NSR H2 2017 (11) - Monetary Indicators Swamped By Hawkish Dogma


Tuesday, August 1, 2017  06.20  PM / ARM Research  

We continue with the serialization of ARM’s  “The Nigeria Strategy Report” with today’s excerpt focusing on changes in Nigeria’s monetary aggregates over H1 2017. Thereafter, we provide our outlook on same for the rest of the year.  

Tight environment weighs on monetary aggregates

Similar to views at the start of the year, developments on the currency front dictated the movement of monetary aggregates in H1 17. Coming from 2016, when FX induced growth in net foreign assets drove expansion in aggregate credit and deposit, the first half of 2017 saw impact of monetary tightening weigh on monetary indicators. Specifically, broad money (M2) has been on a contractionary trend since the turn of this year, with its fourth consecutive MoM decline in April been the longest since 2005. 

In our view, the negative trend of M2 has reflected impact of tighter monetary policy following CBN’s move to stabilise the naira. Consequently, the annualized reading of -8.5% was at variance to CBN’s target of 10.9% for 2017. A Parse through breakdown shows contraction in both constituents of M2—narrow (-14.4%) and quasi money (-3.0%). The weakness in narrow money (M1) emanated from currency outside the banking system which fell 11.7% as well as lower demand deposits (-14.9%).

The cutback in the latter reflected lower private sector deposits both at CBN (-40.5% to N2.0 trillion) and Commercial banks (-1.1% to N6.1 trillion) which neutered higher deposits at Merchant Banks (+30.1% to N28.2 billion). We believe the plunge in private sector deposits at CBN, which substantially1 emerged from other financial institutions2, reflected BDCs’ need to finance higher dollar purchases from the CBN (nine-fold higher from H2 16 to $400 million).

For quasi money, the cutback reflected downswing in time and savings deposits at Commercial banks (-3.2% to N11.7 trillion) which more than offset higher deposits at both the Non-Interest (+24.9% to N63 billion) and Merchant banks (+4.1% to N180 billion) combined. Given the relatively flat movement in naira denominated deposits (-0.9% to N8.1 trillion), the overall decline in time and savings deposit over H1 17 largely stemmed from faster contraction in foreign currency deposits (-7.1% to N3.9 trillion) which we believe was triggered by parallel market naira appreciation as the entire withdrawals occurred after CBN commenced its aggressive dollar sales in late February. Underscoring this view is the contraction in Net Foreign Assets (-55% from December 2016) which similarly commenced in February.

On the asset side, growth in net domestic credit (NDC) decelerated 9pps from the end of 2016 to 1.4% as cutback in credit growth to the private sector (-3.1% to N21.9 trillion) moderated sustained surge in lending to the government (+24.1% to N5.6 trillion). Parsing through the subparts of credit growth over H1 17, increase in government lending emanated mostly from CBN’s claims on FG (twentyfold higher to N814 billion) following a refinancing of debt which ensured that claims from commercial banks were only modestly higher (+0.4% to N4.6 trillion). The increase in CBN’s financing reflected higher purchase of Treasury Bills (+30% to N454 billion), increase in overdrafts (+5% to N2.8 trillion) and, more importantly, an upsurge in the mirror account (from N3 billion at the end 2016 to N1.5 trillion in April 2017). The combined effect of these more than offset a 16% cutback in bond borrowings.

A decomposition of movements along the sub-components of Credit to Private Sector (CPS) also reveals downtick in lending by both CBN (-4% to N5.4 trillion) and Commercial banks (-1% to N16.3 trillion). Given the cutback in loans granted under the Agric Credit Guarantee Scheme (-42.3% to N470 billion), we believe lower credit from the apex bank reflected reduction in its intervention funding program. Meanwhile, the cutback in Commercial banks’ borrowing was unsurprising given their thinning capital buffers and an overall macroeconomic weakness. Overall, reflecting tight monetary policy and capital preservation by DMBs, annualised net domestic credit growth of 4.2% tracked well below CBN’s target of 17.9% for 2017. For context, we note that 2017 marks the fourth consecutive year that monetary aggregates would fail to meet CBN’s target. 


Increased FX sales drives interbank rates to new highs

After falling to a seven-month low of 7.2% in December 16, money market rates climbed in the first half of the year (OBB: +9.9pps on average to 26.8%, overnight: +10.4pps on average to 28.5%) largely reflecting a tighter monetary policy environment. Though naira mop-up via OMO issuances played a part, particularly in January, the sizable monthly jumps in interbank rates only commenced after the CBN, in February, abandoned its strategy of dollar demand management in response to widening premium between the currency markets. Indeed, in a bid to stabilize the naira, the apex bank raised its dollar sales to the currency market, (mean non-swap FX sales: H1 173:$1.25 billion, H2 16: $819 million), with the biggest portion4 of the supply directed to the forward market.

