Economic Update - January 2018
- Proactive or Defensive CBN?: In the month of January, daily average turnover at the Investors and Exporters Window (IEW) touched an all-time high of $274million, 35% higher MoM with a total of ~$6.1 billion sold. Notably, although the CBN has been a net buyer in the market since August 2017, (~$569 million average net purchase from August – December 2017), the apex bank mopped up sizable dollar flows in the month of January – net purchase of $1.3 billion. In our view, the CBN is taking pre-emptive measures for any expected outflows stemming from global monetary policy normalization and domestic political risk. However, this observation begs the question on why the excess supply has yet to force a noteworthy appreciation in the naira, especially when the CBN accounted for ~22% of transactions in the window. Is the CBN trading off between an appreciation in the value of the naira for currency stability over 2018?
- ‘Invisible hand’ will magnify Inflation downtrend: First off, it is fascinating that in the month of December 2017, despite increases in key energy and transport prices relative to Nov-17 and Dec-16, core inflation moderated by 12bps to 12.1% YoY (-26bps to 0.51% MoM). According to the NBS, the deceleration was underpinned by declines in Alcoholic Beverage, Tobacco and Kola, Clothing and Footwear, and HWEGF divisions—which altogether account for 41% of the core basket. Elsewhere, food inflation declined at its fastest pace since March 2013 by 89bps to 19.42% YoY (-30bps to 0.58% MoM) reflecting FX liquidity feedthrough to imported food even as FEWSNET noted the presence of elevated household stocks and market supplies after the main harvest.
- Will the CBN sustain the liquidity strain?: The fixed income market is not dissimilar when it comes to the mighty hand of Jacob. In the last two months, the apex bank has intensified its OMO issuances in a bid to mitigate the liquidity impact of lower fiscal issuances. For context, in the month of December, given the inflows of N198 billion from payment of maturing bills via Eurobond Issuance and subdued bond issuance (N86 billion vs. avg. of N117 billion in H2 2017), the CBN net-issued N919 billion (November: net maturity of N14 billion). Going forward, monetary policy looks set to grapple with an elevated liquidity profile for NTBs, OMOs and bonds over 2018, and a pertinent question is whether the CBN will sustain the aggressive liquidity mop up.
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