Thursday, February 20, 2020 /09:19
AM / By FBNQuest Research / Header Image Credit: Business Today
We comment regularly on the personal statements of the members of the monetary policy committee (MPC) because trading desks, portfolio investors and the community of analysts should be familiar with the thinking of decision-makers. The latest statements following the meeting in January are revealing for the justification of the 500bps rise in the cash reserve requirement (CRR) ratio and for the views on banking sector health. Nine of the eleven members present voted for the hike, leaving two who wanted no change in the ratio.
The committee feels that the CRR is the most potent monetary weapon in its armoury, and the majority back the hike as a response to excess liquidity in the banking system. The excess is attributed to the maturity of OMO bills and the FGN's fiscal operations. The hike would normally deter the banks from expansion of their loan books. However, the majority arguments runs, this is not a material risk because banks are struggling to meet the threshold for the loan-to-deposit (LDR) ratio.
The hike is also warranted because headline inflation has reached its optimal level of 12.0% y/y before undermining growth prospects. This is based upon unattributed "empirical evidence".
Members find the banking industry in good health, and several cite the decline in the ratio for non-performing loans (NPLs) to 6.1% at end-December. One notes that the ratio for return on equity compares favourably with peer markets such as Turkey, South Africa and Malaysia.
The boost to credit extension from the LDR circulars is rightly praised although there is no suggestion that some of the new loans might turn sour.
We see that the industry LDR ratio stood at 60.6% at end-December, highlighting the gap with the CBN's set minimum of 65%.
Members are rightly preoccupied with the suboptimal debt dynamics. There is no suggestion in the statements, however, that the CBN's success in driving down the FGN's borrowing costs will have created some headroom around the N2.45trn projection for total debt service in the approved 2020 budget.
The consensus is that the global outlook has improved due to the "phase one" agreement on trade relations signed by the US and China, and to the clarification on Brexit. When the committee meets in March, it will doubtless reflect on the coronavirus.
At the very best, the forecast of 6.0% growth in China for 2020 in the IMF's latest World Economic Outlook update will surely have to be scaled down by two percentage points. (Indeed, the Fund has this week trimmed its forecast for Nigeria this year to 2.0%.).