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Columnists

The monetary authorities opted for a wait-and-see approach

The CBN’s disposition remains biased towards supporting economic growth.

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External reserves, CBN to hold MPC meeting next week, Demand for credit by household increases in Q2 2020 - CBN, CBN grants licenses to 3 Payment Service Banks, Mobile money loan CBN Governor, CBN, Three PSBs get Apex Bank’s provisional to commence operations, Milk Import: Experts advise CBN on FX restriction , CBN automates trading system, introduces electronic form to facilitate exports , CBN campaigns for Made-in-Nigeria products , CBN recent macroeconomic policies, others lead to a higher Fitch rating; from negative IDR to a stable ‘B’ rating, AGSMEIS: CBN expand beneficiaries to 14,638.

The Monetary Policy Committee maintained the status quo on all policy rates at the meeting on 20 July 2020. The committee decided by a vote of eight members out of ten to keep the Monetary Policy Rate (MPR) at 12.5%, the asymmetric corridor around the MPR at +200bps/-500bps, liquidity ratio at 30% and CRR at 27.5%.

The CBN reiterated that the choices remained limited. A tightening monetary stance, in recognition of increased upside risk to inflation and mounting external sector pressures, would be counterintuitive, as it will further constraint economic growth; while a rate cut is unnecessary, given the weak transmission of monetary policy changes to the real economy.

READ MORE: NDDC Probe: Akpabio accuses NASS members of getting most of the commission’s contracts

The CBN’s disposition remains biased towards supporting economic growth, as the committee highlighted increased interventions across the various sector of the economy. Specifically, NGN152.9bn has been disbursed to the manufacturing sector to finance 61 manufacturing projects and NGN93.6bn will be allocated to support the health sector. Also, in a bid to support national infrastructural development, the government approved the establishment of a CBN-led infrastructure development company, which aims to invest NGN15tn over the next five years. Although these actions aim at softening the impact of the pandemic on the economy, we think this can do little to preventing a recession this year.

On the FX front, the CBN developed a gold purchase framework in order to attract foreign inflows into local gold. While we take this as a positive development given the continued rise in gold price (the highest level since 2011), we believe that low domestic production could impair this initiative. Beyond this, foreign investors are likely to remain risk-averse, until the backlog of FX supply is cleared. 

READ ALSO: CBN’s MPC unlikely to cut rates, as Nigeria’s foreign reserves hit $36.16 billion

As the inflation rate (June:12.56%) is now above the benchmark MPR of 12.50%, a question could emerge as to the appropriateness of keeping negative real interest rate. The CBN has shown by its actions in the past crises (global financial crisis in 2008 and 2016 oil price plunge) that it is willing to tolerate a period of negative policy real interest rate. The move is always to support growth, as credit to the private sector in the aforementioned periods increased by 32.34ppt and 3.70ppt respectively. Besides, market interest rates have trended lower than the inflation rate in recent months, due to lower supply of bills and the ban placed on non-bank local investors from participating in the OMO market. As a result, we do not envisage a major shift at the short end of the yield curve.

Regarding FGN bond, the DMO set to offer between NGN340bn to NGN460bn in Q3-20. In our view, we expect the auction to be well bided, supported by buoyant liquidity (Q3 OMO maturities: NGN3.1tr) due to limited investment options for local investors.

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CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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Columnists

IMF revised growth projection: a tale of vaccinated optimism

In Q4 2020, the economy surprisingly escaped recession evidenced by the 0.11% y/y rise in GDP.

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Explainer: What does GDP actually mean, and how does it affect you?

Yesterday, the International Monetary Fund (IMF) revised its Nigerian growth projection for FY 2021 from 1.5% to 2.5% in its World Economic Outlook.

According to the IMF, the improved optimism stems from the expectation that available vaccines would continue to quell the diverse mutations of the coronavirus, which had surfaced in different strains recently. The IMF also cited the effectiveness of policy supports in the short to medium term.

Recall that the Nigerian economy closed FY 2020 in the negative (-1.8% y/y), having suffered consecutive growth contraction in Q2 and Q3 2020, leading to the economic recession. Worthy of note is that in Q4 2020, the economy surprisingly escaped recession evidenced by the 0.11% y/y rise in Gross Domestic Product (GDP) following the relaxation of the lockdown measures starting in July 2020.

READ: Real estate sector GDP positive in Q4 2020, but still in the woods

The recent adjustment of the IMF’s forecast is hinged on some expectations. One, the OPEC+ alliances will continue to manage crude oil supply. Hence, more activities in the Nigerian oil sector which constituted an average of 8.52% of the total GDP in the last two years. Secondly, the coronavirus curve will continue to flatten amid the mass deployment of vaccines, while the stop-gap measures adopted at the heat of the virus would continue to spur economic activities toward the pre-pandemic levels thus fuelling the necessary recovery.

