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The global economy ended 2013 on a positive note with the euro zone growing for the first time since 2011, albeit marginally. The FOMC is expected to reduce the USD75bn monthly Bond buyback further at its next meeting but the impact is expected to be minimal. There appears to be no major impetus to alter MPR in the Monday meeting.
The global economy ended 2013 on a positive note with the euro zone growing for the first time since 2011, albeit marginally. The FOMC is expected to reduce the USD75bn monthly Bond buyback further at its next meeting but the impact is expected to be minimal. There appears to be no major impetus to alter MPR in the Monday meeting.
The global economy ended 2013 on a positive note with the euro zone growing for the first time since 2011, albeit marginally. The FOMC is expected to reduce the USD75bn monthly Bond buyback further at its next meeting but the impact is expected to be minimal. There appears to be no major impetus to alter MPR in the Monday meeting.
www.meristemng.com Ahead of MPC Meeting January 2014 | 11 Pages
MPR to remain at 12% but with need for more regulatory oversight
International Economic Developments Global economy on the uptick The global economy ended 2013 on a positive note with the euro zone growing for the first time since 2011, albeit marginally. The US grew 2%, Japan (3%), China (7.9%) and the UK (2.4%) in 2013. The euro zone economy grew by 0.3% YoY in Q2:2013 but slowed to 0.1% in Q3 with expectation of 0.3% and 0.4% growth in Q4:2013 and Q1:2014 respectively. Estimated inflation rate for the euro zone is about 1.5% in Q4:2013, and is expected to moderate to 1.4% by Q1 of 2014. The US economy is expected to continue growing at an average of 2.2% with analysts putting Q4:2013 figure at 2.0% and 2.4% expectation for Q1:2014. The FOMC is expected to reduce the USD75bn monthly Bond buyback further at its next meeting but the impact is expected to be minimal as the global economy seems to be more prepared for the tapering measure. China is expected to grow by 7.9% in Q4:2013 up 0.2% from the previous quarter with an expectation of 8.0% for Q1:2014. The Japanese economy expanded by 3.0% in Q3:2013 and is expected to further gain traction in 2014.The inflation rate edged higher to 1.1% in Q4:2013, up 0.4% from Q3:2013. However, it is expected to subside to 0.9% by Q1:2014. Considering the development above and their implication on potential fund flow, there appears to be no major impetus to alter MPR in the Monday meeting.
The Monetary Policy Committee will be meeting on the 20 th - 21 st January, 2014 to deliberate and take key monetary policy decisions. We analyze international economic developments, domestic economic and financial developments, monetary, credit & financial market developments and external sector developments. On a balance of factors, our analysis suggests that the Committee will keep MPR constant at 12%. In addition, we are of the opinion that there should be more regulatory oversight on Islamic Banks in relation to their Financing To Deposit (FTD), commercial banks compliance with Minimum Interest Rate on Savings (MIRS) and BDCs foreign exchange activities.
Nigeria | Economics | Monetary See page 11 for Analysts Certification and Disclaimer
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Nigeria I Economics I January 2014 www.meristemng.com -10% -5% 0% 5% 10% 15% 2008 09 10 11 12 13e 14f Nigeria Russia Brazil India China S/Africa 7% 9% 11% 13% 15% 2009 10 11 12 13 14f Macroeconomics Updates Domestic economy: More growth on the horizon The Nigerian economy is estimated to have expanded by c.6.5% in 2013 (vs. 6.6% growth in 2012) and forecast to grow by 6.650.2% in 2014. This expected growth is to be driven largely by increased consumer and government spending, rising investment across priority sectors such as agriculture, power and infrastructure, and improved net export position fuelled by governments import substitution drive. Decline in oil production in 2013 adversely affected the realized economic growth and efforts will need to be geared towards improving production levels to realize the projected 2014 growth rate. Inflation: Tamed but with upside risks on the horizon Consumer price inflation remained moderate all through 2013 following tightening measures by the CBN which resulted in an average inflation rate of 8.49%. Headline inflation fell to 7.8% in October, the lowest in 2013. However, due to increasing food prices, it rose to 8.0% in December. We expect inflation to remain contained in the first half of 2014. However, there are potential upside risks to price stability in the second half of 2014 that suggests the need for continued tightening measures in order to tame it within the single digit band. There appears no justification to hike MPR in the coming MPC meeting on the basis of inflation outlook.
