging unnecessary imports; Decent inflows from non-oil exports.

Clearly, the monetary authority is walking the talk of deliberating growing the foreign reserves – which it expects to hit USD60 billion in 2019 under prevailing anchors.

The analysts at Cordros Capital had reflected on these scenarios and stated as follows: “Our base case outlook scenario – as highlighted in our Nigeria 2018 Outlook report, ‘Looking Beneath the Surface’ – for the Naira in 2018 assumes an external reserves position of USD47 billion (on a 30-day moving average basis).

“We were of the view that under this scenario, the CBN is unlikely to implement material changes to its FX policy, and forecast the local currency will hover around N360-N365/USD and N363-N368/USD in the I&E FX window and parallel market respectively.

“But at the current run rate of average cumulative monthly growth of 4.84%, we estimate the reserves to hit our forecasted target during H1-18, thus making the case for our 2018 best case reserve projection of USD56 billion, at which level we expect the central bank to adopt more market friendly FX reforms. The big question then is “will the naira reflect the steady accretion to the reserves by way of notable appreciation”?

“Our expectation is for the LCY (local currency) to strengthen to N340/USD and N345/USD in the I&E FX window and parallel market respectively, under a USD56 billion external reserves.

“For that to happen, we highlighted the following conditions (1) stable oil price and domestic production continue to impact on trade balance, (2) the FGN raises the USD portion of the proposed borrowings for the fiscal year to fund the deficit in the budget, and (3) investors’ confidence in the I&E FX window strengthens amid sustained economic growth and further FX reforms, thereby bolstering portfolio inflows. Are the aforementioned conditions likely? Our answer is in the affirmative.

“However, we reckon the above-mentioned as a necessary condition for Naira appreciation. A sufficient condition will be more direct efforts by the central bank to increase the volume of USD supplied (we estimate at an average of USD2.5-USD3 billion monthly, from current average of USD1.4 billion) at its frequent interventions.

“Such move, in our view, should help channel a proportion of parallel market demand to the official window. For instance, we are aware manufacturers still get less than 50% of their total legitimate FX needs via the official window while the balance is sourced at alternative sources.

“That said, we note recent indications from the CBN governor that there is a deliberate attempt by the bank to keep the naira exchange rate in the I&E FX window at current levels. In our view, the aim of that is to (1) keep local assets attractive to foreign investors and further support the CBN’s efforts at growing the reserves, and perhaps (2) further stimulate exports.

“The possibility of that stance changing anytime soon remains to be seen, particularly amid the non-confirmation of nominees to the Monetary Policy Committee (MPC) by the National Assembly – which has made it difficult for the Committee to meet, as it cannot form a quorum. More so, the CBN chief appears to have achieved his desired level of exchange rates convergence in the economy, hinting that, the fact that most transactions are being settled around the N360/USD levels suggests rates unification.

“Over the rest of 2018, we weigh political-related risks to the stability of the naira as modest. While we do not totally rule out the likelihood of (1) a number of foreign investors staying on the sideline towards the final quarter of the year, as the race for the 2019 general elections gathers momentum, and (2) increased naira liquidity – on election-related spending – increasing demand for the dollar, we see the apex bank in a comfortable position to continue its support for the LCY via its interventions in the currency markets. That will bode well for the business environment (particularly manufacturers, service providers, and traders) and investing community.

“By implication, we look for healthy activities in the equities market and fixed income space.”


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