The Central Bank of Nigeria (CBN) has been promoting pro-growth strategies recently, while letting market interest rates fall to a shade over the inflation rate. The problem with this strategy is that the market might question the CBN’s determination to hold the exchange rate, even with its high levels of foreign reserves. Market interest rates moved sharply back up in mid-August, showing the CBN is alert to the issue.
The CBN has foreign exchange reserves of US$44.07 billion (a three-month moving average), which leads us to think that it can hold the Naira at close to N357.75/US$1 for the rest of this year. However, foreign portfolio investment (FPI) in Naira-denominated fixed income markets was sharply down in June and July, prompting questions over what sort of Naira market interest rates will be needed to attract this money again.
Bonds & T-bills
The yield on a Federal Government of Nigeria (FGN) Naira bond with 10 years to maturity fell by 7bps to 14.25%, and at 3 years fell by 13bps to 14.46% last week. The yield on a 364-day T-bill rose by 209bps to 14.26%. The yield on a T-bill with 3 months to maturity fell by 101bps to 13.27%.
With apologies to our regular readers, last week we missed the hike in market rates (by one day). 1-year rates, at 14.26% on Friday, are now 226bps higher than a fortnight ago. For weeks before this, we had written – repeatedly – how we expect 1-year market rates to be between 250bps-300bps above inflation. The fact that the spread is now 318bps brings us a degree of comfort. Furthermore, last week the CBN pulled an open market operation (OMO) bill auction, thereby rejecting bids for OMO bills that were at 14.94% and above. The market and the CBN are having a vigorous dialogue as to where market rates should be.
The price of Brent rose by 1.19% last week to US$59.34/bbl. The average price, year-to-date, is US$65.24/bbl, 9.00% lower than the average of US$71.69/bbl in 2018, but 19.17% higher than the US$54.75/bbl average seen in 2017.
China responded to new US tariffs by imposing retaliatory tariffs that range between 5-10% on US$75 billion worth of American goods. The tariffs, interestingly, included a 5% levy on US shale oil which has enjoyed China as a major customer in recent years. We rate the continuous trade war as bad news for oil prices.
The Nigerian Stock Exchange (NSE) All-Share Index gained 3.25% last week, easing the year-to-date return to negative 11.55%. Last week Oando (+20.90%), Fidelity Bank (+20.00%) and Honeywell Flour Mills (+14.58%) closed positive while Okomu Oil Palm (-18.06%), MRS (-9.83%) and Cadbury Nigeria (-9.71%) fell.
The NSE recorded gains in four out of five trading sessions last week as there were renewed buying interests in selected stocks following the release of H1 results, and what we believe is positioning for interim dividends. The reversal in the bearish trend may be sustained, at least in the short term in our view, as bargain hunters take advantage of stocks which have reached 52-week lows.
The CBN’s balancing act
Here is the CBN’s conundrum: how do you promote growth when conditions are downbeat, and simultaneously keep interest rates high enough to ensure currency stability? For most of this year, we have been writing that the CBN, when setting market interest rates through its open market operations (OMO), might want to set rates at between 250-300bps above inflation in order to keep the currency markets happy. With inflation stubborn at around 11.00% (July: 11.08% y/y), this suggests rates need to be at between 13.58%-14.08%.
However, our benchmark of a spread (over-inflation) of 250-300bps is merely the best guess of what foreign institutional investors would like to earn. We do not think of it as a rule because global economic conditions change (for example, oil prices have fallen recently) and the appetites of foreign institutional investors also change with time. Investors can be fickle.
In theory, the CBN can to shun foreign portfolio investors (theoretically it can pay interest rates less than inflation) if it is not concerned about the level of its foreign exchange reserves. Indeed, why should it be concerned with foreign investors and their US dollars, when it has reserves of US$44.07bn itself? The CBN has plenty of money with which to defend the Naira.
This is how the CBN appeared to be thinking a couple of months ago. Market interests fell from 13.72% in mid-June to 12.00% at the end of July. The CBN announced pro-growth measures, such as requiring banks to report loan-to-deposit ratios of 60% in a bid to make them lend more money to the domestic economy. However, the effects seen in the market came swiftly and were compounded by falling oil prices. Foreign investors bought fewer Naira-denominated fixed income securities than before. Foreign exchange reserves began to fall, by around US$1.0bn from late July until now.
Sooner than we thought, it would but with prudence in mind. Even then the CBN might not be concerned. After all, spending a few billion US dollars here and there in the currency market is well within its range. However, keeping foreign investors happy is not so easy. Last week Nigeria suffered a blow when reporting on the US$9.0bn Process & Industrial Development versus Federal Government of Nigeria case made international headlines. We were already aware of it (see Coronation Research, P&ID’s risk to Nigeria, 14 March 2019) but realise that once something is reported in the Financial Times it may well affect Eurobond investors in Nigeria – and Nigeria has sovereign Eurobond issues planned for later this year. So the CBN began to re-engage with the markets in mid-August.
