MPC Maintains Status Quo but Ignores Elephant in the Room

The Monetary Policy Committee (MPC) held its scheduled 6th and final meeting for 2016 on the 21st and 22nd of November. The conclusions from the two-day deliberations were broadly in consonance with our prognosis in the Pre-MPC note; “Blunted Policy Tools Call for Rollback of Administrative Measures” where we projected that the MPC will likely hold all rates constant whilst reinstating the need for the CBN’s hierarchy to properly implement currency market reforms in order to regain waning credibility. The MPC weighed the events that have shaped the global and domestic landscape since its previous meeting in September concluding that its policy tools are limited in influencing output and unemployment. Consequently, the Committee voted overwhelmingly 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 +200bps and -500bps.

We are in accord with the MPC’s decision to maintain status quo on current interest rate environment as traditional monetary policy tools have become blunted having reached their limits in stimulating investor confidence. We believe that hiking interest rate would not buoy foreign investor confidence in returning to the Nigerian market as the holdback in the return of foreign capital is largely tied to the lingering currency risk and perceived misgivings regarding the credibility and transparency of the current FX market structure. Also, cutting interest rates at this time may not necessarily spur real sector lending by Deposit Money Banks (DMBs) but generate appetite for government securities and speculative FX positions.

Nevertheless, the pin drop silence regarding the apprehension on the credibility and transparency of the operations of the interbank market remains a concern yet to be allayed. We believe that the MPC press briefing may have been a perfect platform for the monetary policy managers to allay investors’ concerns regarding the interference of an invisible hand in market operations. We expect that the FX market will continue to face liquidity crunch while other macroeconomic indicators stay downbeat given limited fiscal space to substantially stimulate economic  activity while FX administrative measures continue to restrict private capital inflows necessary to provide buffer for weak external current account operation.

Whilst the MPC meeting was on-going, the National Bureau of Statistics (NBS) released Q3: GDP estimates on Monday, confirming our expectation of a further contraction in GDP growth. Nigeria’s real GDP declined 2.24% Y-o-Y in Q3:2016 from -2.06% Y-o-Y in Q2:2016 largely as a result of suppressed activity in Oil, Services and Manufacturing sectors. Although the real GDP contraction was slightly ahead of our -2.3% forecast, it was weaker than Bloomberg’s analysts’ consensus projection of -2.0%. Oil real GDP fell 22.0% Y-o-Y in Q3:2016 while the sector’s contribution to total GDP waned from 8.3% in Q2:2016 to 8.2% in Q3:2016. The contraction in Oil GDP in the quarter was a result of the slump in production numbers - which averaged 1.63mb/d compared to 2.17mb/d in Q3:2015 - as supply disruptions by the militants in the Niger Delta region continued.

The Non-Oil sector reversed the negative growth trend of the previous two quarters to inch 0.03% Y-o-Y higher in Q3:2016. The surprising positive performance (albeit marginal) of the Non-Oil sector was largely on the back of the better than expected output from the Agricultural sector (+4.5% Y-o-Y) which offset the impact of the 4.4% and 1.5% Y-o-Y contractions in Manufacturing and Services sectors. Agriculture contributed 28.7% to total real GDP In the period under review.

We expect the economy to record a negative growth in Q4:2016 but at a slower pace, premised on low 2015 base, resilient performance in the Agricultural sector and slight improvement in Oil production numbers. According to the OPEC monthly oil market report for October, Nigeria’s oil production averaged at about 1.6mb/d but the Minster of Petroleum noted that oil production went up to 2.1mb/d in November before talks broke down with militant groups. We believe a return of the economy to a positive growth path is largely predicated on the FGN’s ability to contain the militancy in the Delta region whilst continuing the reforms in the Agricultural sector. We expect 2016 Y-o-Y GDP growth to settle at -1.6%. Yet, to achieve sustainable high medium term growth, policy environment needs to improve to boost private capital inflows and deepen private sector investments.