Weighty options await economy as MPC meets
Data shows persistent sliding fundamentals
The tripartite options of leaving rates unchanged; increase in naira intervention at the interbank market; and a 50-basis point increase Monetary Policy Rate (MPR) to attract and retain portfolio investment have been enlisted as ready-made choices, as the Monetary Policy Committee (MPC) meetings resume on Thursday.
Besides, the meeting, which is coming on the heels of persistent pressure on foreign exchange rate, resurging inflation rate, slowing Gross Domestic Product’s growth and global economic uncertainty, is expected to throw up surprises.
Again, with speculations rife over possible rate hike by the United States Federal Reserve and the debt crisis in the Eurozone, which may liquidity effects of emerging markets, there are also anxieties over its ability to mop up and/or divert foreign portfolio investments.
Afrinvest Securities Limited, in a note to The Guardian at the weekend, said it was optimistic that the MPC meeting would leave all policy rates unchanged and continue to adopt administrative measures to curb the currency volatility, while rebuilding external reserves.
But followed on its ranking of policy choice, the securities company noted that it may also increase the naira intervention rate in the Interbank market, as well as raise Cash Reserve Requirements (CRR) to 35 per cent to reduce excess liquidity that could spur foreign exchange speculation.
The third option it listed was an increase in MPR by 50 basis points to attract Foreign Portfolio Investment (FPI), while subsequently loosening restrictions on foreign exchange trading.
The National Bureau of Statistics (NBS), in its June report showed that growth momentum slowed to 3.8 per cent in the first quarter of 2015, relative to 6.2% in the same period of 2014.
However, it was attributed to fallout of weaker consumer spending power, tighter monetary policy and political uncertainty during the period.
But headline inflation has persisted for seventh consecutive month to 9.2% in June 2015, from nine per cent in May, as a result of the pressure on supply-side cost arising from petroleum products scarcity and weaker Naira/Dollar exchange rate.
Certainly, the developments continue to impact negatively on real returns on investments in the financial market, as analysts expect foreign exchange market issues to be placed on the front burner at the MPC meeting this week.
The recent forex policy has resulted in the widening of the exchange rate spread between the official and parallel markets (now 24.4% or N48.05/US$1.00), which according to the Central Bank of Nigeria (CBN), was not unexpected, may have been adjudged as creating a fertile ground for round-tripping, currency arbitraging and speculations.
Analysts at Afrinvest said the currency market uncertainty coupled with absence of fiscal direction of the new administration and weaker earnings projection of quoted companies have sparked off a bearish run in the financial market.
Already, the Nigerian bourse had declined by 13.1 per cent as at Thursday, since it reached its 2015 high of 35,728.12 points on April 2, 2015 and bond yields have also risen to 15.4% as investors continue to price in forex devaluation risk on investment valuation.
Besides, the latest Iranian pact between United States of America and other Western economies, has been projected to worsen the supply glut in the crude oil market, as sanctions would be lifted on the country.
The nation’s foreign exchange earnings would be eroded further with declining crude oil prices arising from further supply, as well as the possibility of losing market share in Asia to Iran and aggressive Saudi Arabia.
Already, Benchmark Crude Oil price declined 1.7 per cent week-on-week to $57.72 and may face further decline as the nuclear deal reached begins its trickling effects.
Domestically, the money market is currently assessed to be awash with speculative Naira liquidity, due to the recent state bailout fund released by the Federal Government.
Consequently, the secured Open Buy Back (OBB) and Overnight rates reached year lows of three per cent and 3.4 per cent after the bailout fund hit the system and without proactive steps, it may pose additional headwind to price stability.
Meanwhile, the importers of the 41 items prohibited from the official forex window have persistently scrambled for the hard currency in the parallel market.
Consequently, the local unit declined further by 1.7 per cent to the dollar compared to week’s close, as it opened at N244/$ in the parallel market at the beginning of the week, while naira remained stable at CBN’s segment at N196.95/$.
But the CBN has maintained its hawkish position to impede routes of speculation in order to protect the external reserves.
At the Interbank market, the naira traded flat week-on-week as it closed to N199.05/$ due to the continuous intervention of CBN.