Weak money supply performance tempered by late surge


Thursday, March 13, 2014 11:40 AM / ARM Research


Tepid money supply growth in H1 gave way to decidedly clear cut constriction in H2 as Broad money (M2) fell 5.5% in H2 13 putting FY performance at -4.8%. In contrast, Narrow money (M1) recovered with a 1.1% gain in H2 to pare YTD declines to 5.5%. Even so, gains in M1 were somewhat specious, wholly driven as it were by a 10% MoM jump in December on the back of similar-sized jumps in its sub-components ‘Currency outside banks’ and ‘Demand deposits’ that month. Nonetheless, the latter posted declines in each half of the year, making the H2 rebound in M1 wholly attributable to ‘Currency outside banks’ which rose 28% in H2 (H1: -13%). In a mirror image to the subcomponents of M1, Quasi money, which adds to M1 to make M2, declined 7.6% MoM in December and 10.7% in H2 (H1: 7.3%) driving the H2 reverse in broad money.

Credit to Private sector accelerated by 5.2% in H2 (H1: 3.6%) and appears to reflect the surge in power sector lending as the privatization process largely concluded. Net foreign assets fell 7% in H2 and alongside Quasi money was the only other component to contract MoM (-2%) in December. Additionally, Base money maintained its usual H2 surge, driven in the last two years by ‘bank reserves’ in response to the CBN’s July CRR hikes. However, post-July jump in 2013, in contrast to 2012, bank reserves continued to accelerate markedly through December. While H1 is traditionally weak for money supply the muted H2 performance was surprising, especially in light of less aggressive liquidity mop up with N388billion repaid in H2 vs. N2.5trillion withdrawn from financial system in H1 13. Indeed the December surge, which appeared stronger than typical years and more broad-based across money supply components, accounted for much of the H2 boost in most components, and appeared to reflect traditional factors being aided by AMCON bond repayments as discussed later.


Different policy tools engender stronger response

Pertinently, having highlighted the muted interest rate impact of restrictive money policy on interest rates in H1, the switch in liquidity management efforts away from OMO to CRR appears to have engendered some impact. Whilst modest rises in average term deposits rate in July and November appeared to show markets anticipating monetary policy decisions in those months, actual events were more forceful, driving some rates to their sharpest rise in years. The July hike in CRR on public sector deposits from 12% to 50% drove a 460bps jump in average interbank by August, the effective month. A somewhat unexpected secondary CRR debit, withdrawals of AMCON levies as well as increased currency-related funding combined to push a further ~170bps rise in interbank rates in September 2013 with max lending rates also showing a mild bump up at this time as banks repriced credit in response to liquidity constraints. Nevertheless, the longer term declining trend in the interbank market appears to have since resumed and highlights improving stability in the banks and impact of aggressive deposit-raising over the past few years—culminating in much improved liquidity which should persist with less tightening expected though bank specific measures remain an option. Furthermore, we also expect interbank rates to remain volatile in response to various stimuli but to maintain general downtrend in line with broader market yields.

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