Nigeria’s MPC Retains Benchmark Rate at 13.50%; NSE ASI Down 3.55% in June 2019…

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Recently released report by the Nigerian Stock Exchange (NSE) on domestic and foreign portfolio participation in equities trading for the month of June 2019 showed that equities market transactions significantly increased when compared with the equities trades done in May 2019.

Transactions of the retail and the foreign portfolio investors (FPIs) increased; however, domestic institutional transactions plunged.

Specifically, total transactions on the nation’s bourse increased to N297.25 billion in June 2019 (from N221.13 billion in May 2019); of which FPI transactions rose to N96.74 billion (from N77.25 billion) while domestic transactions increased to N200.51 billion (from N143.87 billion).

Breakdown of the FPI transactions in June 2019 showed that foreign portflio outflows which rose by 33.27% to N52.44 billion, outstripped the foreign portfolio inflows which rose marginally by 16.89% to N44.30 billion.

Also, domestic institutional transactions declined by 53.04% to N45.38 billion in June 2019 from N96.64 billion printed in May 2019. Hence, the NSE All Share Index (ASI) plunged by 3.55% to 29,966.87 index points in June 28, 2019 (from 31,069.37 index points in May 2019).

The decline in domestic bourse suggested that the retail transactions which significantly increased by 228.44% to N155.12 billion in June 2019 from N47.23 billion in May 2019 was dominated by sellers.

Consequently, most of the sectored guages plummeted: the Industrial, Oil & Gas and Consumer Goods indicies nosedived by 4.01%, 3.56% and 1.36% respectively to 1,133.27 points, 253.23 points and 622.33 points respectively; however, Insurance and Banking indices rose by 3.29% and 1.47% to 123.75 points and 366.87 points.

Meanwhile, the Central Bank of Nigeria Monetary Policy Committee (MPC), after its 2-day meeting which ended on Tuesday, July 23, 2019, voted to retain the Monetary Policy Rate (MPR) at 13.50% and the asymmetric corridor at +200 and -500 basis points around MPR. Cash Reserve Ratio (CRR) and Liquidity Ratio were also left unchanged at 22.5% and 30% respectively.

The Committee considered the lower global output growth outlook for 2019 by the International Monetary Fund (IMF) amid rising debt levels in some advanced economies and trade tensions between US and its trading partners such as Canada, China as well as India.

It also noted that inflation in advanced economies trended downward, which forced central banks in these economies to adopt dovish monetary policy.

The MPC saw the need to boost Nigeria’s output growth through sustained increase in consumer credit, mortgage loans and loans to small medium enterprises (SMEs) although it expected economic growth in 2019 to remain weak.

Nevertheless, it expected the fiscal authority to support its efforts and expand the tax base, improve government revenue, stem the growth in public debts as well as build fiscal buffers.

Elsewhere, President Buhari and the global Chief Executive Officer of Siemens AG, a German Company, Joe Kaeser, on Monday, July 22, 2019 signed an agreement to increase Nigeria’s electric power generation from the current average of 4,000 megawatts (MW) to 7,000 MW in 2021, 11,000 MW in 2023 and 25,000 MW in 2025.

The MPC’s decision, which was in line with our expectation (see Cowry Weekly Report dated July 19, 2019), to hold policy rate at 13.50% was engendered by the need to boost production output as it patiently waits to see the effect of its recent policies, such as the mandated minimum loan to deposit ratio of 60% for the deposit money banks (DMBs) as well as limitations on DMB’s investments in T-Bills.

Following increased pressure on the DMBs to increase loans to businesses, we caution against reversal of the declining NPLs.

Meanwhile, the recent efforts of the President to increase power generation should further derisk the real sector as availability of electricity will increase efficiency, boost productivity of businesses and boost capital market performance.

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