Fiscal and Monetary Responses to COVID-19 Menace: Racing Against Time

Proshare

Tuesday, March 24, 2020   /12:50 PM / by CardinalStone Research / Header Image Credit: BCL

 

CBN pushes the FX button; activates monetary stimulus packages

In addition to its six initial policy response to the COVID-19 menace churned out on 16 March 2020, the CBN announced a N1.1 trillion stimulus to support local manufacturing & boost import substitution (90.9%) as well as ensure that laboratories, researchers, and innovators work with global scientists to patent and produce vaccines (9.1%). The CBN also quietly devalued the naira by adjusting its FX intervention rates at the I&E (-5.6%% to c.N380/$) and BDC (-5.0% to c.N378/$) markets, amongst others, in response to Nigeria's weakening external position and buffers. At the official window, the naira was also repriced lower to c.N360/$ from N307/$, resulting in a narrower spread between the official rate and the rates in other FX market strata. Elsewhere, the apex bank revealed plans to activate the N1.5 trillion Infraco project and redirect oil & gas dollar sales to itself instead of the NNPC. The former is expected to boost infrastructure while the latter is aimed at ensuring continued funding for petroleum imports and supporting the new policy on fuel price modulation.

 

Proshare Nigeria Pvt. Ltd.

 

Policy responses are likely to provide a calming effect.

We believe the soothing measures could help manufacturers cover important obligations and keep plants running to meet domestic demand without inordinately raising prices to account for the rising cost of raw materials. The measures to support pharmaceutical and healthcare companies are also positive, given the shutdown of countries across the globe, ongoing spread of the COVID-19 virus in Nigeria, and sustained panic buying of pharmaceutical products domestically. However, measures to boost liquidity and economic activities may cascade to some pressures on the naira, which has been well sold in the last two months (CBN intervention: February - $2.1 billion; March - $1.8 billion). These pressures, and continued moderation in oil prices, are likely to offset gains from the mild naira devaluation implemented by the CBN. In addition, even though the FX rates across the I&E and BDC markets are now priced closer to the long-run real effective exchange rate of N382/$, we believe our fair value estimate of c.N437.20/$ better captures the realities of sustained double-digit inflation and twin deficits across fiscal and current accounts. That said, the recent narrowing of FX spreads across the currency markets could imply CBN's growing acceptance of the need to reprice the currency to reflect the state of fundamental variables in challenging periods.

 

MPC may highlight CBN's growth resolve with a 50bps rate cut.

Although the monetary policy rate (MPR) scarcely dictates yield movements in Nigeria, the Monetary Policy Committee (MPC) is likely to use it as a signaling tool for the second time in less than twelve months, at its ongoing policy meeting. Precisely, we expect the MPC to reduce the MPR by 50bps to 13.0% and, possibly, expand its differentiated CRR net to encourage bank lending. For clarity, while we do not expect another CRR adjustment, the CBN may become more accommodative in its discretionary implementation of the CRR to motivate banks to key into its growth campaign. Our prognosis is largely in line with CBN's responses to the 2008/2009 global economic crisis and the extended oil price crash that resulted in Nigeria's 2016 recession. Importantly, CBN's increasing dovishness is likely to cap scope for significant interest rate increases in the domestic market but could fail to stall FPI outflow in isolation. Among other things, FPIs may feel that the mild currency repricing does not sufficiently compensate for the increasing risk of credit rating downgrades amidst weaker oil price and production outlook. On this wise, the CBN may likely leave carry trade opportunities attractive enough at the OMO market.

 

Fiscal intervention may be needed to stimulate demand

As part of measures to prevent a meltdown of the Nigerian economy, we anticipate more fiscal responses from the Federal Government. These measures are likely to complement already announced monetary policy initiatives and fiscal drives. In our view, CBN's stimulus (c.2.1% of GDP) may not be weighty enough to offset potential shocks from the current crisis. We hold the view that a significant stimulation of consumption and direct intervention in healthcare from the fiscal authorities may be more impactful on households. For instance, we believe the direct reduction of PMS price to N125/litre from N145/litre, to reflect the fall in oil prices, could lead to cost savings and higher consumption for consumers in coming months. Other than this, we see other plausible fiscal initiatives likely to be rolled out:

 

Proshare Nigeria Pvt. Ltd.

