The Monetary Policy Committee (MPC) held its 5th meeting for the year on the 19th and 20th of September and the conclusions from the meeting were broadly in line with earlier projections from our Pre MPC Note - “Competing Objectives Call for a Balancing Act” - in which we opined that the MPC will “maintain status quo whilst reinstating the need to fully implement the currency market reforms to regain credibility and push for fiscal-monetary policy coordination to implement structural reforms”. Subsequently, the Committee assessed the current headwinds facing the economy as well as the limitations to monetary policy in tackling these headwinds and elected to allow reforms that have recently been implemented, especially in relation to the FX market, to develop further before a tweak in policy rates. Consequently, all 10 members voted to:
- Retain the MPR at 14.0%;
- Retain the CRR at 22.5%;
- Retain the Liquidity Ratio at 30.0%; and
- Retain the Asymmetric Window at +200 and -500
Our Reaction: Decision Positive for the Economy and Financial Market
We think the MPC’s decision was clearly a balancing act as hiking rates further would have done little to thwart inflationary pressures which remain largely structurally driven, while easing rates in response to political pressures would have communicated policy inconsistency and worsen capital account position. The CBN has further demonstrated its commitment to the policy tightening stance by aggressively mopping up liquidity in the financial system this week via OMO auctions at rates similar to previous auctions.
We believe that the decision of the MPC to maintain policy consistency and resist political pressures to cut rates will reinforce the independence of the CBN which has come under scrutiny over the last few months, whilst also emphasizing priority policy objectives necessary for businesses and markets to reasonable form expectations. In the medium term, we think it is also positive for financial assets as capital inflows are returning, albeit tepidly, to the market. Revised Q2:2016 capital importation report recently released by the National Bureau of Statistics indicated that total capital importation settled at US$1.0bn which is a 46.6% improvement from Q1:2016 level; also, portfolio inflows rose 38.7% from Q1:2016 to US$337.3m in Q2:2016. Worthy of note is the fact that a significant jump in overall capital inflows was recorded in the last month of the quarter (June) and this is broadly linked to the reforms in the FX market which were implemented in the month.
In an effort to bolster FX liquidity and raise revenue to finance economic diversification plan, the National Economic Council (NEC) headed by the Vice President at a meeting this week, considered the proposal of the Minister of Budget and Planning to generate funds via assets sale, advance payment of licenses renewal, infrastructural concession and use of recovered funds. Also, President Buhari, during a speech at the Africa Business Forum in New York on Wednesday 21st confirmed the administration is already in discussion with General Electric to concession existing rail assets. We believe the assets sale strategy is a viable short term option to raise revenue as borrowing capacity is constrained by already high debt servicing cost (relative to revenue) while oil and tax revenues are significantly lower than required to meaningfully boost infrastructure stock and deepen economic diversification.