The Nigerian financial system has been awashed with
liquidity since the end of September. The excess system liquidity is partially
attributable to large redemptions of open market operation (OMOs) instruments
(without adequate new issuance to absorb the excess liquidity) and a reduction
in the Cash Reserve Requirement (CRR) in September. The additional liquidity
that flooded the market sent the overnight lending rate plunging, according to
Reuters data. The fact that the apex bank has since not moved to mop up excess
liquidity has prompted analysts to speculate whether this in fact represents a
shift in policy, aimed towards spurring credit extension to revive the Nigerian
economy. That said, corporate investors soon took advantage of the situation
and climbed into government securities which saw yields dip sharply at the
October and November primary market auctions.
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While the situation remains somewhat uncertain, it is hard
to argue against the notion that this represents a deliberate shift in policy.
Meanwhile, while we previously reported that Abuja approved roughly $2.1 billion
worth of fuel subsidy payments to fuel marketers, it now seems that the funds
have yet to be disbursed as the payment needed to gain approval from Parliament
– this was reportedly not a requirement in the past.
President Muhammadu Buhari subsequently requested Parliament
to approve a supplementary budget worth N465 billionn to cover the subsidy
payments and to provide additional funding for the fight against Boko Haram. A
report in local newspaper, the Sun on November 20, showed that the passage of
the additional funding has hit a road bump as the ruling All Progressive
Congress (APC) and the opposition People’s Democratic Party (PDP) locked horns
on the issue. In the interim, queues at the pump have been growing longer and a
certain level of panic-buying has been reported in some areas. Meanwhile,
according to another local newspaper, Vanguard, progress on the 2016 fiscal
budget has been slow, and the National Assembly is still awaiting the Medium
Term Expenditure Framework (MTEF), which is reportedly required to be submitted
for approval no later than 90 days before the end of the year. A member of the
House of Representatives, Chike Okafor, stated: “What the law says is that 90
days before the end of the fiscal year, we should have the medium term
expenditure framework in place, we don’t have it, so what does it portend, we
are already running into a crisis with respect to the 2016 budget.”
Meanwhile, the naira held steady under the rigid exchange
rate regime on Friday. This week will see the convention of the Monetary Policy
Committee (MPC), at which time we expect the committee to maintain the policy
rate at 13 percent, although we may see an adjustment in the cash reserve
requirement. Excess liquidity has driven overnight rates substantially lower
since the end of September, which has not elicited liquidity absorption from
the central bank. We therefore presume that the growth-oriented regulator may intend
the resultant growth in monetary aggregates to stimulate sluggish economic
growth. While some analysts expect a cut in the policy rate (presumably due to
weak economic growth, and some reprieve in inflation recently), we view the
risks to the inflation outlook as skewed to the upside, and therefore
supportive of maintenance of the benchmark rate. Liquidity management has been
quite erratic at times this year, with overnight rates surging in cycles of
liquidity drought and plummeting on liquidity injections. We do not hold high
hopes that the regulator will provide (useful) forward guidance with regard to
the normalisation of artificial liquidity conditions and loosening of
restrictions on two-way trading. Recent actions by the central bank however just
affirmed our view that the central bank will keep the order-based system in
place for as long as possible. The negative spillover to economic growth and
FDI could however move the regulator’s hand to adjust the naira weaker to
N220/$ by mid-2016, with risks tilted to a shorter timeline to a devaluation.
In the interim, a clampdown on forex liquidity and growing waitlist period to
acquire forex via the legitimate route will see more demand funnelled via the
black market.
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