Budget review could mean record fiscal deficit in 2020

 

The Federal Executive Council (FEC) recently approved a N1.5 trillion cut to Nigeria's 2020 budget amid the recent crash in oil prices to $20/barrel levels. Notably, FG revised its oil price benchmark to $30.00/bbl (from $57.00/bbl), while leaving its oil production target unchaged at 2.18 mbpd. The resultant reduction in oil revenue and projected non-oil revenue cut1 may result to a 45.0% decline in budgeted revenue for 2020. Similarly, government expenditure was reduced by N1.5 trillion after capital expenditure projection was cut by 20.0% and recurrent expenditure was surprisingly slashed by 25.0%. For us, the budget review was a necessity given recent oil price shocks. However, we believe that the government is still likely to underperform its revenue target for two reasons. Firstly, we see significant risks to oil production forecast of 2.18 mbpd as deep offshore production (c.40.0% of Nigeria's oil production) may be disincentivized if prices remain around current levels of $20/barrel (vs. average upstream production cost of $30/barrel). Secondly, we believe that the initial budget overestimated potential revenue from other non-oil sources such as FGN balances in special levies account, FGN share of actual balance in special accounts, and Signature bonus/Renewals revenue. 

 

Proshare Nigeria Pvt. Ltd.



 Proshare Nigeria Pvt. Ltd.


Reports

  1. Of Swans and Free Markets Capitalism - Lessons for Nigeria
  2. Coronanomics: Inside Nigeria's Stock Market Response
  3. Global Markets Tumble As Oil Prices Dip To Five Year Lows
  4. Coronanomics: Understanding The Darker Side of A Virus's Economic Downside
  5. Coronavirus: Establishing The Nexus Between A Bug and Global Equity Markets

 

Proshare Nigeria Pvt. Ltd.

 

Related News - Global Markets

  1. The Federal Reserves is Running Out of Options to Stave Off a Coronavirus Depression
  2. Coronavirus Crisis Is Crushing Global GDP Growth
  3. COVID-19 Outbreak: How is Africa faring?
  4. Fed Actions, US Banks Discount Window Use Prudent Amid Turmoil
  5. There Is No Systemic Risk - Feedback From Goldman Sachs' Conference Call Held Sunday
  6. Coronavirus Containment Actions Pose Material Risk to Global Structured Finance
  7. Federal Reserve Cut Rates to Support the Flow of Credit to Households and Businesses
  8. Africa's Economy and Coronavirus: Business as usual?
  9. South Africa Slips into Recession
  10. Angola to Sell 30% Stake in Sonangol by 2027
  11. Coronanomics: Inside Nigeria's Stock Market Response
  12. A Monday to Remember, Few Places to Hide
  13. Global Markets Tumble As Oil Prices Dip To Five Year Lows
  14. South Africa's Economy: At The Mercy Of Power Sector

 

Proshare Nigeria Pvt. Ltd.

 

Related News - Nigeria Economy

  1. Of Swans and Free Markets Capitalism - Lessons for Nigeria
  2. Hiccup in Trade Activities Ahead
  3. Can the Nigerian Economy Survive the Virus?
  4. Cash Injection Due for Struggling Institutions; FGN Promissory Notes Amounted to N968bn
  5. COVID-19: CBN to Inject N1trn Stimulus Across Critical Sectors of the Economy
  6. Nigeria's Economy Under Strain As Inflation Rate Rises
  7. Headline Inflation Increases By 12.20% YoY In February 2020; 0.07% Higher Than January 2020 Rate
  8. Global Shocks Alters Nigeria's Short Term Outlook - NOVA
  9. Facebook Collaborates with NCDC and WHO to Tackle Misinformation on Coronavirus
  10. Weekly Economic and Financial Commentary - Week Ended Mar 13, 2020

 Proshare Nigeria Pvt. Ltd.


Related News - Monetary Policy

  1. Monetary Policy Preview - Caught Between the Devil and the Deep Blue Sea
  2. Fiscal or Monetary, Both, Neither?
  3. COVID-19: CBN, Bankers' Committee To Support Pharmaceutical Coys
  4. Bankers Committee Reviews Impact of COVID-19 On Economy, Announces Support Packages
  5. Coronanomics: Figuring Out CBN's Recent Policy Intervention
  6. CBN Policy Measures In Response to COVID-19 Outbreak and Spillovers
  7. Bank of England Measures to Respond to The Economic Shock from COVID-19
  8. Bank's Lending Rates Decline Albeit Slower Than Expected
  9. The Policy Wave in the Nigerian Banking sector: A Poison or a Pill?
  10. The Rationale for the Hike in the CRR 


Proshare Nigeria Pvt. Ltd.