Whilst we note that the forecast is achievable going by the current macro-economic clime amid the low base from the dip in FY2020, there are some downside concerns. For instance, the continued spate of insecurity does not bode well for the agricultural sector (which contributed 25.54% to GDP in the past two years).

READ: IMF lifts 2021 global GDP growth to 6%

The ongoing NIN-SIM integration portends the likelihood of stiffening the performance of the telecommunication sector (one of the key drivers of the recovery in Q4 2020) if not quickly nipped.

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Reiterating our positions on the need to optimize the economy further, the government needs to bridge the existing infrastructure deficit, diversify its source of foreign exchange receipt, eliminate bureaucracies that stifle businesses, and promote measured economic liberality that suits the nation.


CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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Columnists

Did OPEC+ April fool the oil market?

OPEC+ understands the sensitivity of the oil markets, so it prepares accordingly.

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Saudi, Russia agree to cut oil by 20 million barrel, Further oil production cut required to keep oil price above $40 in 2020 , OPEC + deal to boost Nigeria’s earnings by $2.8 Billion

Before the April 1st meeting of OPEC members, the consensus was that OPEC+ would roll over cuts. This was clearly because last month’s rollover was the right decision, as Saudi Arabia said the group’s cautious approach had brought dividends.

When the market corrected last month, limited supply gave prices the support it needed. In an event where production cuts were eased last month, oil prices would have declined further than what we witnessed.

However, the group decided to increase output albeit gradually. The increase in output is an optimistic decision that there will be an increase in demand. The demand recovery will begin this summer as vaccines would have been rolled out and accelerated. More people will travel as economies begin to open, hence a return to jet fuel. The decision is clearly a U-turn on their cautious strategy in recent months.

READ: Why NNPC should be commercialised

Oil prices follow an “up the stairs,” “down like an elevator” movement. Understandably, OPEC+ understands the sensitivity of the oil markets, so it prepares accordingly. The JMMC technical meetings that precede OPEC policy meetings highlights how much the decision-making process entails. This month, there were no policy recommendations the first joker card played.

So on Thursday, the 1st of April, when discussions on easing cuts were debated, it appeared as a surprise. The demand for more oil was much lower than it had been before the March meeting.

Nigeria supported a rollover of the cuts. However, there have been question marks on the country’s conformity and honouring its compensation plan, just like Iraq and Kazakhstanboth oil-producing nations who have also submitted their compensation cuts.

The importance of conformity and compensation plans cannot be overstressed, especially as OPEC+’s excess oil production rose to 3 million bpd as reported last week. The extension of the compensation plan till the end of September, which was recommended by JMMC, is to protect the interests of the group.

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In addition, the oil ministers of Angola and Oman supported a rollover. The rollover discussed was for the month of May. During the meetings, traders were curious about updates on Saudi’s 1 million voluntary cut and if Russia would ask for another exemption.

READ: Saudi government reports drone attack on Riyadh oil refinery

During the meeting, Algeria’s minister suggested a two-month rollover which was different from the one-month rollover, plus gradual easing of cuts that the United Arab Emirates supported. Bahrain and Brunei supported a rollover. Kuwait as well. At that point, Saudi Arabia noted the oil ministers who were in agreement with either a one-month rollover or two-month rollover.

Notably, Saudi Arabia’s minister pointed out that as summer approached, there was avenue for domestic demand to rise and the need to gradually increase output in the second half of the year. It was on this premise that sources revealed that Saudi Arabia might ease their voluntary one million cut by May.

According to sources, Saudi proposed: May 350k OPEC+ ease and 250k KSA, June 350k OPEC+ ease and 250k KSA, and July the remainder to reach 5.6m barrels.

Stanbic 728 x 90

Russia agreed with Saudi’s proposal (a very cordial relationship developing between both nations). At this point, it appeared that the group was in support of a gradual increase in output.

READ: Nigeria’s new and ambitious offshore crude prospects excites IOCs

Saudi Arabia emphasised the compliance aspect again, as it appeared that some countries were taking advantage of other countries’ cuts.

The group finally reached a consensus on a gradual increase for a 3-month periodthe last joker that gave oil traders the poker face.

The easing would be May 350k, June 350k, and July 450k for OPEC+. For Saudi Arabia, it would be May 250K, June 350K, July 400k.

Prior to the meeting, the U.S energy secretary had emphasized that affordable and reliable means of energy should be the priority of Saudi Arabia and its counterparts. However, the Saudi energy minister denied its role in their decision. Perhaps this might have prompted the decision of the group. Debates on Joe Biden’s energy policy ensued afterwards. Analysts claim Joe Biden cared about clean energy and cheaper gasoline, and not the profitability of Shale.

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Unity appears to be guiding OPEC’s recent decisions and prices have been stable, unlike last year’s tumultuous crash after the group’s division.

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