NIGERIA raised N120bn in Treasury bills at an auction held
on Wednesday. Marginal rates continued to ease on the back of high system
liquidity. We have been highly critical of the direction monetary policy in
Nigeria has taken since the ousting of Mr Lamido Sanusi (former central bank
governor), and recent conduct has done little to soothe our concerns.
One of our main critiques against the rigid exchange rate
regime is the costs to growth as the private sector experiences difficulty
obtaining hard currency under artificial liquidity conditions. The monetary
regulator has conveyed a developmental mindset in recent months, and is
presumably using de facto easing in financial conditions as an avenue to
stimulate economic growth. Excess system liquidity partially attributable to
large redemptions of open market operation instruments and a reduction in the
cash reserve requirement have pressured the debt curve notable lower since
September, and sent overnight rates plummeting.
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| Emefile, CBN Boss |
Presuming that the lack of liquidity absorption forms part
of a monetary policy growth stimulus strategy, we view this as a further
indicator that the central bank has every intention to maintain a rigid
exchange rate regime. The central bank reportedly also plans on restricting
dollar supply further in a bid to preserve the foreign buffer, limiting the
amount of dollar available for purchase.
We are concerned that the staunch insistence by the
regulator that the naira is “appropriately priced” implies that stringent
restrictions on forex supply with regard to consumer trade goods will be
tightened further in coming months, considering our global assumptions that the
oil price will remain suppressed over the medium term. Besides deterring
foreign direct investment and inward portfolio flows, tight forex liquidity
conditions and the capital controls introduced to shield foreign reserves will
increasingly filter through to the real side of the economy.
Stimulating domestic demand via cheap liquidity will in our
view do little to support economic growth in the absence of an efficient trade
channel. Suppressed crude oil prices will only allow for the adverse effects of
the order-based system to intensify while the naira will become increasingly
overvalued the longer the CBN persists with its current policy framework.
Dollar appreciation on a trade-weighted basis (as the US
prepares to commence with interest rate normalisation) will exacerbate the
degree of misalignment between the de facto peg and the market-clearance level,
adding to deadweight loss. Growing discontent between factions within the
Monetary Policy Committee (MPC) has seen numerous members publicly criticising
the de facto forex controls, and warning of resultant skewed incentives and the
legality of the imposed restrictions. While the MPC governor – and President
Buhari – continue to argue against naira devaluation due to concerns regarding
the resultant shock to inflation and political costs thereof, we think that the
systemic starvation of forex liquidity, souring business sentiment and foreign
factors have now greatly increased the risk of a disorderly devaluation.
While the de facto FX controls – rather than peg management
via foreign reserves – could arguably buy Nigeria some time before capitulating
to devaluation pressure, we tend to think pressure from foreign direct
investment (FDI) and trade partners, rather than portfolio flows, could
ultimately deal the death blow. High barriers to entry and a deteriorating
investment climate, within an environment of lower for-longer commodity prices,
could incentivise corporates to re-think medium-term strategies. We also argue
that adverse domestic consequences of the stringent exchange rate regime may
ultimately move the regulator’s hand (rather than external market perception)
as domestic companies struggle to meet external debt obligations. Security Bids
(Amount) Received N'bn Bids (Amount) Accepted N'bn Bid yield range at previous
auction Bid yield range Previous Weighted Average Rate (WAR) Current Weighted.
We anticipate the central bank to shed some light on the
direction of monetary policy at next week’s meeting and the regulator’s view on
inflation dynamics going forward. We consider the (presumably) policy action of
using de facto easing of financial conditions to stimulate growth as
undermining the central bank’s objective of maintaining price stability. We
remain unconvinced that growth in monetary aggregates will translate into
robust economic growth in the absence of an efficient trade channel.
Adding to excess liquidity is however inflationary, adding
to the upside risks to the inflation outlook along with higher electricity
tariffs, higher fiscal spending, and higher consumer prices as product
shortages weigh. The current fuel shortages being experienced in the country
may also prove inflationary moving forward, not to mention the adverse impact
on economic growth if shortages persist for as long as in Q2.
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