This week is bound to be a very important week for the Nigerian economy and it is important that you understand why this is so. Whatever decision certain people take this week will probably determine how much more money you could make or lose. The week is very important for three important reasons which I will like to explain below.
The Central Bank Monetary Policy Committee (MPC) is meeting this week for the 98 time to decide on which direction the economy will be heading. The meeting is typically a stage for the stirrers of our monetary policy to deliberate on policy that are either proactive or reactionary to economic activities in the country. Currently, the Nigerian economy has been faced with a currency crisis arising from the fall in crude oil prices dovetailing into a run on the naira. The Naira as at Friday, November 21st was trading at N180 against the dollar at the black market and a near 20 premium on the official exchange rate. This rate margin is making some analysts predict that the MPC will have no choice but to devalue the Naira by as much as 15%. The last time they faced a similar situation in November 21 when it met, the decision thenwas to devalue the naira by about 3%. This was its decisions back then
The Committee decided as follows:
1. By a unanimous vote to retain the MPR at 12.0 per cent and the symmetric band at +/-200 basis points.
2. To retain the CRR at 8.0 per cent.
3. To adjust the mid-point of target official exchange rate from N150.00/US$1.00 to N155.00/US$1.00 and maintain the band of +/-3.0 per cent. This means that the naira should float roughly within a range of N150.00/US$1.00–N160.00/US$1.00, unless extraordinary shocks necessitate a change in stance.
4. To encourage the CBN to continue to seek convergence between wDAS and interbank rates to reduce arbitrage opportunities, avoid speculative attacks, and the emergence of a multiple-exchange rate environment.
Since then MPR has been retained at 12% for 35 consecutive straight Months whilst the CRR for Public and Private Sector deposits has shifted to 75% and 15% respectively.
If the CBN decides to devalue the Naira then I expect a spike in volatility in the short term as the shock will reverberate around the economy. Whilst it will help reduce the pressure on external reserves and help reduce arbitrage, the stock and money market may react in an even more irrational manner. An unchanged policy may suggest inaction from the CBN and raise more tension for investors. This is not the best of time to be a CBN Governor or a member of the MPC
Opinion – Naira will be devalued by not more than 5%, MPR will be increased by 50 basis points to 12.5% whilst CRR will be retained. Naira was devalued slightly this month.
The Organization for Petroleum Exporting Countries(OPEC) is set to meet on November 27 in what will be one of the most anticipated meetings this year. Brent Crude Oil Price has crashed by nearly 30% since June and many believe this is because of a clog (increased supply) in the market as well as the increasing shale oil production in the US. In fact, the bet is that big Oil exporters like Saudi is not averse to a slump in Oil prices. The counterintuitive reason for that is whilst a lower oil price may hurt in the short term, it will pay off in the long run. it is opined that a price below $60 will basically render a lot of Shale producing companies in the US unprofitable as the model requires a high crude price to cover its cost.
If OPEC decides to cut oil production then I expect the negative headwinds on the naira to abate. The naira is also under pressure because of fear of the impact a lower oil price will have on Nigeria’s oil revenue and to a larger extent external reserves. Maintaining the status quo however, may portend a further run on the Naira and we may well see the Naira hitting N185 before Xmas.
Opinion – I believe OPEC will retain current supply levels and won’t be able to muster enough votes to call for a supply cut.
Last week was obviously chaotic on the political scene as the National Assembly convened after a recess. The meeting was marred with hostilities between the Police and House of Reps members and brought a lot of shame to our democracy and heightened the political tension in the country. The National Assembly was shut down and may reopen this week to another round of hostile politicking and political pandering. The market doesn’t like uncertainty and attach a high premium to political risk.
If our politicians and police continue to behave like Children then this will have a negative impact on the markets. More people will flee for safety of the dollars putting more pressure on the Naira. The stock market may also be under pressure again and may signify another sell-off.