Rising inflation ruffles analysts, predict end to lower rate era.
Analysts are unsettled as headline inflation continues to rise, the situation that pundits have attributed to both monetary and fiscal authorities policy somersault.
The nation’s inflation rate is rising just at the same time when yield on fixed interest instruments is moderating. This, according to analysts has translated to negative real return for some financial instruments.
As inflation rate moves faster than yields on Bills, both investment and savings would be negative for economic agents, says LSintelligence in an email. The firm said: “savers would lose value, and T-Bill investors would likely lose”.
The National Bureau of Statistics (www.nigerstat.gov.ng) in a data recently releases revealed that headline inflation rate for December 2019 pitched at 11.98%.
According to chart, the December figure is the highest point in the last 20-month.
Financial experts pointed that the trend around the recent increase in general price of goods and services has implications for the financial market.
Specifically, analysts at WSTC Securities (www.wstc.com.ng) said with 1-year T-bill yielding an average of 6.90%, the increase in inflation rate from 11.85% to 11.98% implies a wider negative real return on investment.
“We see this development as a disturbing development especially to the asset managers, particularly the pension funds administrators (PFA), who try to benchmark their returns to the inflation rate”, WSTC said.
According to analysts, the real return of all government securities from 90-day bills to 10-year bonds are currently in the negative territory.
“Given that the Pension Fund Assets (PFAs) place majority of funds of about 60%-70% on government securities.
“It means that returns on pension savings will suffer. Hence, we believe that a redirection of funds to the equities market is inevitable.
“Although we are cautious about the sustainability of the low yields in the economy due to the fundamentals that do not support, we yet maintain that the monetary policy authorities might not be willing to make adjustment any time soon.
“Consequently, we see asset managers taking up some risks by investing in other asset classes, particularly equities”, WSTC analysts said.
It would be recalled that fiscal year 2019 was closed amid rising policies adjustment targeted at stimulating growth and increase government revenues.
On the monetary front, the Central Bank of Nigeria rolled out economic policies that aims at stimulating performance of the economy.
The regulator used various directives to ensure Banks channel more credit into the real sector.
Just as the fiscal side settled for policy direction to raise government revenues. The finance ministry raised value added tax from 5% to 7.5% on VATable consumption.
It also proposes to exclude some small and medium scale enterprises with revenue below N25 million from being taxed.
Analysts believe that border closure by the Federal Government would generally push inflation upward.
This is due to the fact that supply side has been constrained as imports side from neighbouring countries through land borders have been stopped.
For December 2019 consumers’ price index (CPI) report, headline inflation reaches 20-month high of 12.0%
Afrinvest (www.afrinvest.com) in a note stated that Nigeria’s latest CPI data revealed a rise in headline inflation rate to a 20-month high of 12.0% year on year in December 2019 from 11.9% in the prior month.
The investment banking firm said this means average monthly inflation rate was 11.4% in 2019, below our revised estimate of 11.5% and a moderation from 12.2% in 2018.
In its analysis, Afrinvest said the uptrend in headline inflation was despite a slower month on month increase at 0.9% from 1.0% in November 2019.
It further noted that the food index rose slower on a monthly basis by 1.0% from 1.3% in the previous month.
It observed however that there was a sharp increase in food inflation to 14.7% in December from 14.5%, the highest since April 2018.
“We attribute the notable rise in food inflation to a weak base and the ongoing land border closure with neighboring countries”, Afrinvest said.
Meanwhile, imported food inflation rose 4 basis points (bps) to 16.0% as the month on month increase remained unchanged at 1.3%, although still elevated.
On the flip side, only the core index rose faster on a monthly basis with a 2 bps month on month increase to 0.8%.
As a result, core inflation advanced to 9.3% year on year from 9.0% in the previous month.
Afrinvest analysts said they suspect that the uptick recorded in core inflation reflected rising demand for non-food items during the festive season.
“Although the moderation in month on month inflation could indicate easing food price pressures, the level recorded in the food basket was still the highest in the months of December since 2016.
“Hence, it would be premature to suggest that the impact of the border closure on prices is thinning”, Analysts remarked.
“In the immediate term, we foresee sustained pressure on consumer prices on the back of the extended land border closure and the increase in VAT rate to 7.5% from 5.0%, for which implementation is expected to start February 2020.
“However, early implementation of the new VAT increase by some companies means that we could start to see the impact from January 2020 numbers.
“In the short-term, the upward review of electricity tariff and the onset of planting activities are downside risk factors to inflation”, Afrinvest reckoned.
Analysts at WSTC Financial Service said they expect to see a continuation of the current inflationary trend in the near to medium term.
“In our view, the rising inflation is expected to stem from an adjustment exercise, relating to minimum wage increase, hike in electricity tariffs, and increase in Value Added Tax (VAT) rate”, WSTC analysts added.
To the analysts, other issues that might possibly result in a higher inflation going forward include the impact of an extended border closure on food prices, and higher levels of liquidity in the system owing to an improved banking sector credit to the private sector.
“In our 2020 economic outlook, we projected inflation rate to be 11.50% as our best case scenario, 11.94% as our base-case scenario and 12.60% as our worst-case scenario”, WSTC analysts highlighted.
Also, Financial Derivative Company (www.fdcng.com) held that it anticipates a buildup of inflationary pressures in subsequent months, driven by the lingering effect of supply bottlenecks.
According to FDC, the bottlenecks include border closure, forex restrictions, higher logistics and distribution costs and the VAT increase to 7.5% that will be implemented February 1.
The demand pull effect of the liquidity surfeit would also impact on consumer prices and disposable income, the firm revealed.
FDC projected that the expectation of higher costs of goods increases the possibility of a change in the CBN’s current stance to a tightening position in the first quarter of the year.
“This may mean that the era of lower interest rates is slowly coming to an end”, Analysts at the firm reckoned.
By Julius Alagbe, analyst
