Pre-MPC Analysis: What choice is best for the CBN at this moment?


Next week, precisely Monday 21st and Tuesday 22nd September 2020, all the eleven members of the CBN Monetary Policy Committee (MPC) are expected to gather in the nation’s capital to review and decide on the direction of key monetary policy variables amid divergent development since the last MPC meeting two months ago.

Recall that at the end of the last MPC meeting in July, the committee members by a vote of eight (8) to two (2) agreed to retain all monetary policy parameters – MPR at 12.5%, CRR at 27.5%, LR at 30%, and Asymmetric corridor at +200/-500 around MPR, while continuing to observe the impact of the reviews made during January (CRR increase) and May (MPR reduction) meetings on the macro-economy.

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Against this backdrop, we have taken our time to review key development in the macro-environment since the last meeting, with a view to project what the outcome of the coming

MPC meeting will be as the economy strives to recover from the negative impact of the COVID-19 pandemic.

Positive gains since the last meeting
COVID-19 spread on the downside: As of the time of the last MPC meeting in July, Nigeria was still in the 3rd phase of the economic re-opening road map designed by the presidential Task-Force on COVID-19 to gradually reopen the nation’s economy, which had earlier been brought to its knee by the emergence and spread of the pandemic.

According to our analysis of data released by the Nigeria Centre for Disease Control (NCDC) and the presidential Task-Force on COVID-19, Nigeria’s average daily infection rate from the pandemic has reduced significantly from 586 in July to 114 in September.

This significant improvement has seen Nigeria moved to the 5th and last phase of the economic re-opening road map, in which many businesses, schools, religious centres, outdoor sporting activities, and international flights have now been reopened.

Gradual Recovery of PMI: The Manufacturing Purchasing Managers’ Index (PMI) – a measure of the expansion or contraction in manufacturing sector activities of the country has improved considerably when compared to the position before the July meeting of the MPC.

The index (though still below the expansion threshold) printed at 48.5 index pts in August, and this represents an improvement of 3.7 index pts when compared to the July reading of 44.9 index pts.

This suggests that manufacturing activities are beginning to return to pre-COVID-19 level, and the efforts of the CBN to mobilize more capital to the productive sector of the economy are beginning to yield some results.

Modest strengthening of the exchange rate: Between the time of the last MPC meeting in July and now, the Naira had witnessed some modest gains against the U.S. dollar both at the CBN Official Window and the Investors and Exporters Window (I&E).

Precisely, the Naira gained 0.83% at the official window to settle at ₦379/$1 in September (from ₦381/$1 as of the last MPC in July), while it gained 0.52% at the I&E window to settle at ₦386/$ (from ₦389.2/$1).

Modest recovery of Stock Market: Between the period of the last MPC in July and now, the domestic bourse had seen some improvement in investors’ appetite.

Specifically, the Nigerian Stock Exchange All-Share Index (NSE-ASI), which tracked the performance of the equity segment of the capital markets shows that the market gained c.3% between July and now, and this has helped reduce the year-to-date (YTD) loss of the NSE-ASI to -4.58% from -8% in early July.

Worsen Fundamentals since last MPC meeting
GDP contracted sharply in Q2: More than the CBN staff projection of -1.03% contraction during the last MPC meeting, Nigeria’s Gross Domestic Product (GDP) in Q2’2020 contracted by -6.10% according to official data released in August by the National Bureau of Statistics (NBS).

This was jointly driven by a sharp contraction of both the oil (-6.05%) and the non-oil (-6.63%) components of the GDP amid a global shutdown of economic activities due to the outbreak of the pandemic. Besides, only six (6) out of the forty-six (46) activity sectors of the Nigerian economy reported growth in Q2, led by Finance and Insurance +18.49%, Information and Communication +15.09%, and the Agriculture sector +1.58%.

Inflation and Unemployment rates spiked to a new high: The two major objective of the CBN is to use its policy variables to achieve price stability and full employment.

Between the period of the last MPC and now, Nigeria’s Headline inflation has moved up from 12.56% to 13.22%.

This represents the highest price level in the country in 29-months and has further worsened the Inflation-to-MPR spread (a measure of real return on fixed income investment) to -72bps (or -0.72%) from -6bps (or -0.06%) as of the time of the last MPC meeting.

Besides, the Q2’2020 unemployment rate data released in August by the NBS is another macro indicator that will worry the MPC, as the figure now settles at 27.1% as against 23.1% (Q3’19) which the MPC members considered during the last meeting.

Foreign reserves and Oil price head southward: Despite the modest accretion reported in the last two weeks, Nigeria’s foreign reserves have weakened by c.$230 million between the period of the last MPC in July to $35.81 billion (as of September 14).

Also, crude oil price which averaged $43/bl as of the period of the last MPC now average $40/bl in September.

In addition to this, OPEC has enforced Nigeria’s compliance with its crude oil production quota, and this had led to the reduction of the nation’s daily average crude oil production to 1.48mbpd from the pre-July level of 1.69mbpd.

This by implication means less revenue for Nigeria from crude oil exports since the last MPC meeting.

National Debt size increased amid bleak revenue prospect: Latest figure by the Debt Management Office (DMO) shows that Nigeria’s total public debt stock had further risen by ₦2.381 trillion (to ₦31.009 trn) from the level it was (₦28.628 trn) during the last MPC meeting.

This latest development (we believe) will test the resolve of the MPC members during next week’s meeting, given the recent outcry of the Minister of Finance, Budget and National Planning, Zainab Ahmed, that Nigeria’s revenue expectation for 2020 has plummeted by about 65% as a result of the decline in global crude oil price and demand.

Capital importation and Balance of trade position worse-off: As of the time of the last MPC meeting in July, total foreign investment inflows into Nigeria (i.e. Capital Importation) stood at $5.85 billion (Q1’20 figure).

However, the latest figure for Q2’20 published by the NBS last week shows that total investment inflows into Nigeria have collapsed by 77.8%q/q to settle at $1.29 billion (Q2’20 figure) as a result of the negative impact of the Coronavirus pandemic.

Also, the recently released Q2’20 Balance of Payment (BoP) figure, a measure showing
the difference between the total value of Nigeria’s merchandise exports to the rest of the world and the value of imports from the rest of the world, shows that Nigeria’s trade deficit has risen to ₦1.80 trillion in Q2’20 from ₦421.26 billion in Q1’20.

This two development will also be a major source of headache for the MPC, as the bulk of FX inflows into Nigeria comes through these two activities.

Our Position
From the above analysis, it is evident that there are more downside risk factors to be considered by the MPC that upside factors.

However, given the limited option available to the CBN – Reduce, Retain, or Increase, we are of the view that the MPC may likely vote in favour of policy retention during next week’s meeting. Our position is informed by the historic conservative and unconventional approach of the present CBN regime led by Mr. Godwin Emefiele.

For instance, a reduction of the leading policy variable, the MPR, will lead to a reduction in the cost of capital to players in the real sector, and this will over time help create more employment opportunities that can help to grow the nation’s GDP.

However, this option (if taken) will further worsen the domestic inflation rate, weaken foreign investors’ interest in the Nigerian capital market, and by extension cause further pressure on the exchange rate.

On the other hand, an increase in the MPR will help curtail the rising inflationary pressure, attract foreign investment inflows, and reduced demand-pull inflation, especially for imported goods.

However, an increase in the MPR will further drive the cost of capital to the real sector players high, thereby limiting their potential to creating new jobs that is needed to increase aggregate demand as well as the GDP.

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