September 20, 2021/CSL Research

After the recently concluded Monetary Policy Committee (MPC) meeting, the committee unanimously kept all benchmark policy rates at their current levels. In a widely expected move, the committee elected to keep the Monetary Policy Rate (MPR) at 11.5%, the asymmetric corridor was retained at +100bps/-700bps around the MPR while the Cash Reserve (CRR) and Liquidity Ratios (LR) were retained at 27.5% and 30.0%, respectively. The decision was largely premised on the pursuit of output growth, as tightening, will raise borrowing rates, and reduce the volume of credit to the private sector. A rate cut, on the other hand, though positive for interest rates and loan repayments, could intensify inflationary pressures, widening the negative real interest rate and worsening capital outflows with its attendant effect on the currency.

In our view, the decision seems reasonable. The economy has continued its recovery from Q4 2020, with the most recent growth (5.01% y/y) being in Q2 2021 from 0.51% in Q1 2021. Headline inflation moderated for the fifth consecutive month to 17.01% y/y in Aug (July:17.38%), driven mainly by the high base effect from the prior year. We expect inflation to continue to moderate through 2021, supported by a high base and the absence of major price shocks. As such, this supports the prognosis for the MPC to retain the policy rate. That said, we see an upside risk emerging from food inflation as insecurity remains a bane to food production in the country. Also, the Nigerian Meteorological Agency projects the likelihood of above-average rainfall (floods) affecting seasonal output towards the end of the year. In our view, we envisage the committee would maintain the status quo in the ultimate meeting of the year, in its bid to further boost economic recovery.

Since the last monetary policy meeting, the average parallel market premium has widened significantly (up to c.38% based on the last published Aboki FX rate). Recall that the CBN had, in reaction to evidence of illicit financial behaviour of Bureau De Change (BDC) operators, discontinued the sales of FX to the BDC operators while redirecting the quantum of FX previously sold to BDCs to commercial banks for invisible trades. Though the committee provided little or no colour on the current FX situation, the CBN alleged that the founder of the online foreign exchange update platform, Aboki FX, was involved in market manipulation at the parallel market. Following the accusation, the platform had ceased to provide daily updates on foreign exchange rates.

Our base case expectation is for the parallel market premium to remain widened in the near term as a huge part of the FX demand will continue to go to the parallel market, save for policy amendments and improved interventions by the CBN. Despite the NGN remaining overvalued, however, we think that the I&E window rate (benchmark currency) will remain relatively stable. Overall, FX outlook for the rest of the year will be largely dependent on (1) expected inflows from impending Eurobond issuance of US$3.0bn, (2) inflows from Special Drawing Rights (SDRs) of US$3.4bn, (3) improvement in current account deficit position (CSL’s forecast: 1.2% of GDP in 2021) and (4) continued recovery in crude oil prices