” “ Monday, March 23, 2015 | Issue 034 FIXED INCOME & FOREX Tough choices face MPC meeting today Source: FMDQ Verbatim With continued improvement in economic conditions, however, we do not want to rule out the possibility that an increase in the target range could be warranted at subsequent meetings. Let me emphasize, however, that the timing of the initial increase in the target range will depend on the Federal Open Market Committee’s assessment of incoming information. - Janet Yellen, US Federal Reserve chair, March 18, 2015 Currency Central Rate SWISS FRANC 199.4519 YEN 1.6236 WAUA 270.1251 RIYAL 52.3944 DANISH KRONE 28.2697 SDR 270.6198 FOREX RATES MONETARY & CREDIT POLICY ! Page VM2 The quarterly communiqué issued at the end of every MPC meeting gives the best policy orientation of how the country’s economic managers assess its situation and its outlook. These have worsened since the committee’s last meeting in January, held against what it described as ‘the backdrop of challenging external conditions and downside risks in the domestic economic environment.’ Most market watchers expect the MPC to retain rates unchanged, but anything could happen. Mo Fr 195.9 196.2 196.8 196.5 197.1 196.5 Tu We Th Fr $/N Mo Fr 287.0 288.5 291.5 290.0 293.0 290.5842 Tu We Th Fr £/N Mo Fr 207.0 208.0 210.0 209.0 211.0 210.7266 Tu We Th Fr Euro/N Mo Fr 31.00 31.20 31.60 31.40 31.80 31.6589 Tu We Th Fr CNY/N Mo Fr 0.29 0.30 0.32 0.31 0.33 0.3098 Tu We Th Fr CFA/N In February, the Central Bank of Nigeria closed the Dutch Auction System to stop the naira being an easy target for currency speculators.
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”“
Mo
nd
ay, M
arch
23
, 20
15 |
Issu
e 0
34
FIXED INCOME & FOREX
Tough choices face MPC meeting today
Source: FMDQ
VerbatimWith continued improvement in economic conditions, however, we do not want to rule out the possibility that an increase in the target range could be warranted at subsequent meetings. Let me emphasize, however, that the timing of the initial increase in the target range will depend on the Federal Open Market Committee’s assessment of incoming information.
- Janet Yellen, US Federal Reserve chair, March 18, 2015
Currency Central Rate
SWISS FRANC 199.4519
YEN 1.6236
WAUA 270.1251
RIYAL 52.3944
DANISH KRONE 28.2697
SDR 270.6198
FOREX RATES
MONETARY & CREDIT POLICY
! Page VM2
The quarterly communiqué issued at the end of every MPC meeting gives the best policy orientation of how the country’s economic managers assess its situation and its outlook. These have worsened since the committee’s last meeting in January, held against what it described as ‘the backdrop of challenging external conditions and downside risks in the domestic economic environment.’ Most market watchers expect the MPC to retain rates unchanged, but anything could happen.
MoFr195.9
196.2
196.8
196.5
197.1196.5
Tu We Th Fr
$/N
MoFr287.0
288.5
291.5
290.0
293.0290.5842
Tu We Th Fr
£/N
MoFr207.0
208.0
210.0
209.0
211.0210.7266
Tu We Th Fr
Euro/N
MoFr31.00
31.20
31.60
31.40
31.8031.6589
Tu We Th Fr
CNY/N
MoFr0.29
0.30
0.32
0.31
0.330.3098
Tu We Th Fr
CFA/N
In February, the Central Bank of Nigeria closed the Dutch Auction System to stop the naira being an easy target for currency speculators.
Nothing is sacrosanct THE CENTRAL BANK of Nigeria’s Monetary Policy Committee (MPC)
meets on Monday and Tuesday in what many are calling its most im-portant meeting in years. The out-come of its deliberations are awaited with bated breath. This will offer the first substantive monetary and credit guidelines since the apex bank’s tacit devaluation of the currency last month.
On February 18, the CBN scrapped the bi-weekly Dutch Auction Sys-tem (DAS). Until its closure, DAS accounted for 10% of all forex trans-actions. By that act, the CBN did away with its official exchange rate peg of NGN168/$1 +/- 5%. The peg was imposed after a devaluation in November. The February decision came barely four weeks after it had affirmed this rate band at the MPC’s meeting in January.
The CBN has little room for ma-noeuvre. Nigeria’s foreign reserves have suffered a precipitous fall due to the drop in oil prices. Crude oil pumps in 90% of the country’s for-eign exchange earnings and about 80% of the federal government’s revenue. In consequence, the apex bank’s beleaguered arsenal leaves it with few palatable options. The adverse effects are being felt on in-flation, employment, savings, and investment.
