EUR 3.48 For Business Accounts Only

Nigeria Strategy Report H1 2018 Excerpts-Monetary Policy : Dialing back on monetary tightening

• Over 2017, in its quest to stave off further speculation in the naira, the CBN adopted a hawkish posture curbing naira liquidity via daily OMO auctions. However, as concerns over naira volatility receded underpinned by improvements in the current account and FX reserves, the CBN lowered discount rates at OMO sales thereby signalling monetary easing. Precisely, aggressive tightening in the first half of 2017 drove a contraction in net domestic assets (NDA) which was evident on both broad (H1:-14.7% annualized) and narrow (H1: -21% annualized) measures of money supply. Nevertheless, following the switch towards an accommodative policy over Q4 2017, growth in monetary aggregates helped unwind the cutbacks from tightening with M2 posting 1.2% growth over 2017 while M1 contracted only 3.2%. Overall, the growth performance fell well below of CBN targets of 10.3% for 2017.

 

• Monetary policy looks set to grapple with elevated system liquidity from maturing bills and bonds. Specifically, with a total of N6.6 trillion from maturing OMO bills, N2.6 trillion maturing Treasury bills, and ~ N300 billion from maturing bonds, the question in our minds is if the apex bank will be comfortable with the elevated liquidity levels or focus on sterilizing this liquidity via higher OMO issuances. In framing our outlook, we assume that fiscal authorities stick with plans of refinancing of maturing treasury bills via Eurobond Issuance of $3 billion. The balance of $2.5 billion which equates to ~ N900 billion is just 35% of the overall maturity of N2.6 trillion and we assume the FG rolls over the balance of N1.7 trillion. Consequently, the CBN will potentially have to grapple with a liquidity profile in the region of N7.8 trillion.

 

• Going into 2018, with no expected supply shocks, we expect a downtrend in inflation. Thus, given the removal of the textbook cause for monetary tightening should permit the CBN to resorting towards policy accommodation. Furthermore, we expect a relatively stable naira across all FX windows driven by higher accretion in the CBN’s FX reserves which should mitigate capital flight and demand pressures over the forecast period. Thus, we see increased prospects for easing as real yields expand in 2018. In any case, the apex bank must grapple with a sizable maturity profile over H1 2018, which as we observed in December 2017, rendered impotent the impact of any net OMO issuances leading rates lower. Farther out, where we expect a downtrend in inflation, we think the monetary authority will cut rates to close the year at 12% for the MPR.