Chart 1: Nigerias Economic Growth Performance Relative to BRICS (2011-2013) Nigeria Inflation (Actual and Outlook)
Sources: World Bank, IMF CBN, Meristem Research
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Nigeria I Economics I January 2014 www.meristemng.com Monetary, Credit and Financial Market Developments Money Suppy: Rising but below provisional benchmark Broad money supply (M2) contracted by c.5% in November 2013 compared to the level as at December 2012 resulting in an annualized decline of 5.2%. Albeit, it marginally inched up by 1% over end-October levels due to a 4% rise in time and savings deposit which was partly offset by a 1% drop in narrow money. From another perspective, developments in money supply reflected lower Net Foreign Assets (-2%) but increased Net Domestic Asset (7%) relative to October levels. The lower NFA was shared broadly across all holders from Monetary Authorities (CBN and FMF) to banks (Deposits Money Banks, Merchant banks and Non-interest banks). The NGN421billion addition to NDA was driven by NGN465bn net addition to the stock of domestic credit being slightly offset by increased deficit on other domestic assets. Net domestic credit (NDC) expanded by 4% and 3.4% Month on Month in October and November respectively to peg annualized growth at 12%, which, though higher than 9% as at the last MPC meeting, underperforms the 2013 provisional benchmark of 23%. Islamic Banks: FTD trending down but still above 100% While NDC by conventional banks grew 9% from December 2012 to November 2013, financing by Islamic bank recorded 3-digit growth of 263%. Furthermore, evidence from countries with strong Islamic banking institutions suggest that Financing To Deposit (FTD) ratios is usually in tandem with Loan To Deposit (LTD) by conventional banks. However, the Nigerian experience appears to be an exception with Islamic banks having 102% FTD (although down from 139% in 2012 Dec) while conventional banks have 36% LTD. Although this might be peculiar with their early stage in the industry life cycle, the CBN will need to further up its regulatory oversights on this segment to avert any potential crisis due to exposure to excessive risk factors in a bid to improve their average rate of return.
Money Suppy: Rising but below target Reserve money (RM) contracted further by 1% in November compared to October. This was as a result of a 1% and -2% changes in currency in circulation and bank reserve. 2013 annualized growth of the RM stood at 24%. The level of RM at the end of November fell short of the fourth quarter indicative benchmark of NGN5tn by 11%.
Chart 3: Movement of Broad Money and Reserve money Outlook)
Source: CBN Chart 2: Islamic Bank FTD vs. Conventional Banks LTD Outlook)
Source: CBN
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Nigeria I Economics I January 2014 www.meristemng.com -1.00 -0.50 0.00 0.50 1.00 1.50 2005 06 07 08 09 10 11 12 13 MPR and Prime Lending Rate MPR and Maximum Lending Rate Interest Rate Savings rate: Yet to inch up to regulatory minimum Average savings rate of commercial banks at 2.5% is yet to match up with the regulatory minimum of 3.6%, 30% of MPR. While some banks are willing to offer significantly higher than the benchmark due to the need to cushion their liquidity positions, a number of other banks groaning under reduced income heads and higher cost are offering lower than the set benchmark. The CBN, in an effort to grease monetary policy transmission channel and support its policy objectives, is set to ensure higher levels of compliance by banks through stricter regulatory oversights and this might be addressed at the upcoming MPC meeting. Lending rate: Not cheering even for prime borrowers Prime lending rate hit its high for the year in November and this is not surprising given the need to maintain a high margin in the face of increasing cost higher savings rate, gradual phase-off of COT and cap on some lending fees and commission among others. The prevailing risk factors facing banks do not support a reduction in lending rates and we view them being sticky at their current high levels. Furthermore, the 5-year rolling correlation between MPR and prime lending rate on one hand and maximum lending rate on the other hand stand at -0.4 and 0.66 respectively. Of striking importance is the latter which increased from 0.03 in December 2012 to 0.66. This relationship is stronger when viewed in a 3-year rolling correlation context. .