It is pertinent to recall that on his assumption of office, Godwin Emefiele, the CBN governor, gave hints that he would review the tight monetary policy instituted by Sa-nusi Lamido Sanusi, his prede-cessor in office, to address excess liquidity concerns. This week’s MPC meeting may offer Emefiele the chance to set his own course.
He stated his readiness to go in the opposite direction in the maiden speech he gave in June. ‘We shall pursue a gradual reduction in in-terest rates… To enhance financial access and reduced borrower cost of credit, we would pursue policies targeted at making Nigeria’s T-bill rates more comparable with other emerging markets and by extension, pursue a reduction in both deposit and lending rates. While a reduc-tion in deposit rates would encour-age investment attitudes in savers, a reduction in lending rates would make credit cheaper for potential investors.’
Hard choicesIn the present environment the
MPC faces its biggest challenge in a long time. The committee was set up ‘in order to facilitate the attainment of price stability and to support the economic policy of the Federal Gov-ernment,’ by handling ‘the responsi-bility for formulating monetary and credit policy.’
Monetary policy covers the control of money supply by target-ing inflation and interest rates to en-sure price stability and confidence in the naira. Its counterpart, credit policy is the use of the financial sys-tem to influence aggregate demand. It is focused on bank lending rates and the availability of loans to firms and households. This preoccupation with credit policy stems from the view that the CBN can control the flow of credit and demand stimula-tion by setting the monetary policy (base) rate, and by extension, the health of the economy.
That responsibility places it be-tween the devil and the deep blue sea as it weighs its options this week.
In MPC Meeting: Considerations
and Policy Options, a note published last week by FSDH Research, the analysts adduce reasons why the CBN is unlikely to change rates.
Raising rates would pinch banks further and stymie lend-ing to businesses and house-holds. For years, beginning during the Sanusi governorship, the CBN offered an attractive yield on gov-ernment debt drawing in foreign creditors in search of a place to park funds turned away by the accommo-dative interest rates in the EU and US.
According to FSDH, a cursory glance ‘at the trend analysis of the yield on the 1-year U.S. Treasury Bill and the 1-year Nigeria Treasury Bill’ shows ‘that the premium between
the yields on the two bills increased to 18.66% as at March 18, 2015 from 14.83% as at January 20, 2015.’
The 383 basis points increase in 8 weeks places ‘the current premium among one of the highest in the world, and capable of stimulating ex-ternal and internal inflows into the government treasury bills market.’
Verdict: If the MPC raises rates, it would have the unintended effect of acting as ‘a disincentive for lend-ing to the private sector; an addi-tional increase in rate would not be desirable.’
The softness of the Nigerian economy places 2015 growth in a vulnerable position. FSDH forecasts GDP growth for 2015 at 5.68%, representing a 54 basis points decline from 6.22% growth recorded in 2014. An attempt to hike rates in the analysts’ view ‘may fur-ther lead to a weakness in the GDP growth rate.’
Verdict: If the MPC raises inter-est rates it would place 2015 GDP growth at risk.
Sooner than later, creditors will reprice the risk of holding Nigerian government paper without any need for MPC in-tervention. As at March 18, the av-erage yields on the 90-day and 180-day Nigerian Treasury Bills (NTBs) have fallen 28 basis points to 11.24% and 3 basis points to 15.24% respec-tively since the January MPC meet-ing. In comparison, the average 364-day has increased by 61 basis points to 17.65% during the same period.
The mismatch shows a lag in pric-ing of risk attached to lending to the Nigerian government. Rather than falling like its shorter-term siblings, FSDH predicts that market forces will drive up the yields on 90-day and 180-day paper in the short-to-medium term. This view is hinged on ‘the expected rise in the inflation rate, weak fiscal position of the Fed-eral Government of Nigeria (FGN) and the expected increased borrow-ing from the market.’
Verdict: The cost of government borrowing will go up anyway so there is no need to catalyze it.
The latest bump in the infla-tion rate will reset downwards in H2 2015, that is, after elections and the full absorption of effects of the currency devaluation. Though the in-flation rate has risen (8.4% in March versus 8.2% in January), it remains within single digits, the result of ‘monetary tightening and favourable prices in the international market.’
Verdict: A rise in the inflation rate to double digits between Q1 and Q2 will be short-lived once the devaluation is universally reflected in prices by Q3. This should recom-mend a non-interventionist (laissez-faire) approach to interest rates be-cause it would cure itself.
The devaluation of the naira and soaring US dollar have worsened trading conditions
for import-dependent busi-nesses. The fall in oil prices – de-spite recent marginal improvements -has had a deleterious effect on the country’s foreign reserves and the Central Bank’s ability to defend the currency. As a result, it acceded to the devaluation of the naira in Feb-ruary. Coupled with the appreciation of the US dollar’s appreciation many importers, and consumers, are feel-ing the squeeze. The US dollar’s rise can be explained as the market’s an-ticipation for a hike in interest rates by the second half of the year in the world’s largest economy.
