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Fixed income, equities may remain flat

By Emeka Anaeto, Business Editor  

As the Central Bank of Nigeria, CBN, struggles to sustain monetary stability amidst challenging macroeconomic headwinds, its Monetary Policy Committee, MPC, outcome last weekend has pointed to some level of shifts in two key economic financial sector parameters while another two may remain muted.

The most likely to be affected, according to analysts, are the banking sector earnings and the real sector performance while fixed income yields and the equity market would, at best, record marginal impact.

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The MPC had, last weekend, voted to retain all its policy parameters in line with previous meeting held in June, 2021.

Financial Vanguard findings from market operators and analysts indicated that banks’ net interest margins, NIM, would receive further boost.   

One of the observed trends in the Nigerian banking sector is the continuous tilt of deposit mix towards low-cost funds.

According to industry analysts, the MPC’s decision to retain the policy rate at 11.50 percent provides more room for deposit money banks to further reduce their funding costs.

Although, maximum lending rate reduced marginally from 28.39 percent in May 2021 to 27.99 percent in July 2021, prime lending rate has maintained an upward trajectory (from 11.29% to 11.57% within the same period).

Consequently, the elevated lending rates combined with lower cost of funds points to a better NIM for banks.

Giving their views on this analysts at Afrinvest West Africa, a Lagos based investment house, stated: ”While we acknowledge the historical variance between effective CRR (Cash Reserve Ratio) and official CRR, our view is that the Committee’s decision to retain the official CRR at 27.50%, amidst economic expansion, provides more scope for credit expansion. This should further support funded income for banks.”

Also in connection to the CRR policy the decision of the MPC is expected to sustain recovery in the real sector.

Another quarter of economic growth was recorded in the second quarter, 2021, Q2’21, as output expanded by 5.01 percent year-on-year, YoY, as against 0.51 percent in Q1’21).

Data from the National Bureau of Statistics, NBS, showed a continued improvement in the Agriculture (+1.30%YoY) and Manufacturing sectors (+3.49%YoY) in the quarter.

The improvement in output from these sectors can be partly attributed to the continued targeted credit interventions by the CBN through its special funding programs including, Anchor’s Borrowers Programme, Real Sector Facility, Non-Oil Sector Simulation Facility, Agricultural Credit Scheme, among others.

Though the Manufacturing PMI at 46.90 points (pts) and Employment Index at 49.40pts, remained in contraction in August (below 50pts), the reading was better than July when PMI was 46.60pts, and Employment Index at 48.80pts, implying a gradual recovery in manufacturing activities.

Popular view amongst analysts is that the MPC’s decision to leave policy parameters unchanged signals its resolve on supporting the economy to a full recovery.

The analysts believe that a continued availability of credit to the real sector would help insulate the sector from possible shocks that can arise from the emergence of the delta variant of the COVID-19 in the country as well as other subsisting macroeconomic headwinds.  

In the money market and the stock market, however, the analysts believe that the MPC decisions would be of marginal impact.

Afrinvest stated: ”Upwards Yields in the fixed income market have continued to trend downwards since the last MPC meeting. Notably, average T-Bills and FGN Bond yields declined from 5.76% and 11.38% respectively as of 27th July 2021, to 5.13% and 10.73%, as of 17th September 2021. Also, stop rates at the primary market auction (PMA) for treasury bills remained mostly flat at 2.50% and 3.50% on the short and medium end of the curve. However, the rate on the long end of the curve increased from 6.80% to 7.20%.

”We note that the decline in yields has been due mainly to a decline in the FGN’s borrowing appetite as a result of expected Eurobond borrowing.

”The MPC’s decision is therefore expected to have a negligible impact of fixed income yields.”

Similarly, they also expect activities in the equity market to remain muted.

Market sentiment has been largely mixed since the MPC’s last meeting in July, closing higher on four out of the eight weeks. Consequently, the year-to-date loss has moderated slightly to -3.29% (a 36bps decline) as of 17th September, 2021.

According to the investment analysts, ”The Committee’s decision to maintain status quo is not expected to trigger a reversal in the market’s current course. We, however, note the possibility of buying pressures during earnings season in October and upon the announcement of corporate actions.

”On a balance of factors, we expect the activity levels in the market to remain frail, in the absence of significant catalysts.”

MPC considerations

The MPC had raised some threats to the expected positives in its policy outcomes while acknowledging some green shoots. It highlighted the increasing rate of insecurity in the country as a deterrent to the expected economic growth.

While noting the moderating headline inflation, the Committee also called on the Fiscal authorities to prioritize tackling of insecurity, especially in regions that contribute significantly to the nation’s food basket.

The Committee also considered the ongoing effort to strengthen Nigeria’s commodity exchange, as this should positively impact the food supply value chain in the country and ultimately reduce the prices of key commodities such as rice, maize, and sorghum. The Committee also urged the Fiscal authorities to implement initiatives such as public private partnerships and diaspora bonds to fund infrastructure development projects.

The committee applauded the InfraCo initiative as a positive step in improving the business environment in the country. Furthermore, it stressed the importance of investment in the transportation and power supply sectors of the economy as they have a potential positive ripple effect into other sectors.

The MPC encouraged the Federal government to intensify its efforts on tax collection to reduce their dependence on oil revenue and exposure to counter-cyclical shocks.


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