Monetary policy to appeal to old friends

Proshare

Tuesday, August 02, 2016 12:19PM /FBNQuest Research

Two bold steps, perhaps bolder needed
The core developments of the past quarter have been the devaluation in June and the monetary tightening in July. The second was designed to make the first effective, and its message to foreign investors could be paraphrased as ‘welcome back, all is forgiven’. These are bold steps by the authorities: bolder will be required in our view in the form of further rate hikes if the fx market is to attract sizeable autonomous flows and the exchange rate is to settle.

Fiscal achievements to trumpet, too
We note some promising fiscal developments, led by the sizeable FAAC payout of June revenues and the new ceiling for the retail fuel price. The pick-up in non-oil revenue collection compensates for the heightened sabotage of oil installations.

Nonetheless, we expect a trimming of the FGN’s capital spending plans to prevent the alternative of a spiraling deficit. This fiscal narrative and the policy shifts should facilitate the FGN’s efforts to meet its external borrowing requirement.

Modest growth to return in 2017
The economy is set to contract further in the second and third quarters, and by -1.2% over the year. This assumes improved Niger Delta security

Unchanged global drivers of the oil price
We see no reason to revise our take on the oil price, and continue to forecast a spot average of US$50/b for Bonny Light this year.

FGN bonds set to weaken
Monetary tightening, rising inflation and, more importantly, the FGN’s unprecedented issuance programme point to a widening of bond yields. The 16.0% threshold is set to be breached in the mid-curve in the weeks ahead.




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