Related News - Fiscal Policy

  1. FG Launches Financial Transparency Policy Portal
  2. Treasury Single Account - The Puerto Rican Government Earned $49m in Interest Fiscal YTD
  3. Friedrich Hayek and The Price System: The Future Of Classical Liberalism and The Free Market
  4. Economic and Institutional Restructuring for the Next Nigeria - Soludo
  5. How Government Policy Affects Business , Society In National Development and Changing Environment
  6. Nigeria's Fiscal Quandary: A Revenue Problem Or A Debt Problem?
  7. Irrespective of Who Wins 2019 Elections, ERGP Should Be Sustained - Toyin Sanni
  8. 2019-2021 MTEF and Fiscal Strategy - First Fiscal Projections Through to 2021
  9. Government Role In The Economy - Differentiating Policies And What Elections2019 Comes Down To
  10. Federal Government releases 2018 Fiscal Policy Measures
  11. Buhari Signs Bills Granting Financial Autonomy To State Assembly And Judiciary; Signs 3 Others

 

Proshare Nigeria Pvt. Ltd.


Related News - Health

  1. Philanthropic Efforts Towards COVID-19 Containment Globally
  2. Non-Essential Federal Public Servants to Stay and Work From Home to Check Spread of COVID-19
  3. COVID-19: Presidential Task Force Issues Statement; FEC Meetings Suspended Until Further Notice
  4. Coronavirus: Oyo State Activates Emergency Operating Centres, Names Incident Manager
  5. WHO launches Health Alert service on WhatsApp
  6. COVID-19: Lagos and Ogun States Ban High Density Social Gatherings
  7. NCDC Releases Self Isolation Guidance for Nigerians
  8. Coronavirus: Dangote Fertilizer Contractor Staff Quarantined
  9. Africa CDC Guidance on Community Social Distancing During COVID-19 Outbreak
  10. Africa CDC Policy Recommendation for AU Meetings and Travel During COVID-19 Outbreak
  11. FG Calls For Unity Of Purpose Against Impact Of COVID-19

 

Proshare Nigeria Pvt. Ltd.


Related News - Travel and Tours

  1. FG Restricts Entry Into Nigeria from 13 Countries; Suspends Issuance of Visa on Arrival
  2. UK Foreign Office Issues Travel Advice Against Non-Essential Travel Worldwide
  3. Airlines Face Growing Pressure From The Coronavirus
  4. LSTSA Chairman Speaks On Growth Prospects for Tourism In Nigeria
  5. Nigeria Has a New International Airport in Asaba
  6. Zenith Bank Unveils Easy Online Dubai Visa Application
  7. 1.01m Passport Applications Received in 2018 - NBS
  8. National Holidays 2019: Comparison of Four Countries
  9. Emirates Reports a Profit of US$ 237 Million For Its 2018 - 2019 Financial Year
  10. Emirates Unveils its Pavilion for Expo 2020 Dubai Focusing on Future of Commercial Aviation
  11. Emirates Announces Network Updates For 2019

 

Proshare Nigeria Pvt. Ltd.


Related News - State and Local Govts

  1. Fragility of State Government Finances
  2. Can Privatization of Government Owned Enterprises be Instrumental to the Economy's Sustainability?
  3. Invest in Oyo - The Pitch, Frank Talk and Optimism
  4. IGR in Need of Diversification
  5. Lagos Raises N100bn Bond to Finance Infrastructure
  6. N293.80bn Generated as IGR in Q3 2019 - NBS
  7. Fitch Revises Lagos's Outlook to Negative on Sovereign Rating Action
  8. The 4th Mainland Bridge in Lagos: What Has Gone Wrong and Why
  9. Northern Nigerians and the "Poverty" of Ambition
  10. Urgent Need to Bolster States' IGR
  11. Onerous Debt Burden For Most States
  12. Kwara State Recovers N4.8bn Tax Refunds from Previous Administration
  13. Lagos; A Nightmare For Expatriates, But A Place To Make Friends

 

Proshare Nigeria Pvt. Ltd.


