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Reviews & Outlooks | |
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Friday, October 13, 2017 08:28 AM / ARM Research
The MPC has achieved something impressive. It
now has markets speculating on its language rather than on actual policy
changes. This means that its forward guidance is working. So, turning to its
language, the communique from the latest monetary policy meeting showed that
there was an agreement on the fragility of growth and expected moderation in
inflation, though the call for caution still echoes. We expect the MPC to
upgrade its assessment of risks in its next meeting, which should guide to an
imminent change in policy.
The talk in markets is that a near-term cut in
interest rate is back on the cards. Recent cessation of the one-year OMO paper
and gradual reduction in clearing rates at OMO auctions suggest that the CBN is
edging closer to an inflection point policy wise if one goes by historical
patterns. For evidence, we note the recent action by the CBN in money markets,
which saw it allow liquidity build up into massive demand at the primary market
with the eventual impact driving rates lower at primary market auctions.
In addition to this, CBN’s cessation of one-year
bills at its OMO auctions also explained the current yield trajectory at the
treasury end with longer term rates dropping faster than that of shorter-term
instruments. We look again at key drivers to delineate our outlook for domestic
monetary policy.
Sharper moderation in Inflation expected beyond
2017.
We expect to end the year at 15.8%, resulting in
a 2017 average of 16.7% YoY. Further, we see pressures gradually falling apart
in 2018 as high base effect and lack of material price shock take out the steam
from current price momentum. For us, headline inflation should average 12.6%
over H1 18. These figures suggest that the CBN will gradually phase out its
liquidity sapping programme with the need to support the fragile economic
growth set to provide more backing.
In the near term though, with mean 2017
inflation still materially above CBN target 11% and the MPR, the argument of
trying to ensure positive real returns on investments is likely to remain in
support of CBN’s ongoing monetary policy tightening.
External liquidity position stabilized.
In Q2 17, Nigeria retained its net creditor
status in relation to the rest of world after posting current account (CA)
surplus of $1.4 billion. However, the reading implied a second consecutive
quarterly decline in CA balance after the nation recorded $2.7 billion and $3.3
billion in Q1 17 and Q4 16 respectively.
Going forward, overlaying the implied goods
trade surplus with target services and income deficits of $3.6 billion and $3.2
billion as well as net current transfers of $6.2 billion, we expect the
country’s current account to print at $1.36 billion (Q4 17: $1.1 billion) and
1.3% of GDP in Q3 17 (Q4 17: 1.1%), with a sustained surplus in 2018.
Fragile growth outlook.
Non-oil GDP growth disappointed as the Q2 17
reading (0.4% YoY) signaled a slowdown from Q1 17 levels (+0.72% YoY) following
contractions in Services and Trade. The pattern in non-oil, owing to a slack in
ICT (12% of GDP) and impact of credit tightening on Trade (17% of GDP),
suggests that the pace of economic recovery is likely to remain soft over the
rest of 2017 and even going into 2018.
Balance of factors guides to an accommodative
stance in H1 18.
On balance, juxtaposing the fragile growth
picture with expected downtrend in inflation and improved FX picture because of
rising dollar inflows with a subsisting CA surplus, we see more scope for the
apex bank to ease gradually to support the slow pace of economic recovery.
In the interim (Q4 17 and Q1 18), we expect the
CBN to assume a less aggressive stance at its weekly OMO auctions leading to
lower rates on government securities. Farther out, we forecast a cut in
monetary policy rate (MPR) from Q2 18 and expect the MPR to be at 12% by
year-end 2018.
From ARM’s H2 2017 Nigeria
Strategy Report
2.
NSR Q4 2017 (6)
Naira Resilience: New Normal or Fleeting Reality?
3.
NSR Q4 2017 (5)
- Balance of Payment to Survive Murky Waters
4.
NSR
Q4 2017 (4) - Nigeria’s Net Creditor Status Diminishes Again
5.
NSR Q4 2017 (3)
- Fiscal: Federal Revenue Growth Shows Signs of Life
6.
NSR Q4 2017 (2)
- GDP: Uphill with the Handbrake On
7.
NSR
Q4 2017 - Crude Oil: Will Crude Oil ‘Roller Coaster’ Linger?
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2.
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H2 2017 (10) - CBN’s Volte-Face Narrows FX Markets Premium
3.
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H2 2017 (9) - Trade Balance to Survive Muddy Waters
4.
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H2 2017 (8) - Nigerian GDP: Recovery Signal Speaks
5.
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H2 2017 (7) - Nigerian Fiscal: One Step Closer, Several More To Go
6.
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H2 2017 (6) - REFORMS: Getting Down to Brass Tacks
7.
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H2 2017 (5) - New Regulations set sights on increasing gains for Pension Assets
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H2 2017 (4) - Nigeria's Socio-Political Milieu: Just Before That Sigh of Relief
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H2 2017 (3) - Supply Glut Underpins Broadly Bearish Trends Across Soft
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Report H2 2017