Monday, January 25, 2016 03:45 PM / CBN
Global Economy Economic conditions in the world were tepid during the first half of the year, as there was overall commodity price decline and slowdown in growth. Growth in the Euro-zone, China, Japan, Russia, Brazil and many other emerging markets weakened, whilst an isolated growth (of 3.7 per cent in the second quarter of 2015) was observed in the United States of America (US).
The performance in the US was occasioned by improved employment, robust private sector demand/ spending (that grew by 3.3 and 3.1 per cent, respectively), oil price decline and housing sector rebound. The outcomes were due largely to the positive effects of the Federal Reserve Banks (Fed) quantitative easing (QE) programme that ended in October 2014.
Conversely, emerging markets were adversely affected after the QE programme ended, as foreign capital inflows either abated or exited in anticipation of rising interest rates in the US and strengthening of the dollar. The declining commodity prices, in addition, contributed. Weak exports affected the economies of the BRICS (Brazil, Russia, India, China and South Africa).
The growth in the Chinese economy, the second largest in the world, dropped to 7.00 per cent in the first half of 2015, from 7.30 per cent in the second half of 2014 and 7.45 per cent in the corresponding period of 2014.
The gross domestic product (GDP) in India grew by 7.00 per cent in the second quarter of 2015, down from 7.50 per cent in the first. Brazil and Russia struggled to escape recession, while the GDP in South Africa shrank by 1.30 per cent in the second quarter of 2015 from 1.30 per cent growth in the first quarter.
The economies of Japan, Indonesia, Turkey and Nigeria also weakened as they recorded declines in growth, in the second quarter.
Oil and other commodity prices were historically low in the first half of 2015, due to excess supply that arose from inventory stockpile, slowdown in demand for commodities (like iron ore and bauxite for aluminum) in China, robust shale oil production in the US and the maintenance of OPEC production quota.
In the euro-zone, GDP growth was 0.3 per cent in the second quarter of 2015, slightly lower than the 0.4 per cent recorded in the first quarter. The un-abating debt crisis in Greece heightened concerns and exacerbated uncertainties that stalled new investments in the Eurozone.
Outlook for the Second Half of 2015
Global oil and commodity prices are projected to remain weak owing to supply glut and slowdown in economic activity in China, India and the Eurozone and the debt crisis in Greece. In addition, weaker currencies in the emerging markets and commodity exporting countries might linger in the face of stronger US dollar, and exert downward pressure on demand and growth.
GDP growth in Nigeria slowed during the first half of the year. The GDP grew by 2.35 per cent in the second quarter of 2015, down from 3.96 per cent in the first quarter. This compared to 5.94 per cent in the last quarter of 2014.
The slow growth was attributable largely to weak demand for Nigeria’s crude oil, adverse price movements in the international oil market and anxieties about the possible outcome of the March/April general elections.
The moderate growth, albeit decelerating, was accounted for by non-oil sector growth, which accounted for 5.59 per cent growth in the first quarter, and 3.46 per cent in the second quarter of 2015.
The growth in the sector was driven largely by trade, crop production, construction and telecommunications. The non-oil sector contributed 89.90 per cent to the GDP during the review period, compared to 88.70 per cent in the corresponding period of 2014.
Inflationary pressures increased, as year-on-year rate of inflation grew from 8.20 per cent in January to 9.20 per cent in June 2015. The development was the outcome of increased money supply (M2), fiscal expenditure, electioneering cost, government transition and foreign exchange rate depreciation by 14.72 per cent, from N168.00/US$ to N197.00/US$.
Outlook for the Second Half of 2015
Outlook for the second half of 2015 remains positive. This stems from ongoing structural reforms to diversify the revenue base of the economy away from oil, block revenue leakages, ensure fiscal consolidation and increased investor confidence.
Monetary policy stance remained restrictive as open market operations (OMO) remained the dominant tool for liquidity management, complemented by standing facilities, cash reserve ratio and discount window operations. The monetary policy rate (MPR) was retained at 13.00 per cent, while the net foreign currency trading position limit was reviewed to 0.5 from 0.1 per cent in January, and the cash reserve ratio (CRR) on private and public sector deposits harmonized at 31.00 per cent, from 20.00 and 75.00 per cent, respectively, in May 2015.
Nigerian Financial Markets Operations
Activities in the money market reflected the trend in liquidity flows in the banking system as the total value of transactions stood at N2,809.58 billion compared to N3,652.25 billion in the corresponding period of 2014.