Given the need for market participants to prefund their dollar demand, CBN’s mean forward FX sales of $850 million over the first five months of the year culled an average N273 billion from the banking system on a monthly basis. However, settlement of the forward contracts (mostly 60 days) as well as a N480 billion maturity of FGN bond on April 27 boosted the banking system with much needed liquidity after the succeeding two months from February.

Consequently, after rising to a record high in April 2017, money market rates commenced a descent afterwards with the biggest monthly drop occurring in May.

Figure 3: Trend in mean OBB and overnight rates, CBN FX forward sales ($’ million) and Net OMO Issuances (N’ billion)

Cutback in dollar supply to temper money market rate

Over the rest of the year, we expect monetary policy to remain tight largely reflecting emerging worries on the currency front. Particularly, despite recent naira gains at both the parallel market and the investors’ and exporters FX window (IEW), the plunge in oil prices (-20% since February 2017) threatens CBN’s ability to maintain its currently elevated FX sales. Overlaying the foregoing with increasingly hawkish outlook on US interest rate as well rate normalisation by other key central banks, we think the CBN, in a bid to keep portfolio flows, would leave its contractionary monetary policy unchanged.

However, in contrast to H1 17, we are of the view that the apex bank would increasingly rely on OMO issuances to keep the system tight as lower accretion to reserves and reduced pent-up demand compel CBN into lowering its FX forward. However, given the liquidity boost from maturing forward contracts as well as expected cutback in CBN’s dollar sales, we expect a moderation in money market rates over the second half of the year.

From ARM’s H2 2017 Nigeria Strategy Report 


1.       NSR H2 2017 (10) - CBN’s Volte-Face Narrows FX Markets Premium  

2.      NSR H2 2017 (9) - Trade Balance to Survive Muddy Waters  

3.      NSR H2 2017 (8) - Nigerian GDP: Recovery Signal Speaks  

4.      NSR H2 2017 (7) - Nigerian Fiscal: One Step Closer, Several More To Go  

5.      NSR H2 2017 (6) - REFORMS: Getting Down to Brass Tacks

6.      NSR H2 2017 (5) - New Regulations set sights on increasing gains for Pension Assets

7.      NSR H2 2017 (4) - Nigeria's Socio-Political Milieu: Just Before That Sigh of Relief

8.   NSR H2 2017 (3) - Supply Glut Underpins Broadly Bearish Trends Across Soft Commodities

9.      NSR H2 2017 (2) - Crude Oil: US Shale Challenges Anticipated Market Re-balancing

10.  NSR H2 2017 (1) - After Bullish Run, Portfolio Flows to EM Look Set To Moderate



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1.       Nigeria Strategy Report H1 2017 (17) - Blessed are the Flexible

2.      Nigeria Strategy Report H1 2017 (16) - NSEASI: On A Wing And A Prayer

3.      Nigeria Strategy Report H1 2017 (15) - Yields Set to Succumb to Gravity

4.      Nigeria Strategy Report H1 2017 (14) - Monetary Indicators Ride Currency Waves Higher

5.      Nigeria Strategy Report H1 2017 (13) - Base Effects Set High Hurdle For Inflation

6.      Nigeria Strategy Report H1 2017 (12) - Shaky NGN Outlook as CBN Resumes Playing Ostrich

7.      Nigeria Strategy Report H1 2017 (11) - Balance of Trade Deficit: Moderation In Sight?

8.     Nigeria Strategy Report H1 2017 (10) - Feeble Steps Out Of Recession

9.      Nigeria Strategy Report H1 2017 (9) - Pension Reforms Set Sights On Infrastructure Investing

10.  Nigeria Strategy Report H1 2017 (8) - FG Fiscal Expansion: Once Bitten, But Not Shy

11.   Nigeria Strategy Report H1 2017 (7) - Energy Sector Reforms: An Unbalanced Score Card

12.  Nigeria Strategy Report H1 2017 (6) - Back and Forth on a Political Tight-Rope

13.  Nigeria Strategy Report H1 2017 (5) - Broadly Bearish Twist For Soft Commodities

14.  Nigeria Strategy Report H1 2017 (4) - Crude Oil Prices On Verge Of A Breakout?

15.   Nigeria Strategy Report H1 2017 (3)-Tightening US Monetary Policy Stokes Prospect For Portfolio Flow

16.  Nigeria Strategy Report H1 2017 (2) - Commodity Price Shocks Dim Growth Lights Across Africa

17.   Nigeria Strategy Report H1 2017 (1) - Optimism on US GDP Buoys Global Growth Prospects 

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