The Central Bank of Nigeria has revealed that it will continue with its monetary policy measures aimed at boosting the stock market, even as the country faces higher inflation and remains in recession.
This was made known by the CBN Governor, Godwin Emefiele, in his remarks at the end of the monetary policy committee meeting held last week. He believes a bullish stock market is a leading indicator of a medium-term macroeconomic recovery of the economy.
According to Mr. Emefiele,
“On the Financial Markets, the Committee considered the improved performance in the equities market as a leading indicator of medium-term macroeconomic recovery. Thus, it urged the Bank to maintain its policies on exchange rate and financial system stability to attract more investment into the Nigerian equities market.”
Nigerian stocks are one of the best performing asset classes and stock markets in the country. Stocks are currently up 29% YTD, reversing all the post-Covid-19 losses incurred at the height of the lockdown in March and April.
Why this matters: The CBN’s decision to continue with its policy of lowering interest rates is a major boost for the stock market, and an indication that the rally currently being enjoyed by investors will remain sustained.
- A preferred next line of action will be to encourage robust capital market activities such as IPOs and other forms of public offers.
- With limited investment outlets, more and more inflow from institutional investors could create new demand for capital formation.
- However, the pressure on the exchange rate could force a change in policy, increasing interest rates to attract foreign investor dollars in Eurobonds and other foreign offerings.
How we got here
The positive performance for stocks is largely driven by central bank policies that have reduced interest rates for other competing asset classes, such as treasury bills and corporate bonds. Treasury bills yields have fallen below 1% in recent weeks, with true yields falling into negative territory earlier in November.
For most parts of the last two years, Nigerian stocks remained unattractive despite offering dividend yields in the double digits. Yet, investors will rather go for risk-free treasury bills and FGN Bonds.
Since the last massive stock market crash in 2009, local investors have relied on activities of foreign portfolio investors in deciding what stocks to buy and when to even invest in the stock market.
However, with Covid-19 triggering billions of dollars in foreign portfolio outflows exited stock markets, frontier markets like Nigeria suffered massive losses until the central bank policy of low-interest rate environment opened opportunities.
The central policy that gave birth to lower interest rates began in May 2019, when it increased the cash reserve requirement of local banks and forced a loan to deposit ratio of 65%.
This forced banks to either lend more to the private sector or avoid being debited via the cash reserve requirement provisions of the bank. Banks felt lesser impetus to stimulate customer deposits, thus increasing the amount of naira in the economy looking for where it will be invested.
As Nairametrics earlier reported, in the third quarter of 2019, the apex bank announced it would stop local nonbanking investors from purchasing its lucrative OMO bills, releasing over a trillion into the economy. As OMO bills matured into 2020, trillions more unlocked in the economy with very few options available for investments.
It is likely that the stock market will close positively by year-end, reversing most of the losses incurred in the last 18 months. The CBN’s latest decision to continue with its policy is an indication that the drive to look inward in the quest to resuscitate the economy is being pushed on all fronts.