The supply of funds by authorised dealers in the inter-bank market indicated preference for collateralised transactions, reflecting the level of risk aversion in the market.
The anchor interest rate, the MPR remained at 13.00 per cent. Monthly average money market rates were fairly stable, with days of spikes and troughs occasioned by changes in liquidity conditions.
These were due to cash reserve requirement (CRR) debits, Nigerian National Petroleum Company (NNPC) withdrawal of funds from the commercial banks to the federation account, payments for foreign exchange sales by the Bank at the inter-bank foreign exchange market (IFEM), FGN bond maturity, CBN bills maturities and payments of LNG dividends, amongst others.
Foreign Exchange Market
Following developments in the global and domestic environment and its negative impact on the local economy, demand pressures in the foreign exchange market persisted, leading to a sharp depletion of the nation’s external reserves and devaluation of the local currency against major convertible currencies.
In view of these developments, the monetary authority took a number of measures, which included the closure of the retail Dutch auction system (RDAS) in February 2015 and commitment of the CBN to meet legitimate demand at the inter-bank foreign exchange market; exclusion of forty-one items from the foreign exchange market and the upward review of the net foreign currency trading position limit from 0.1 to 0.5 per cent, amongst others.
Amidst these measures, the foreign exchange rate depreciated, as the Bank migrated to the inter-bank foreign exchange market and transacted at N197.00/US$ as against N168.00/US$ at the RDAS window.
Capital Market Developments
The performance of the Nigerian capital market was sluggish during the period, owing to developments in the international and domestic economies that negatively impacted transactions. The expectation that the Fed would raise interest rate and the anxieties about the possible outcome of the general elections affected investor decisions in the market.
Consequently, a large number of foreign investors which hitherto overshadowed local investors in the first five months of the year, dropped to a monthly average of 34.23 per cent from 57.03 per cent, at the end of the review period. Arising from these, the All Share Index (ASI) and Market Capitalisation (MC) of listed equities slowed, while the regulatory authority continued in its efforts at deepening the market.
The regulators intensified the drive for the implementation of a Ten-year master plan (2015-2025) for the market, enhanced its integration within the sub-region, amongst other actions, to promote investor conducive climate.
Federal Government Domestic Debt
The Federal Government of Nigeria (FGN) issued debt instruments of various tenors to bridge budget deficit and accelerate economic development in the face of dwindling oil receipts and rising fiscal expenditure.
Thus, the stock of FGN domestic debt as at June 30, 2015 stood at N8,396.59 billion, which represented an increase of N975.49 billion or 13.14 per cent over N7,421.10 billion in the corresponding period of 2014. The increase arose from new issues of both FGN Bonds and Nigerian Treasury Bills (NTBs).
The stock of the domestic debt comprised FGN Bonds worth N5,300.42 billion (63.13 per cent), Nigerian Treasury Bills worth N2,824.95 billion (33.64 per cent) and Federal Republic of Nigeria (FRN) Treasury Bonds worth N271.22 billion (3.23 per cent).
Other Developments in the Nigerian Financial Markets
In the course of the review period, some measures were carried out by regulatory authorities that impacted the landscape of the financial markets and influenced the conduct of transactions. Some of these included the extension of the Bank Verification Number (BVN) project deadline to October 31, 2015, from June 30, 2015, introduction of a new set of rules for capital market operators, review of cash reserve requirement and net foreign currency trading position limit, amongst others.
Activities of Internal and Inter-Agency Committees
The Financial Markets Department continued its collaboration with both internal and external stakeholders in developing the financial market infrastructure, ensuring the effective and efficient implementation of monetary policy decisions and promoting financial system stability.
These were anchored on the framework of specialized committees and work groups, which were the: Liquidity Assessment Group (LAG), Scripless Securities Settlement Working Group, Nigerian Inter-Bank Offered Rate (NIBOR) Committee, Non-Interest Financial Institutions’ Product Development Committee, Financial Stability Report (FSR) Committee, Fiscal and Liquidity Assessment Committee (FLAC), Financial Services Regulation Coordinating Committee (FSRCC), Financial System Strategy (FSS) 2020 Committee and Treasury Dealing Room Project Committee.
Guidelines and Circulars
During the period, some guidelines and circulars were issued to operators in the markets. A list of these guidelines and circulars are provided in this report, and can be accessed on the CBN website, www.cbn.gov.ng.