CBN – the step to normalisation

by | November 20, 2017 12:35 am

On the 20th and 21st of November, the CBN Monetary Policy Committee will meet for the last time in 2017. The key mandates of the Committee are to facilitate the attainment of price stability for the naira and to provide technical support for fiscal policy inter alia.

At its previous meeting held in September, the bank was quick to note that Nigeria had exited recession which began in Q1 2016 by Q2 2017, i.e. the country had endured five quarters of negative growth. The main triggers that spurred the economy back on the growth path were identified as (1) macroeconomic stimulus and (2) price stability both related to monetary policy and as such within the direct influence of the apex bank. It was also noted that inflationary pressure had largely subsided having declined steadily to 15.98% in the month of September after peaking at 18.72% in January 2017. This is largely attributable to the prevailing tight monetary policy stance of the apex bank. Moving forward, the Committee was hopeful that active implementation of the 2017 budget could boost aggregate demand and employment thereby accelerating growth in Q3.

Without prejudice to the CBN, market watchers have noted that government bureaucracy, and low levels of budget execution continue to hamper the economy thus limiting the achievement of the Bank to monetary aspects alone. This fact is further buttressed by recent reports which show that as at end of July 2017, government spending was 30% below target. It is pertinent to note at this juncture that the Ministry of Finance had stated at one of its recent media briefings that spending on capital projects was the government’s key strategy to return the economy to the path of growth.

Perhaps the biggest achievement which the CBN can lay claim to during the year is the announcement of its new FX regime in February, closely followed by the launch of the Investors’ & Exporters’ (I & E) window in April. The Investors’ & Exporters’ FX Window (I&E FX Window) is the market trading segment for Investors, Exporters and End-users that allows for FX trades to be made at exchange rates determined and agreed within willing buyers and sellers, thus ensuring efficient and effective price discovery in the Nigerian FX market.

The establishment of this window effectively addressed the issues of price discovery, foreign investor confidence, and depreciation of the naira. Furthermore, the window has also helped improve liquidity in the Nigerian FX market whilst at the same time eliminating the arbitrage opportunities evident between the parallel and official markets. Foreign investors are now able to freely access the Nigerian financial markets with minimal concerns on how they can exit when necessary.  Within 6 months of its establishment, the I & E window has traded about $16.8bn as of early November thus underscoring its perception as a major source of FX liquidity in the Nigerian foreign exchange market.

On its own part, the CBN has injected circa $13.28bn into the FX market from February 21st till date, despite managing a 17% growth in its foreign reserves during the period to $34.272bn as of 13th November, 2017. Accretion in the nation’s reserves has been largely attributed to the stable and marginally increasing volume of daily crude oil production which as at August had risen circa 1.742mbpd up from 1.533mbpd being produced in January. Coupled with the appreciation in benchmark Brent crude price which opened the year at $59.05/bbl, dipped to $45.51/bbl in June, before soaring to current levels c.$62.61/bbl.

It is expected that the CBN will continue to play its part towards wooing foreign investors into the country as this is one of the most effective ways of achieving further price stability (and marginal appreciation) for the local currency as Investors channel their capital to Nigeria for business. At a recent road show in London, the CBN reminded potential investors that return on investment (ROI) in all sectors of the economy is amongst the best in the world.

Already, the machinery is in place for another planned $2.5billion Eurobond issuance by the Federal Government before the end of the year according to reports. However, the recent downgrade of Nigeria’s sovereign issuer rating coupled with the lowering of the long-term foreign-currency bond ceiling by a major global rating agency may have adverse effect on the eventual coupon and volume of the issuance.

A cursory look at borrowing costs and the attendant impact on investment volumes show that despite dropping rates across the various tenor buckets at the Treasury Bills Primary Auction from average of 16.533%p.a. to current levels at 14.825%p.a., the CBN still expects that at current yield levels, Nigeria would remain a choice destination for global investors. Furthermore, with longer tenor (c.180-day) OMO Bills still being sold almost daily at a true yield of 21.6545%p.a. and 5 to 10-year FGN bonds being sold at coupon of 15%, the bouquet of mouth-watering fixed income offers available to potential investors remain irresistible.

Now the big concern amongst market watchers is what the CBN’s next move will be in terms of policy rate and overall policy stance. At its last meeting, the Bank noted its reluctance to hike rates in view of valid concerns that such a move would further hinder credit delivery to the private sector, as well as trigger an unwelcome increase in cost of borrowing. On the other hand, adopting an expansionary stance at this point could adversely upset inflationary pressure whilst serving as a trigger for price instability. On the back of the foregoing, the Bank felt it appropriate to keep rates on hold. Furthermore, the Committee had also noted that growth remains fragile as the positive effects of a complementary fiscal policy continue to lag. Based on the foregoing, the Committee felt more time was needed before any further action is required.

The position of the apex bank at its September meeting is quite understandable given the justifications provided. Furthermore, there has been no significant negative change in fundamental indices since the last MPR held in September. There have been some positive developments though with regard to crude oil price and foreign reserves. Benchmark Brent crude price has appreciated by another 8% from $58.03/bbl when the apex bank last met to $62.61/bbl as of 17th November. Based on NNPC’s July 2017 report, market watchers expect crude oil production for the second half of the year to average at 2.05mbpd baring all unforeseeable circumstances. Q3 growth figure is due for release before the Committee concludes its meeting. Market forecast is at 2.5% up from 0.55% printed for Q2. Actual outcome around this forecast would be deemed positive albeit not enough to significantly alter the decisions of the MPC. The recently presented 2018 budget has also put forward as one of its assumptions that daily oil production would average at 2.3mbpd (albeit some find this rather unrealistic).  FX end-users continue to meet their needs through the liquid I&E window, or the subsidised CBN (SMIS) windows. Rates between the parallel market and the NAFEX windows continue to reflect the convergence pattern which further underscores the desired price stability. System liquidity has been largely tight, averaging N88billion short through the month of September as the CBN continued to sell OMO bills, and issue stabilisation securities in a bid to keep system liquidity within acceptable levels, and possibly discourage frivolous FX demand. Looking forward, the International Monetary Fund (IMF) projected that the Nigerian economy will expand by 1.9 per cent in 2018, but would remain subdued due to population growth, cautioning that the country’s projected growth was still lower than its population growth rate of 2.7 per cent. Whilst population growth rate may not directly fall within the purview of the apex bank, it would be worthy of note that projected growth would be subdued. This qualifying statement should to some extent suppress any hawkish undertone in the bank’s policy decisions. Inflationary pressure has also continued to wane with another drop in the recently published October numbers to 15.91% down from 15.98 reported for the month of September.

Based on the foregoing, it is reasonable to expect the MPC to keep its benchmark rate and other key policy indices on hold into the New Year. The ancient Athenian playwright Aristophanes once said “a man’s homeland is wherever he prospers”. The MPC has found its homeland at least for now. It would only be wise for it to perch there.


By: Olawale Hamed, Currency Trading Unit, United Bank for Africa Plc