July 28, 2016/Cordros
On Tuesday, the Monetary Policy Committee (MPC), rising from its fourth meeting of the year, voted to:
- Increase the Monetary Policy Rate (MPR) by 200bps to 14.0%;
- Maintain the asymmetric corridor around the MPR at +200/-500bps;
- Retain Cash Reserves Ratio (CRR) at 22.5%; and
- Keep the Liquidity Ratio (LR) at 30.0%
Note that the Committee’s decision was closely debated as 3 out of 8 members voted to maintain status quo. The MPC’s conclusion was broadly overlaid on the challenges of a severely weakened macroeconomic landscape, accentuated by stagflation dilemma and a recessionary trend. Consequently, the eventual decision reflects the fact that the elevated risk matrix in the macroeconomic environment limited the policy space and called for an appropriate balance between growth and price stability.
MPR Hike to Further Increase Fixed Income Yields?
In our view, the hike in MPR may not likely sustain yields, independently, at current levels. We would think that the CBN’s subsequent actions – vis-à-vis liquidity management – would more appropriately impact yields, going forward. Here, we refer to the need for consistency in the apex bank’s liquidity mopping up actions.
That said, we consider a more pertinent question, “will immediate inflows come in from FPIs following the rate hike and the CBN’s relaxation of its grip on the interbank naira rate?” Our answer to this is that downside risk factors raise dark dusts over the expectation of immediate foreign inflows. First, concerns on the fiscal space – which has remained bleak – may further weigh on international investors to keep the distance. In particular, recent comments by the finance minister, Kemi Adeosun and the CBN governor, Godwin Emefiele, painting a gloomy picture of the economy and casting doubts on the full implementation of the 2016 budget; may further spook foreign investors. Worthy of mention is the fact that the structural headwinds (e.g declining crude oil production due to elevated security challenges, forex scarcity and weak electricity supply and distribution) constituting a drag on output growth remain largely unresolved.
Second, a large number of foreign institutional investors in FGN bonds were those that tracked JPMorgan and Barclay’s Emerging Market Government Bond indices. Thus, JPMorgan’s decision of removing Nigeria from its Emerging Market bond index, and Barclays’ decision of cutting Nigeria from its Emerging Market local bond index may continue to discourage most FPIs monitoring both indexes, particularly in the absence of positive indication of reconsiderations by both index providers as liquidity concerns remain a major strain.
Equities Market: A Safe Haven?
On the equities space, we note the potential risk of the market being significantly hit by the flight-to-safety syndrome following the increased attractiveness of fixed income yields and investors rebalancing their portfolios to stay equities-averse. In addition to this highly likely trend, disappointing corporate earnings (e.g NB, UNILEVER, CADBURY and WAPCO’s Q2-2016 earnings), weak consumer demand and rising costs of higher interest rates amid rising input prices; further suggest bearish sentiments in the domestic bourse, with a negative Year-to-Date return of 1.52%. Notably, the hitherto preference for fixed income securities by Pension Fund Managers (PFAs) – recent reports show that a significant proportion of PFAs’ investments are concentrated in the fixed income space – diminishes the prospect of positive sentiment in this space.
