Wednesday, November 13, 2019
/09:37 AM / By Meristem Research / Header Image Credit: Brand Spur
Global Growth Concerns Subsist
In October, the International Monetary Fund (IMF) released its latest revision of the World Economic Outlook amidst a backdrop of rising global trade barriers and a downturn in global manufacturing activity. The Fund has now pegged global growth at 3.0% in 2019, a significant downgrade of 3.3% from April, 2019. Much of the deterioration in global growth is attributed to the protracted Sino-US trade spat and geopolitical tensions elsewhere in the Middle East and Asia.
To this end, major central banks around the world have maintained their accomodative stance in a spirited bid to boost economic growth. In October, the US Federal Open Market Committee (FOMC) cut rates to between 1.50% -1.75%, while the ECB maintained status quo (-0.50) from its last meeting in September. In Nigeria, the Monetary Policy Rate remains at 13.50%, with the monetary authorities keen to achieve the dual objectives of growth and price stability. However, the Central Bank continues to pull on other levers such as restriction of domestic participation in Open Market Operations (OMO) and higher Loan-to-Deposit Ratio (LDR) floors for Banks, to stimulate growth.
On the currency front, the Naira remained relatively stable in October, with gains of 0.03% against the U.S dollar to close at NGN362.66/USD in the I&E window, leading to an expectation that increases to the core index will be marginal.
However, the FAO's Food Price Index ticked up by 5.97% year-on-year in October - the third consecutive month of increases, largely due to higher Meat (+13.87%), Dairy (+5.58%) and Oils (+2.64%) prices. While this should ordinarily portend intensified inflationary pressures, owing to Nigeria's large food import bill, the closure of the country's land borders has emerged as the major upside risk to inflation.
Border Closure Hits Food Prices Hard; Major Upside Risk to CPI
In August, we witnessed a decline in Food prices as a result of the harvests. In September, the impact of the land border closure announcement began to be felt in commodity prices, triggering a 22bps uptick in CPI. Data from our most recent survey of commodity and food prices suggests a significant expansion in the prices of staples such as Rice, Poultry and Oil in October. Just before announcement of the border closure in August, a 50kg bag of Rice retailed for c. NGN12,000.
As the full effect of the closure set in, prices surged by between 75.00% and 100.00% to NGN21,000 and NGN24,000 per bag. Poultry products (Chicken and Turkey) and Oils have also recorded average price expansions of 33.00% and 17.00% respectively over the same period. Combined, these items formed the strongest inflationary pressure points, as prices of other local staples remained relatively stable. CBN's Purchasing Manager's Index also supports the view that inflationary pressures are building; PMI for October increased to 58.2 from 57.7 in September and we envisage that the imminent upward review in energy tariffs and extension of the border closure period to January 31, 2020 should sustain pressure on the CPI in the near term.
Following our evaluation of primary inflationary triggers in the economy, we forecast that headline inflation will tick up by 0.08% YoY, to 11.32% for October 2019.