Nigeria Strategy Report H2 2017 Excerpts - Monetary Indicators swamped by hawkish dogma
- We continue with the serialization of our core strategy document – The Nigeria Strategy Report, with today’s excerpt focusing on changes in Nigeria’s monetary aggregates over H1 2017. Thereafter, we provide our outlook on same for the rest of the year.
- Similar to views at the start of the year, developments on the currency front dictated the movement of monetary aggregates in H1 17. Coming from 2016, when FX induced growth in net foreign assets drove expansion in aggregate credit and deposits, the first half of 2017 saw impact of monetary tightening weigh on monetary indicators. Specifically, broad money (M2) has been on a contractionary trend since the turn of this year, with its fourth consecutive MoM decline in April been the longest since 2005.
- After falling to a seven-month low of 7.2% in December 16, money market rates climbed in the first half of the year largely reflecting tighter monetary policy environment. Though naira mop-ups via OMO issuances played a part, particularly in January, the sizable monthly jumps in interbank rates only commenced after the CBN raised dollar sales in February.
- Over the rest of the year, we expect monetary policy to remain tight largely reflecting emerging worries on the currency front. Particularly, despite recent naira gains at both the parallel market and the investors’ and exporters FX window (IEW), the plunge in oil prices (-20% since February 2017) threatens CBN’s ability to maintain its currently elevated FX sales. Overlaying the foregoing with increasingly hawkish outlook on US interest rate as well rate normalization by other key central banks, we think the CBN, in a bid to keep portfolio flows, would leave its contractionary monetary policy unchanged. That said, given the liquidity boost from maturing forward contracts as well as expected cutback in CBN’s dollar sales, we expect a moderation in money market rates over the second half of the year.
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