February 27, 2024/CSL Research
As the Central Bank of Nigeria (CBN) concludes its first Monetary Policy Committee (MPC) meeting under the CBN Governor Yemi Cardoso today, we anticipate a sustenance of its contractionary monetary measures. Despite the administration’s preference for a low interest rate environment, we expect a 100bps increase in the Monetary Policy Rate (MPR). We believe price pressures, and the need to attract foreign portfolio investors (FPIs) will remain top on the committee’s mind, necessitating a rate hike. We, however, expect the other policy parameters such as the Cash Reserve Ratio (CRR), liquidity ratio and the asymmetric corridor to remain unchanged. In 2023, the MPC raised the MPR rate by a cumulative 225bps in a bid to stem rising inflation. That said, we maintain our view that continuous rate hikes will further limit and put the country’s fragile growth at risk while having a minimal effect in combating inflation and attracting foreign inflows.
Nigeria’s Headline inflation continues to soar to record breaking heights due to the direct and indirect impact of the continuous depreciation of the Naira, the removal of petrol subsidies and the worsening insecurity situation in the food producing regions and we believe that this will be on the forefront of the committee’s mind. In January, Nigeria witnessed a surge in headline inflation, reaching 29.90%, marking a 98 basis points increase from December 2023’s 28.92%. The surge was propelled by a notable uptick in food inflation, rising by 148 basis points to 35.41% from December’s 33.93%. Additionally, core inflation climbed to 23.59% from 23.06%, reflecting a 53 basis points increase. It is crucial to highlight that prior rate hikes have demonstrated limited efficacy in curbing inflation, with supply-side factors remaining predominant. Addressing the country’s structural challenges, such as insecurity in key food-producing areas, ensuring exchange rate stability, and enhancing the power supply, is imperative to tackle the surging inflationary pressures.
The challenge of capital flight has remained a key concern for the committee. We note that issues around the country’s stability and inability of FPIs to repatriate funds in recent years, amidst poor economic indices has continued to deter portfolio investments. Despite a marginal uptick in total foreign participation in Nigeria, with total foreign portfolio investments increasing by 10.95% from N47.87billion (about US$53.26million) to N53.11billion (about US$39.13million) between December 2023 and January 2024, we believe we may not see a significant increase in foreign portfolio inflow in the medium to long term as the FX situation in the country remains dire.
Data from the National Bureau of Statistics (NBS) showed a 2.74% GDP growth for Nigeria in 2023, lower than the 3.10% GDP growth rate in 2022. The manufacturing sector was rattled by troika factors in 2023. First, the 49% (June-December 2023) currency devaluation by the CBN and FX scarcity dampened the import capacity of the manufacturing sector. For context, we note that about 60.0% of companies on the NGX30 have significant FX needs either for import or foreign debt services. In fact, FMCGs (over half of the manufacturing sector) were badly beaten, with many of the listed players recording a negative equity position after the devaluation. Secondly, in 2023, interest rates reached unprecedented levels, leading to elevated finance costs for numerous manufacturing companies. Additionally, the high borrowing costs significantly constrained the expansion of manufacturing activities. Thirdly, inflation introduced an additional layer of pressure, as diminished purchasing power resulted in lower sales volumes and output. Given another steep devaluation of the Naira at the start of 2024, we maintain our belief that continuous rate hikes will further limit and put the country’s fragile growth at risk while having a minimal effect in combating inflation and attracting foreign inflows.
We anticipate that a rate hike will further dampen the enthusiasm of equity investors. Activities in the stock market have slowed significantly, given the increasingly attractive yield environment, though still negative in real terms. Expectations of further rate hikes will likely sustain the bearish sentiments.
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