MPC Expectedly Holds Policy Rates as Cyclical Growth Recovery Extends to Q3

The Monetary Policy Committee held its 6th and final meeting for 2017 on the 20th and 21st November and in line with consensus expectation, committee members overwhelmingly voted to retain policy rates at current levels whilst emphasizing on the need to consolidate on gains in external balance and domestic price stability. Hence,

  • MPR was held at 14.0%;
  • CRR was held at 22.5%;
  • Liquidity ratio was retained at 30.0%; and
  • The asymmetric corridor was retained at +200 and -500 basis points around the MPR.

Despite the broadly consensus view on the MPC outcome, there were calls from several quarters in the run up to the meeting for monetary easing via reduction in benchmark rate to support the nascent and slow pace of economic recovery. Addressing this argument, the CBN Governor in his speech acknowledged the justification for easing: weak economic growth vis-à-vis supportive external sector variables – FX rates convergence, improving capital inflows, steady oil prices and growth in reserves. Yet, the committee overwhelmingly voted to retain policy rates in consideration of the downside risks of a premature easing cycle, which include, 1) Increased demand for imports and negative feedback on current account balance, and 2) Increased pressure on exchange rate and consumer prices.

Although the MPC reiterated its policy tightening objective, the bullish run in the fixed income market has continued unabated, driven by decline in primary market issuance rates – T-bills, OMO and bond auctions – as well as fiscal strategy to reduce domestic debt issuances in favour of external debts. At the DMO bond auction held mid-week, the 5- Year and 10-Year bonds on offer were issued at a marginal rate of 14.8% apiece, 20bps lower than October issuance rates. Average yield on benchmark bonds in the secondary market has also moderated 123bps YTD with long duration bonds enjoying the most buying interest – a pointer to expectation of lower interest rate. We believe the moderation in yield environment and FGN external borrowing is supportive of liquidity in the domestic market. Hence, we expect further normalization of interest rates in the domestic market although the much anticipated Policy rates cut might not occur until the March/May MPC meeting.

Q3:2017 GDP Report: Growth Accelerates on Cyclical Recovery in Oil Sector
On the 20th of November, the National Bureau of Statistics (NBS) released Q3:2017 GDP report which expectedly showed an expansion in the economy for the second consecutive Quarter. Total output in the economy grew 1.4% Y-o-Y in Q3:2017, below Bloomberg Consensus and Afrinvest Research projections of 1.5% and 2.7% respectively, but above revised Q2:2017 GDP estimate of 0.7% (from 0.5% reported earlier).

Underlying the acceleration in growth in the Quarter is continued expansion in Oil sector, which grew 25.9% Y-o-Y to offset the 0.8% contraction in Non-Oil sector. The Oil sector expanded for the second time this year, gaining momentum from a soft 3.5% Y-o-Y expansion in Q2, due to improvement in oil production volume to 2.0mbpd from a low base of 1.6mbpd in Q3:2016. This was unsurprising given the decline in frequency of militants’ attacks on oil installations in the Niger Delta in recent times, following the FGN’s engagements with political and ethnic leaders in the region. Non-Oil sector however remains a pressure-point, as it relapsed into negative growth after showing positive signs in Q1 and Q2. The disappointing performance of the Non-Oil sector - which was largely unexpected given positive readings from leading variable such as the PMI - is evident in virtually all the main Non-Oil sub-sectors, save Agriculture will expanded 3.0% Y-o-Y. Manufacturing output fell 2.9%, dragged by Oil Refining (-45.4%) and Cement (-4.6%), while Services contracted 2.7% Y-o-Y on the back of weaker activities in the Trade (- 1.7%), ICT (-4.5%), Construction (-0.5%) and Financial and Insurance (-5.9%) sub-sectors.

The generally disappointing Manufacturing and Services sectors growth casts a shadow on an otherwise robust Oil & Agricultural sectors performance, thus emphasizing the need for structural reforms to buoy Non-Oil productivity and compliment the cyclical tailwind in the Oil sector. Against the backdrop of the lesser than expected growth in Q3, we have slashed our FY:2017 and FY:2018 growth forecasts from 1.2% and 2.4% to 0.7% and 1.6% respectively, reflecting 1) anticipated steady decline in oil sector growth from Q4:2017 as low base effect wears off, and 2) Sticky headline inflation dampening real consumption spending.