0% 5% 10% 15% 20% 25% 30% 2005 06 07 08 09 10 11 12 13 Savings Rate Prime Lending Rate of Commercial Banks Maximum Lending Rate of Commercial Banks MPR Chart 4: Movements in MPR vs. other Bank rates 5-year Rolling Correlation between MPR and rates Outlook)
Source: CBN
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Nigeria I Economics I January 2014 www.meristemng.com 8 9 10 11 12 13 21-Nov-13 5-Dec-13 19-Dec-13 2-Jan-14 OBB InterBank Money market rates moderate Interest rates in all segments of the money market reflected the liquidity conditions in the banking system. OBB rates during the period recorded an average of 10.66% (vs. 11.73% as at the last MPC) while Inter-Bank rates recorded an average of 11.12% (vs.12.50% as at the last MPC meeting).
CRR: Any review expected? Liquidity ratio dropped from 60% to 48% as banks re-allocated their assets to higher yielding instruments. Although banks are still shy of creating risk assets, the terrain is gradually improving with loan to deposit ratios at 36% in November compared to 34% just before the increase in CRR on public sector funds in July. The last MPC meeting for 2013 recorded two votes for increase in CRR on public sector funds from 50% to 75% and 100% respectively and this has an undertone of reversion to the old liquidity management system of withdrawal of public sector funds from commercial banks to the CBN. We however do not foresee any review in CRR in the Monday meeting but there is the possibility of review later in the year.
Nigeria I Economics I January 2014 www.meristemng.com 0% 2% 4% 6% 8% 10% 12% 14% Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Interbank rate
BDC Rate
0 2 4 6 8 10 12 14 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Import Cover WAMZ Benchmark International Benchmark External Sector Developments MPC likely to consider BDC-targeted policies From the last MPC, the Naira has remained stable against the US Dollar at the official market. However, the BDC market has continued to trade at a significant premium to the official rate evidenced by NGN17.28 spread over the CBN rate from NGN13.30 on the 19th of November. From the last auction in December, the premium widened at the interbank (4%), BDC (NG12%) and parallel markets (10%) but they have all reversed to December 18 levels. Although the BDC rate has initiated a slight correction, it might be premature to draw an inference on its sustainability. We therefore expect the MPC to consider policies that will catalyze the observed correction. The CBN rates averaged NGN155.72 over the review period, opening at NGN155.70 on the 19 th of November and closing at NGN155.72 on the 13 th of January. This represented a depreciation of NGN0.02k (0.01%). The interbank market averaged NGN159.00 over the period, opening at NGN159.04 and closing at NGN159.65 representing a depreciation of NGN0.61k (0.38%). The BDC rate averaged NGN171.41 over the same review period, opening at NGN 169.00 and closing at NGN173.00 representing a depreciation of NGN4.00 (2.37%).
Chart 6: BDC and Interbank rates premium to official rate Reserve Adequacy Outlook)
Source: CBN
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Nigeria I Economics I January 2014 www.meristemng.com Reserve: Though adequate for import, needs cushioning Nigerias external reserve has declined 0.96% to USD43.3bn as at Jan 10, 2014 (vs. USD44.8bn as at the date of the last MPC meeting). Despite the decline, the reserves is still able to cover 9months of import, well above the WAMZ and International benchmarks of 6 and 3 months respectively. This decline can be attributed to the 28.7% shortfall in the Excess Crude Account to USD3.3bn as at December 2013 at a time when crude oil prices remained above USD100/barrel. With a significant portion of the reserves accounted for by Foreign Portfolio Investments, a decrease in the MPR is unlikely in the face of potential capital reversal fuelled by the on-going US Fed tapering. It is our view that the MPR be kept at the current 12% to keep funds attracted to the Nigerian market and to help stabilize the foreign exchange rate. Conclusion On a balance of factors, we are of the opinion that the MPR be retained at 12%. However, there is also need for more regulatory oversights especially with regards to the activities of the BDC operators, Non-Interest Banks, as well as compliance of commercial banks to the Minimum Interest Rate on Savings (MIRS). It is also noteworthy that the tenure of 5 of the 12 members of the MPC will expire this year and the re-composition has a strong bearing on policy direction.
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Nigeria I Economics I January 2014 www.meristemng.com 0 5 10 15 20 25 2008 09 10 11 12 13 WAMZ Benchmark International Benchmark Months of Import Cover
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