Verdict: If the MPC raises rates it will tighten access to credit for businesses reeling from devaluation of the naira, putting them in an un-tenable situation.
The drop in foreign reserves would be aggravated by capital flight if the Central Bank re-duces interest rates. As at March 19, the country’s foreign reserves had fallen from $34.47 billion on January 20, the date of the last MPC meeting, to $30.08 billion, a drop of $4.39 bil-lion or -12.74%. The International Monetary Fund estimates that it still has some way to go – down to $28 billion by year end – before any improvements are seen from a recov-ery in oil prices. The Economist In-telligence Unit in a report released last week forecasts that the country will run a current account deficit of up to 3% of GDP in 2015.
Verdict: Given the unfavour-able foreign reserves and current account position, the MPC would be averse to seeing it deteriorate more by reducing rates, which would lead to capital flight.
The US angleJanet Yellen, chair of the United
States Federal Reserve went on the record this week to say that the central bank would not ‘rule out the possibility’ of a hike in interest rates at future meetings. This statement caused instant euphoria in markets around the world.
The implication for peripheral economies like Nigeria that have at-tracted international funds through high rates is that a reversal is in the works. A big chunk of these funds will return to the safety of US gov-ernment debt as soon as the Fed increases rates. The MPC’s decision to increases rates will make no dif-ference at all. Besides, with recent events in Nigeria, capital flight will continue till there is more clarity around the recovery of oil prices, politics, the broader economy.
Verdict: A reduction in interest rates is not the doomsday proposi-tion it is being made out to be.
To raise or not to raise this is the question. Both sides of the ar-gument have merits. Ultimately, the decision will come down to the ideological biases of individual MPC committee members. ;
MONETARY & CREDIT POLICY
EDITOR: MIDENO BAYAGBON
GROUP BUSINESS EDITOR: OMOH GABRIEL
CONTENT DIRECTION: OBIORA TABANSI ONYEASO
DESIGN & ILLUSTRATION: PUBLICAN MEDIA
Vanguard Markets features unbiased, in-depth coverage of corporate and market developments across a wide range of business sectors.Every week, Vanguard Markets delivers essential business analysis and commentary on Nigerian companies, regional economies, and global markets. Vanguard Markets is published by Vanguard Media Limited in associa-tion with Customs Street Advisors Limited, a specialist communications consultancy.
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Tough choices face MPC meeting today
ECONOMYVM2 VM | Monday, March 23, 2015 | Issue 034
W Continued from Page VM1
Looking at the current and the short-to-medium term outlook for the Nigerian economy and the financial system, we are of the opinion that the MPC would vote to maintain rates at the current levels, as any decision to increase rates would hurt the fiscal position of the government at all levels and that of the private sector. A rate cut may lead to a capital flight, which would hurt the economy and the financial system.
– FSDH Research
MARKET DATA VM3VM | Monday, March 23, 2015 | Issue 034
LEGEND
15-week trading bar:This bar shows the volume of the company’s shares traded during the 5 most recent weeks. Each alternate colour bar represents a consecutive week. The bar is to be read from left to right. The first bar on the left (light blue) represents the traded volume five weeks ago. The next bar (grey) represents the volume 4 weeks ago. The 5th and last bar (light blue) signifies the volume of shares exchanged last week. The purpose of the Weekly Trading bar is to give readers an instant view of trading volumes as they compare on a week-by-week basis.
2Liquidity Rating: This indicates the level of demand for a company’s shares based on the number of deals rather than volume done over the past week. Stocks are graded accord-ing 5 categories. Blue spheres are used to represent liquidity. • Category 5: This is the highest liquidity rating shown by 5 blue spheres.
Stocks that have traded more than 20 deals per day on at least 4 days in the past week are awarded this score
• Category 4: This is shown by 4 blue spheres. It indicates that the stock has
traded between 12 to 19 deals per day on at least 4 days in the past week• Category 3: Shown with 3 spheres, this liquidity classification represents
those stocks that have traded 8 to 11 deals per day on at least 4 days in the past week
• Category 2: Shown with 2 spheres it identifies those stocks that traded 4 to 7 deals per day on at least 4 days in the past week
• Category 1: This is shown by one blue sphere to represent stocks on which 3 deals and/or below were traded per day on at least 4 days in the week.
SECTOR PRICE CHANGES – MAR 16 – 23, 2015MARKET REVIEW – MARCH 16 – MARCH 23, 2015
1. 52-week low price2. Year low price3. Current price4. Year high price5. 52-week high price6. Current price7. 5-day price change8. 1-year price change9. 3-months price change10. 1-week price change11. Daily price movement over 3 months.12. 30-day moving average13. Daily price movement over last week
MARKET DATAVM4 VM | Monday, March 23, 2015 | Issue 034