EUR 3.58 For Business Accounts Only

Economic Update - August 2017

• Naira faces fresh test at parallel end: In August, the naira rebounded at the IEW (+2% MoM to N359.67/$) with movements at the parallel end moving inversely to close August at N368/$ (-0.82%). In our view, sentiment for naira assets were positively impacted by the regulatory move for banks to quote the floating IEW rate rather than a fixed exchange rate, which was seen by market as a move towards a unified, floating exchange rate. Elsewhere, the depreciation at the parallel market was partly underpinned by increased dollar demand pressures – evidenced by the sizable increase in CBN sales to the BDC over the last two months preceding August. Despite glitches in demand pressures over the review period, we retain our expectation for near term stability of the naira at the different windows with subsisting improvements in fundamentals (Forex reserve: +2.5% MoM to $31.5 billion; crude production: +14% from April to ~2mbpd in our estimates) providing fresh backing for sustained CBN dollar sales.
• Food Inflation: what goes up must come down…or not?:  In line with the trend over the past five months, headline inflation declined 5bps from prior reading to 16.05% YoY in July. Going forward, we expect another subdued moderation in transport inflation owing to sustained declines in MoM PMS and diesel prices. This, combined with the end of lean season in the southern part of the country, underpins our expectation for further temperance in food inflation in August. However, reflecting the high base effects in the earlier part of the year, our projected MoM reading translate to a largely unchanged YoY inflation of 16.04% for August
• Rising T-Bill demand underpins yield curve tightening: The naira yield curve extended its contractionary trend (-8bps MoM to 18.40%) for the second consecutive month in August reflecting lower yields on short dated instruments (-35bps MoM) which more than offset upswing in bond yields (+20bps MoM). Akin to July, we believe the decline in T-Bill yields largely reflected increased bank purchases following CBN’s issuance of a N250 billion stabilization securities on the second of August at below market rate of 17.1%. Going forward, we expect concerns over inflation and subsisting worries on the currency front to sustain CBN’s contractionary monetary policy. That said, given the prospect of below market rate stabilisation security issuances by the apex bank, we think the deluge of OMO maturity over the rest of the year (N2.3 trillion) could sustain the buying pressure at the short end of the curve, which should apply downward pressure on T-bill yields. Elsewhere, whilst we expect some moderation in the marginal clearing rate at the bond auctions as liquidity improves, we think investors preference for higher yielding short dated instrument should keep rates high.
• Recovery still on course despite slower PMI reading: Purchasing Manager’s index (PMI) sustained its expansionary trend in August with the manufacturing and non-manufacturing sectors expanding at a slower rate to 53.6 and 54.1 index points respectively. As previously communicated, we perceive that the economy is still on track for further recovery in the third quarter of the year on the strength of sustained expansion in PMI readings which have, thus far, coincided with improved dollar liquidity in the country. Thus, further aided by improvements in the crude production front following re-opening of Trans Forcados and relative peace in the Niger Delta, we forecast GDP growth forecast of 1.7% YoY for the third quarter of 2017.
• CBN’s new non-interest instruments: Are NIFIs approaching take-off stage?: Towards the close of August, the CBN introduced two new funding instruments for licensed non-interest financial institutions. This move, aimed at boosting liquidity, allows licensed Non-Interest Financial Intermediaries (NIFIs) to secure interest-free overnight funding from the CBN, backed by eligible securities worth 1.1x the size of requested facility. For us, the introduction of the two non-interest instruments reinforces ongoing efforts to enhance liquidity in the broader system with earlier deliberations to license stockbrokers to access CBN’s liquidity window already well documented.
• See attached for full report