‘Stimulus bailouts worth 2% of GDP measly to stem potential shocks from crisis’
Cardinalstone Partners, an investment banking firm has said policy responses to the recent development in the economy is likely to provide calming effects.
However, the firm held that stimulus packages value at 2% of GDP may not be weighty enough to offset potential shocks from the current crisis.
In addition to its six initial policy response to the COVID-19, the CBN also announced ₦1.1 trillion stimulus to support local manufacturers, boost import substitution.
Cardinalstone believes that the soothing measures could help manufacturers cover important obligations.
It added that this can help keep plants running to meet domestic demand without inordinately raising prices to account for the rising cost of raw materials.
Recently, the CBN devalued the naira by adjusting its FX intervention rates at investors and exporters window to ₦380 to a dollar.
Also, it sold to Bureau de Change (BDC) at ₦378/$ in response to Nigeria’s weakening external position and buffers.
Again, at the official window, the naira was also repriced lower to about ₦360/$ from ₦307/$.
This has resulted to a narrower spread between the official and rates in other FX market strata.
Elsewhere, the CBN revealed plans to activate the ₦1.5 trillion Infraco project and redirect oil & gas dollar sales to itself instead of the NNPC.
“The former is expected to boost infrastructure while the latter is aimed at ensuring continued funding for petroleum imports and supporting the new policy on fuel price modulation, analysts held.
These policy responses are likely to provide a calming effect, the investment banking firm explained.
It said the measures to support pharmaceutical and healthcare companies are positive given the global shutdown and panic buying of pharmaceutical products domestically.
Analysts at the firm positioned that measures to boost liquidity and economic activities may cascade to some pressures on naira, which has been well sold in the last two months.
It explained that the CBN intervention in February was $2.1 billion and $1.8 billion in March.
“These pressures, and continued moderation in oil prices, are likely to offset gains from the mild naira devaluation implemented by the CBN”, the firm held.
Though, FX rates across the I&E and BDC markets are now priced closer to the long-run real effective exchange rate of ₦382/$;
Cardinalstone believes its fair value estimate of about ₦437.20/$ better captures the realities of sustained double-digit inflation and twin deficits across fiscal and current accounts.
The narrowing of FX spreads across the currency markets could imply CBN’s growing acceptance of the need to reprice the currency.
The FX rates narrowing is to reflect the state of fundamental variables in challenging periods, analysts added.
The investment banking firm had expected MPC to slashed policy rate with a 50 basis points.
It had stated the monetary policy rate (MPR) scarcely dictates yield movements in Nigeria.
“The MPC is likely to use it as a signaling tool for the second time in less than twelve months”, Cardinalstone had projected.
Though the Committee maintained policy rates, analysts had expected reduction in MPR by 50 bps to 13% and, possibly, expand differentiated CRR net to encourage bank lending.
Fiscal intervention
In addition, analysts at Cardinalstone position is that fiscal intervention may be needed to stimulate demand
“As part of measures to prevent a meltdown of the Nigerian economy, we anticipate more fiscal responses from the Federal Government.
“These measures are likely to complement already announced monetary policy initiatives and fiscal drives.
“In our view, CBN’s stimulus which is about 2.1% of GDP may not be weighty enough to offset potential shocks from the current crisis”, analysts held.
Analysts think significant stimulation of consumption and direct intervention in healthcare from the fiscal authorities may be more impactful on households.
For instance, we believe the direct reduction of PMS Price to ₦125/litre from ₦145/litre, to reflect the fall in oil prices, could lead to cost savings and higher consumption for consumers in coming months.
Other than this, we see other plausible fiscal initiatives likely to be rolled out, as analyst held that budget review could mean record fiscal deficit in 2020.
Federal Executive Council recently approved a ₦1.5 trillion cut to Nigeria’s 2020 budget amid the recent crash in oil prices to $20/barrel levels.
Read Also: COVID-19: Analysts say CBN’s stimulus measure marginal on economy as MPC holds rates
Government also revised its oil price benchmark to $30.00/bbl from $57.00/bbl, while leaving its oil production target unchanged at 2.18 million barrels per day (mbpd).
Cardinalstone stated that the resultant reduction in oil revenue and projected non-oil revenue cut may result to a 45% decline in budgeted revenue for 2020.
As a reaction to the recent developments, government expenditure was reduced by ₦1.5 trillion after capital expenditure projection was cut by 20.0%.
Then, recurrent expenditure was surprisingly slashed by 25.0%.
“For us, the budget review was a necessity given recent oil price shocks.
“However, we believe that the government is still likely to underperform its revenue target for two reasons.
“Firstly, we see significant risks to oil production forecast of 2.18 mbpd as deep offshore production of about 40.0% of Nigeria’s oil production may be disincentivized if prices remain around current levels of $20/barrel against average upstream production cost of $30/barrel.
“Secondly, we believe that the initial budget overestimated potential revenue from other non-oil sources such as FGN balances in special levies account, FGN share of actual balance in special accounts, and Signature bonus/Renewals revenue”, Cardinalstone said.
‘Stimulus bailouts worth 2% of GDP measly to stem potential shocks from crisis’