Related News - #Coronavirus

  1. Non-Essential Federal Public Servants to Stay and Work From Home to Check Spread of COVID-19
  2. COVID-19: NSE Activates 30-day Remote Work Plan; Remote Trading to Continue
  3. IsDB Supports OIC Countries With $730m To Combat COVID-19
  4. COVID-19: Presidential Task Force Issues Statement; FEC Meetings Suspended Until Further Notice
  5. Quiet Bond Market as COVID-19 Fears Creates Uncertainty Among Investors
  6. The Federal Reserves is Running Out of Options to Stave Off a Coronavirus Depression
  7. ACCESS Releases Update To Key Stakeholders on Coronavirus
  8. COVID-19: NSE Extends Time to File Audited Financial Statement for the Year Ended 31 December 2019
  9. Coronavirus: Oyo State Activates Emergency Operating Centres, Names Incident Manager
  10. COVID-19: Our Compliance with Lockdown and Measures Put in Place To Serve You
  11. COVID-19: CBN, Bankers' Committee To Support Pharmaceutical Coys
  12. Bankers Committee Reviews Impact of COVID-19 On Economy, Announces Support Packages
  13. WHO launches Health Alert service on WhatsApp
  14. Coronavirus Crisis Is Crushing Global GDP Growth
  15. Coronavirus: Firstbank Deploys Measures to Protect Employees, Customers and other Stakeholders
  16. Blunting the Impact and Hard Choices: Early Lessons from China
  17. COVID-19 Outbreak: How is Africa faring?
  18. COVID-19 Pandemic: Ecobank Encourages Customers to Adopt Digital Self-Service Solutions
  19. COVID-19 Pandemic and Latin America and the Caribbean: Time for Strong Policy Actions
  20. COVID-19: NSE Advises Companies to Put Adequate Precautionary Measures In Place Ahead of 2020 AGMs
  21. Can the Nigerian Economy Survive the Virus?
  22. What's Really Happening In Oil Markets?
  23. COVID-19: Lagos and Ogun States Ban High Density Social Gatherings
  24. Banks Bring Down Cost-to-income ratios As Industry Margins Tighten
  25. NCDC Releases Self Isolation Guidance for Nigerians
  26. COVID-19: CBN to Inject N1trn Stimulus Across Critical Sectors of the Economy
  27. Coronanomics: ICIEC Pledges $150m In Insurance Coverage For OIC Members
  28. Coronanomics: Figuring Out CBN's Recent Policy Intervention
  29. Oil Price Plunge to Pressure US Energy States and Locals
  30. Coronavirus to Weaken Sovereign Fiscal Positions; Track Record Matters
  31. FG Restricts Entry Into Nigeria from 13 Countries; Suspends Issuance of Visa on Arrival
  32. UK Foreign Office Issues Travel Advice Against Non-Essential Travel Worldwide
  33. Fed Actions, US Banks Discount Window Use Prudent Amid Turmoil
  34. CBN Policy Measures In Response to COVID-19 Outbreak and Spillovers
  35. Coronavirus Containment Actions Pose Material Risk to Global Structured Finance
  36. Federal Reserve Cut Rates to Support the Flow of Credit to Households and Businesses
  37. World Bank Group Increases COVID-19 Response to $14bn To Help Sustain Economies, Protect Jobs
  38. There Is No Systemic Risk - Feedback From Goldman Sachs' Conference Call Held Sunday
  39. Coronavirus Containment Actions Pose Material Risk to Global Structured Finance
  40. Africa CDC Policy Recommendation for AU Meetings and Travel During COVID-19 Outbreak
  41. Africa CDC Guidance on Community Social Distancing During COVID-19 Outbreak
  42. COVID-19 and the Nigerian Economy: Backed to the Wall
  43. Coronanomics: Inside Nigeria's Stock Market Response
  44. Coronavirus: IsDB President Calls For Coordinated Efforts To Tackle Pandemic
  45. Coronavirus: FG to Review Budget as Oil Price Plunges
  46. Potential Impact of the Coronavirus Epidemic: What We Know and What We Can Do
  47. World Bank Group Announces Up to $12bn Immediate Support for COVID-19 Country Response
  48. China's Official Manufacturing Index Crashed from 50.0 to a Record Low of 35.7 In February 2020
  49. FG Inter-Ministerial Meeting Reviews Strategies On Containing Coronavirus
  50. Arbitrary Increase in Prices of Protective and Hygiene Products on Account of Coronavirus Concerns
  51. Coronanomics: Understanding The Darker Side of A Virus's Economic Downside
  52. Coronavirus: Establishing The Nexus Between A Bug and Global Equity Markets
  53. WHO Director-General's Opening Remarks at the Media Briefing on COVID-19
  54. First Case Of Coronavirus Confirmed In Lagos
  55. COVID-19 Refinancing Risk Elevated for 6% of Rated China Corps
  56. Global Ports Vulnerable to Coronavirus-Related Volume Declines
  57. The First Innovative Corporate Bond Supporting Anti-Epidemic Is Given The Green Light To Issue
  58. Coronavirus May Add to Liquidity Strain for Some APAC Corporates
  59. Coronavirus Set to Dampen China's Economic Growth
  60. What Coronavirus Means for Investors
  61. Coronavirus Raises Risks for China Toll Road Operators
  62. Coronavirus Could Push Global Oil Market into Surplus
  63. Airlines Face Growing Pressure From The Coronavirus
  64. Coronavirus' Severity Will Frame Effect on Corps, Sovereigns
  65. China Government Suspend Equity Market Trading to Prevent Sell-Off

 

 

 Proshare Nigeria Pvt. Ltd.

 

 

 

READ MORE:
Related News
SCROLL TO TOP