Vetiva Research - Pre MPC Release: March 2011




Monday, March 21, 2011
March 22 MPC Meeting: More Tightening in the Offing...
Despite February’s improved inflation rate at 11.1% (-1.0pps from January), our core view is for a hike in the Monetary Policy Rate (MPR), and further tightening with other policy instruments to lower inflation expectations, restrain domestic financing of the Federal Government deficit, moderate the pressure in the FX market and its resultant effect on foreign reserves.  
Whilst we note the limits of monetary policy due to structural bottlenecks (see our Feb’11 Note), our stance is premised on the following:
Significant threat to Monetary Policy from the fiscal side
  •  The 2011 budget passed by the National Assembly shows an upward revision of the benchmark crude oil price from the originally proposed $65/barrel to $75/barrel which translates to a higher revenue allocation to the three tiers of Government.

  • An election year also reinforces our perception that we may have a supplementary budget as the imminent administration comes in with more capital and recurrent spending plans. 
  • We expect the projected fiscal deficit to widen to around 5.6% of GDP vs. the 3.6% in the budget proposal. This gap will likely be financed by domestic borrowing through the Federal Government’s bond issuance programme. 
  • A rate hike will make borrowing more expensive in anticipation that this will curtail an impending expansionary stance.   
Interest rate spread remains high
  • Despite two rate hikes and other tightening measures since September 2010, real returns on savings remain negative, though yields on the longer end of the curve are now positive. 
  • As the financial system prepares for the removal of interbank guarantee at a guided June 2011 date, it is necessary for banks to begin to aggressively attract deposits for asset creation. 
  • Whilst we note the need to stimulate credit growth, we recall the muted effect of the MPR on lending rates. We would rather push for the de-risking of some sectors of the economy by the CBN to stimulate lending, and to encourage diversification of credit away from the prime/safe borrowers. 
Exchange rate stability 
  • Despite a YtD increase in crude oil prices (bonny light) by c.23% to $115.2/barrel, reserve accretion has been at a slower pace (c.8%) over the same period. Whilst we note the impact of higher subsidies, given the increasing price of crude (Feb. landing cost of PMS at $118.12/barrel), we believe the recent surge in demand at the bi –weekly auctions has also accounted for the slow rate of accumulation.

  • Uncertainties which lie ahead of the elections (barely 3 weeks away) have supported the weakness of the currency as evidently seen in the interbank and most pronounced in the parallel market rates. 
  • We believe the commitment of the CBN to exchange rate stability will keep the official rate within the band though with attendant implications on reserves. A tighter environment will rein liquidity thereby reducing impending speculation on the currency.


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