(READ ALSO: Nigeria Weekly Update: CBN goes for growth)
Smartphone to be used for daily tracking of first set to receive COVID-19 vaccine
Essential workers would get daily text messages on their smartphones enquiring about the side effects.
The first set of Americans who get the doses of the first Covid-19 vaccines will be closely monitored by the US Centers for Disease Control and Prevention (CDC) through daily text messages and emails from their smartphones.
This disclosure was made by a federal advisory group on immunization practices during a meeting.
A CDC immunization expert, Tom Shimabukuro, at a meeting of the CDC’s Advisory Committee on Immunization Practices, said that essential workers, who were expected to be the first recipients, would get daily text messages on their smartphones enquiring about the side effects in the first week after they get the shot, and then they would be contacted weekly for 6 weeks.
Shimabukuro disclosed that those essential workers could be as much as about 20 million people.
Janell Routh, a CDC medical officer revealed that the advisers also discovered that the CDC and the US Defense Department have set up technical assistance teams to help state and local jurisdictions develop and implement distribution plans, which are due for review and approval by October 16.
While addressing the panel, Routh said, “We are asking states to think broadly. In their plans, I think they should have contingencies for whether there’s an ultra-cold product only or whether there’s more than one vaccine available.”
This meeting is coming up at the time when some prominent voices like Bill Gates have expressed their distrust for CDC under its current leadership over their rush for vaccine development which has political undertones.
This is as polls conducted in the past 2 months revealed that majority of Americans expressed worry over the rush in vaccine development and a third wouldn’t get inoculated.
Shimabukuro said the quick detection of safety signals was of paramount importance, while also noting that the data gathered could provide reassurance if no safety concerns were detected.
While responding to a question over public safety concerns, Shimabukuro said there would be a chance to opt out of the smartphone program. He, however, pointed out that those who had opted out could also decide to opt back in at a later time.
The head of the panel’s Covid-19 vaccines working group, Beth Bell, said that the advisory group would counsel Robert Redfield, the CDC Director, on how best to get a Covid-19 vaccine to Americans. A vote on specifics though, won’t occur until after the U.S. Food and Drug Administration takes action on a vaccine.
The committee is made up of 15 voting members, who are mostly medical experts and academics, as well as government and medical industry representatives.
Every jurisdiction is “heavily involved right now in planning” and have been for some time, Routh said. It’s unclear whether states will know which vaccine could be first available. Each has different storage requirements with some needing extremely cold storage.
Kathleen Dooling, a CDC epidemiologist who presented to the immunization panel last month, said 10 to 20 million vaccine doses would be available in November if a vaccine is approved before then.
CBN gives up on its policy of attracting dollars
CBN has given up its policy of attracting ‘hot money’ as it selects an alternative way to fight inflation.
The Central Bank of Nigeria (CBN) issued a monetary policy communique explaining why it cut its monetary policy rate from 12.5% to 11.5%, the first drop since May 2020 when it slashed MPR from 13.5% t0 12.5%. The cut in rates means it is no longer targeting foreign investor inflow as a basis for keeping the exchange rate stable.
The CBN has held MPR high for years due to high inflationary pressures believing that higher MPRs could lead to a lower inflation rate. However, the Covid-19 pandemic and the increased price of fuel and electricity suggest this is a battle already lost via hawkish monetary policy.
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What they are saying: According to the bank, it believes the higher inflation Nigeria is facing is not due to monetary policy but due to “causal factors” which are outside of its immediate control.
“In the view of the MPC, so far, evidence has not supported the rising inflation to monetary factors but rather, evidence suggests nonmonetary factors (structural factors) as the overwhelming reasons accounting for the inflationary pressure,” the CBN stated.
The structural factors the CBN is referring to are rising in prices of fuel and electricity as well as cost increases emanating from the devaluation of the naira.
“Accordingly, the implication is that traditional monetary policy instruments are not helpful in addressing the type of inflationary pressure we are currently confronted with,” the CBN added.
These issues mean the CBN faces a quagmire in how to combat inflation as the traditional measures it has typically deployed might not work effectively.
Forgo hot money: The apex bank toyed with increased MPR to combat the high inflation rate but opined that doing so could lead to an even deeper recession despite the benefits of attracting foreign capital.
