March 27, 2019/InvestmentOne Update

·         In contrast to our expectation, the benchmark interest rate was reduced by 50bps to 13.50% (first reduction since November 2015) while other monetary parameters were held unchanged as follows:

ü  Cash Reserve Ratio at 22.50%

ü  Liquidity ratio at 30%

ü  Asymmetric corridor of +200/-500 basis points around the MPR.          

·         In our view, we believe the decision of the committee to reduce the MPR was guided by the dovish stance of Central Banks in major economies in the face of lower global growth outlook. While the current inflation rate (11.31% as at February 2019) is still above the CBN’s target of 6-9%, we believe the substantial stability in major macro-economic variables, as highlighted by the committee, gave the Apex bank the headroom to cut rate in order to support growth.

·         Some of the variables, in our view, are: stable exchange rate, continued moderation in inflation rate, higher Brent oil price (+27%YTD) and robust external reserves (US$45billion according to the CBN governor).

·         In our view, this may provide little impetus for growth until other fundamental issues are addressed through fiscal policy. We believe issues such as delays in budget passage and implementation, herdsmen attacks, insecurity in the North and infrastructural deficit may continue to limit Nigeria’s GDP growth in 2019. As such, we may not see the economy growing at 3.01% and 2.74% as targeted by the Federal Government and CBN respectively. We expect the economy to grow by only 2.30% which is above the International Monetary Fund‘s (IMF) and World Bank’s estimates of 2.00% and 2.20% respectively in 2019.

·         Despite the rate cut, we do not expect a massive increase in banks’ loan books as most of the Deposit Money Banks are still concerned about asset quality which has not improved significantly. While non-performing loans ratios are reducing, they remain above the regulatory threshold of 5.00% at 14.16% (industry wide average as at September 2018) according to the National Bureau of Statistics’ Banking Sector Credit Report. This could continue to deter lending to the real sector. 

·         In line with the Committee’s position, we believe loosening by a marginal reduction may serve to manage the sentiments in the capital markets owing to the wider spread in yields in Emerging and Frontier economies relative to the advanced economies. As such, we believe the real interest rate in the country may remain positive. While the cut may be negative for the country’s currency as foreign inflows may slow down, we believe the current reserve level is sufficient for the CBN to continue to defend the local currency in the near term.

·         While CBN’s loosening suggests the potential for further decline in yields in the fixed income space, we expect the Monetary Policy Committee to be cautious in its attempt to spur growth as it tries to achieve a lower interest rate environment in 2019. As such, we expect it to use Open Market Operations to manage liquidity levels and inflation as macro-economic variables change. In the same vein, we opine that the benchmark interest rate has not really been influencing yields directions in the last few years thus we may see not significant fall in yields due to the rate cut. We are of the view that stop rates in subsequent primary auctions may provide clarity to the yields direction in the near term.                              

·         Overall, we may not see a significant assets reallocation to the equities market as the recent rate cut is too marginal to drive investors’ interest to the risky asset. Nonetheless, we believe equities market is still attractive for investors with medium to long term horizon.