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NSR H1 2020 Excerpts - Monetary Policy - CBN caressing both FPIs and Economic Growth

• In this afternoon’s cut-out of our core strategy document – The Nigeria Strategy Report, we look at the major themes that dominated monetary policies in Nigeria over H2 2019 and delineate our outlook for CBN’s monetary stance over 2020.

 

• Over H2 2019, the monetary authority maintained its drive to spur economic growth while keeping FX stability at the fore front of its activities. To start with, following a rate cut in March 2019, the monetary authority kept its benchmark rates unchanged all through the second half, reflecting the need to balance the trend  between growth and inflation. Meanwhile, in a bid to support FX inflows, stop rates at the OMO auctions (CBN’s preferred monetary policy tool) were hiked in August and has remained at almost the same level since then. In a separate move, non-bank locals (individuals and corporates) were barred from participating in CBN’s auctions in October. Elsewhere, upon seeing the gains realized from its initial directive of a minimum loan to funding requirement of 60% for DMBs, the CBN revised it higher to 65% effective from Dec 31st, 2019.

 

• Looking ahead, anticipated maturities is expected to come in at N15.6 trillion over 2020 split into N13.0 trillion OMO bills and N2.6 trillion of T-Bills. More worrisome is the fact that about N3.6 trillion of OMO maturities would certainly hit the system due to exclusion of non-bank locals from participating in OMO auctions. Though the apex bank might have expressed more fondness to supporting growth in the real sector in recent time, we can’t ignore its major concern - maintaining FX stability. Hence, we believe FX stability will continue to be a major focus area for the CBN in 2020. It is therefore pertinent to adjudge what CBN’s reserve position would be over 2020. We see the FX reserve ending H1 2020 lower at $34 billion against the backdrop of slow inflows and continued intervention to meet FX demands. Hence, we think the CBN has enough ammunition to continue its growth drive in the interim. In our view, we think as long as FPI are satisfied, the CBN will give less thought to the impeding liquidity – stemming from the exclusion of non-banks in OMO auctions. Nonetheless, we believe the CBN would continue to enforce its loan to funding requirement in a bid to manage liquidity, while maintaining its regular OMO auctions. On the former, excess liquidity in the system is given out as loans. In addition, any shortfall is duly charged to the DMBs as CRR, thus reducing liquidity as well.