“The Committee noted that the likely action aimed to addressing the rise in domestic prices would have been to tighten the stance of policy, as this will not only moderate the upward pressure on prices but will also attract fresh capital into the economy and improve the level of the external reserves. It however, noted that this decision may stifle the recovery of output growth and thus, drive the economy further into contraction.”
In 2017, the CBN adopted a hawkish monetary policy stand of increasing MPR and offering interest rates as high as 18% via its open market operations bills.
- The policy helped attracted billions of dollars in capital rising to as high as $13.4 billion in 2019. It dropped to as low as $332 million in the second quarter of 2020.
- Foreign investors have basically stopped inflowing forex into the control as yields have crashed and repatriating it is now a major challenge.
The other option: Deciding against increasing MPR means the CBN had to consider a dovish policy, which requires that they cut monetary policy rates and intervene in sectors of the economy that can address the supply side factors it cited. Supply-side factors are price-related increases emanating from high production, storage, and distribution cost of finished goods and services meaning that price will remain high despite stable or lower demand.
“On easing the stance of policy, the MPC was of the view that this action would provide cheaper credit to improve aggregate demand, stimulate production, reduce unemployment, and support the recovery of output growth. Members were of the opinion that the option to lose will complement the Bank’s commitment to sustain the trajectory of the economic recovery and reduce the negative impact of COVID-19. In addition, the liquidity injections are expected to stimulate credit expansion to the critically impacted sectors of the economy and offer an impetus for output growth and economic recovery,” the CBN stated.
What this means: By dumping inflation targeting from the demand side, the CBN is betting that spending money on stimulus programs will pay off down the road as cheaper long term credit will reduce cost of goods and services and will eventually reflect in the lower inflation rate.
- The CBN did not state where it sees the inflation rate and when it will drop to its new target by relying on supply-side management as strategy.
- The downside of this strategy is that there is very little impetus for foreign investors to purchase CBN securities at very low-interest rates.
- This shuts the door to the reliance of foreign portfolio inflows to shore up dollar reserves leaving us with investors who may want to return to the stock market.
- If oil prices fail to pick up and foreign investor inflow is not forthcoming, then there will likely be heavy pressure on the CBN effectively worsening things.
De facto Government: CBN explains why it will keep funding the economy
The Central Bank of Nigeria provided reasons why it will keep spending on development activies such as its intervemtion funds in the agricultural and energy sectors.
The Central Bank of Nigeria provided reasons why it will keep spending on development activities such as its intervention funds in the agricultural and energy sectors. The central bank has carried on as a form of de facto government in recent years particularly in the Covid-19 months, funding several developmental activities and sectors in the economy.
The explanation was provided in its monetary policy communique read out by the CBN Governor, Godwin Emefiele following the end of the monetary policy committee meeting held on Tuesday.
According to Mr. Emefiele, it will keep spending because the Federal Government is currently incapable of funding development programs because it is facing revenue shortfalls. The CBN reckoned that the economy is faced with likely stagflation (a combination of an economic recession and high inflationary environment) even as Nigerians still have to deal with an increase in fuel and energy prices. It opined that it had to work harder to combat the pressure the price increases will have on Nigerians.
“The Committee was therefore of the view that to abate the pressure, it had no choice but to pursue an expansionary monetary policy using development finance policy tools, targeted at raising output and aggregate supply to moderate the rate of inflation.
“At present, fiscal policy is constrained and so cannot, on its own lift the economy out of contraction or recession given the paucity of funds arising from weak revenue base, current low crude oil prices, lack of fiscal buffers and high burden of debt services.
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“Therefore, monetary policy must continue to provide massive support through its development finance activities to achieve growth in the Nigerian economy. This is the reason MPC will continue to play a dominant role in the achievement of the goals of the Economic Sustainability Program (ESP) through its interventionist role to navigate the country towards a direction that will boost output growth and moderate the level of inflation.”
As part of its plans to inject stimulus into the economy, the central bank committed to a stimulus package of about N1.1 trillion through the government’s Economic Sustainability Plans revealed in June.
CBN to the rescue: Over the last few months the CBN has been at the forefront of leading developmental activities in the country despite overseeing monetary policy and not fiscal policy.
- The role it is currently playing should be that of the Ministry of Finance, but with government revenue on decline, it believes it has no choice but to come in as a spender of last resort.
- The CBN through its development finance responsibilities has the powers to fund activities in the economy that it believes will create jobs and reduce the inflation rate.
But more recently, it has been criticized for expanding its balance sheets and playing too big a role in backstopping nearly all major developmental programs of the Buhari administration.
- The CBN is currently spending trillions funding the agricultural sector
- It has also set aside hundreds of billions of naira in funding SME’s through NISRAL and partner microfinance banks
- There is also several targeted private sector spending in the areas of power, healthcare, real estate, entertainment etc.