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Post-MPC Reaction: Policy Parameters Unchanged as Unorthodox Policy Measures Gain Steam—Afrinvest

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MPC
CBN

THE Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) retained all policy rates at its last meeting of the year which ended on Tuesday.

The eleven members of the MPC in attendance unanimously voted to maintain Monetary Policy Rate (MPR) at 13.5% with the asymmetric corridor of +200bps/-500bps, Cash Reserve Ratio (CRR) at 22.5% and Liquidity Ratio (LR) at 30.0%. The MPC’s decision was in line with the outcome of all meetings since March 2019.

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Sentiment of members towards easing monetary conditions remained weak as seen from the unanimous vote and similar to the previous meeting. As expected, the MPC maintained its waiting game, stating that the CBN will continue its unconventional monetary policy measures. The committee noted that the improvement in credit to the private sector captures efforts to attain the new 65.0% LDR as mandated by the CBN, especially as the December 31st deadline looms

Nigeria’s Near-term Risks Trail Weak Global Outlook The committee further emphasised that the near-term risks to the Nigerian economy remain closely related to global and domestic events. Globally, policy normalisation in advanced economies, weaker than expected oil prices and prolonged trade spat between the US and China which could prompt slower growth remains prominent concerns. On the domestic front, confounding issues such as elevated insecurity, structural deficiencies amid slow pace of reforms and low fiscal buffers still abound.

Overall, the stance of the MPC is unsurprising, however we are concerned that there could be a resurgence in FX demand management; with potential impact on imports, further exacerbating inflationary pressures and ultimately constrain growth. Although the decision to hold policy rates may stem capital flights in the short-term, risk of reversals remain green given uncertainties in the global and domestic economy as well as a declining external reserve at US$39.9bn (11/25/2019) due partly to negative current account balance at US$1.1bn.

We highlight that to achieve inclusive economic growth and development, a mix of favourable monetary and fiscal policy measures would be required to drive optimum results. Also, we reiterate the need to revert to convention to restore the relevance of the MPR as a policy instrument necessary for triggering expansion in economic activities. Implications for Market Trading We expect muted effect at the fixed income end of the market as the CBN guide rates through its liquidity management operations. More recently, rates on the short end of the curve have been trending lower at single digit with the average TBills currently yielding 8.1%.

This mainly reflect increased demand, driven by the recent restriction of local corporates and individuals from the Open Market Operations (OMO) to boost foreign capital inflows, thereby creating a dual-market system; where foreign portfolio investors and banks enjoy double-digit yields on one end, with domestic investors scrambling for single-digit rates on the other end. Consequently, the average market yield and the benchmark rate continue to diverge and borrowing rates in the system have declined accordingly.

Sentiment remains fundamentally weak in the equities market, although we have seen renewed interest in stocks with strong fundamentals which has resulted in a 3-week gaining streak. We suspect the restriction of local investors from the ‘juicy’ OMO market perhaps shifted investors’ focus towards equities.

The gradual recovery in the economy is slow paced and may not support an overtly bullish expectation in the short-term. Yet, we believe the market has been far compressed and remains attractive for equity investors.

 

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