The Monetary Policy Committee (MPC) will hold its penultimate meeting for the year on September 19 and 20, 2019.
This is the fifth meeting for the year and will afford the committee an opportunity to critically evaluate the quality of its previous decisions vis-à-vis the state of the Nigerian economy.
We expect that the Committee will consider current conditions in the global economy, principally the accommodative posture adopted by monetary authorities in advanced economies to catalyse weakening growth.
[READ MORE: MPC upholds monetary policy status quo]
We also envisage that the Committee will consider the ongoing trade tensions, geopolitical pressures and oil price cum demand-supply dynamics. On the local front, we expect that the MPC will assess the impact of its various initiatives at stimulating business and economic expansion.
It will also be imperative that the Committee considers current inflationary pressures and the risks recent restrictions (such as the closure of land borders) pose to the single-digit inflationary target.
After due consideration of the aforementioned factors, we envisage that the committee will favour maintenance of the status quo.
International Economies and Developments
Weakened International Trade Spurs Monetary Easing
Weakened growth remains the overarching theme for the global economy as we near the end of the third quarter of 2019. The escalation of trade tensions between the U.S and China continues to dominate headlines, dampening the outlook for international trade and oil prices, and causing disruptions to the global supply chain. However, both countries have attempted to defuse tensions with delay in tariff implementations and tariff exemptions for some U.S goods, ahead of negotiations in September.
Nevertheless, global manufacturing has continued to bear the brunt of weakened trade. Global Manufacturing PMI data for August reveal a fourth consecutive monthly slowdown to 49.5, with Germany among the countries recording the steepest PMI readings.
In the advanced economies, the European Central Bank (ECB) announced a 10bps cut in deposit rate from -0.4% to -0.5% in September while signalling its intention to restart its quantitative easing program. This has become pertinent as the E.U continues to battle slow growth and low inflation due to weakened international trade, structural challenges in some member countries and the lingering Brexit conundrum.
Also, the Fed is widely expected to follow in the steps of the ECB and cut rates in its next meeting in September, in order to provide support to the US economy amidst the weak global economic backdrop. Elsewhere in China, recently released data shows that GDP slowed to 6.2% in Q2:2019, its lowest level in recent years, as the Orient nation continues to writhe under the impact of the trade tensions. This has prompted the People’s Bank of China (PBOC) to also adopt easing policies to cushion the effect of the trade dispute on its economy.
Monetary easing has been a recurring theme across most major economies, with the declining yield environment spurring capital outflows to most emerging and frontier markets. These factors provide a good case for a rate cut by the MPC, however, other risk factors inherent in the economy such as unstable oil prices and the ongoing P&ID dispute might prevent this decision. Hence, we expect the MPC to maintain status quo at the next meeting.
Geopolitical Tensions Provide Much-needed Buffers for Oil Prices
Since the start of the second half of 2019, oil prices have trended further downwards, averaging USD60.90pb since the last MPC meeting. Concerns about the unresolved trade war and its implication for oil demand are mounting and have subdued any positive triggers for prices. OPEC+ has maintained its production adjustments, with output reaching a new 5-year low of 29.61MMbpd in July, led by Saudi Arabia’s aggressive cuts. Meanwhile, the political impasse in Venezuela and the sanctions on Iran continue to artificially constrain supply from these two sources of heavy oil.
There have also been sizeable inventory drawdowns in the US, even as geopolitical strife in the Persian Gulf has persisted. All of these do not seem to count for much, as international agencies including the Organization for Petroleum Exporting Countries (OPEC), the International Energy Agency (IEA) and the Energy and Information Administration (EIA) have consistently adjusted demand outlook downwards; the IEA revised oil demand growth for 2019 to only 1.1MMbpd from the 1.5MMbpd projected at the beginning of the year and expects even slower growth in 2020.
In August, oil prices averaged only USD59.50pb, as the market was awash with a flurry of negative regards regarding the trade war. However, on 14th September, Houthi rebels from Yemen attacked two of Saudi-Arabia’s key facilities, the Abqaiq – which is the world’s largest crude oil processing facility and the Khurais, its second-largest oilfield. The drone strikes shut in at least 5.7MMbpd, equivalent to 58.13% of Saudi’s August production and 5.7% of global supply. The attack was unprecedented in the oil markets, and immediately hurled prices at least 20% upwards to c. USD71.95pb on fears that Saudi might be unable to promptly recover from the disruption.
This incident has introduced a new dynamic that might provide some support for prices in the coming months. In the domestic space, production numbers have seen some progress in the last 3 months, aided by relative calm in producing areas. However, early in September, the Nembe Creek Trunk Line was placed under Force Majeure for undisclosed reasons. Further, there have been no major policy announcements in the sector since Q2 when the National Assembly passed the redrafted PIGB to the President for assent.
Oil production (including condensates) have averaged 1.98MMbpd in 2019 but remains well below the budget benchmark of 2.3MMbpd. With the recent incident, we expect OPEC to deemphasize the production cuts for a while, to allow Saudi Arabia some scope to recover from the attack.
This, alongside the fact that Brent prices should remain above the support level of USD60pb, are positives for Nigeria, triggering accretion to foreign reserves from oil exports. However, higher under-recovery costs on refined products could temper reserve growth.
In the near term, we expect Brent crude to trade between USD60pb – USD70pb, which augurs well for fiscal spending. The MPC should consider the impact of this on oil receipts and Nigeria’s external reserves, as well as its influence on the CBN’s ability to support the Naira in its decision to hold MPR at 13.50%.