‘MPR Cut Positive for FG Borrowing Plan, Negative for inflation’
Analysts have interpreted the Central Bank of Nigeria’s Monetary Policy Committee decision to cut monetary policy rate (MPR) as move to soften government’s borrowing cost.
In macroeconomic note, Coronation Merchant Bank Limited stated that the MPC unanimous decision to cut headline rate from 13.50% to 12.50% is a clear signal that policy authority is happy with low market interest rates.
MarketForces then gathered that the decision is positive for the economy at the moment due to wide gap in revenues and plan to finance the budget with borrowings.
Recalled that Federal Government (FG) indicated that it would borrow to finance it recurrent and capital expenditure for fiscal year 2020.
Lower receipts from crude market has affected FG revenues, just as review of its spending plan for 2020 has double up budget deficit to ₦5.4 trillion.
Currently, oil accounts for as much as 90% of the nation’s foreign earnings and 60% of aggregate revenue of the government.
In its macroeconomic note, Coronation Merchant Bank Limited stated that the recent surprise cut in the policy rate is negative for inflation, neutral for equity market and lower for longer implications for interest rates.
Meanwhile, analysts at Coronation explained that the reduction in headline rate hold a neutral implications for equities.
The firm stated that the stock market is undergoing a bull run, which is consistent with seeing this as a V-shaped recession with a clear exit early next year.
“Although this is plausible if Brent crude prices recover to US$50.00/bbl -currently US$34.79/bbl- it is less plausible if oil prices falter”, the merchant bank explained.
The telecoms sector continues to grow with data partly replacing lost voice revenues, and both subscribers and internet subscribers sharply up in Q1.
Meanwhile, the merchant bank added that 100 basis points drop in rate is negative for inflation.
It expressed that the slowdown in trade is associated with a steep fall in foreign exchange volumes and a rise in the parallel market exchange rate, meaning an increase in input costs.
In its review, Coronation stated that agricultural production may not be growing as fast as population growth.
Coronation explained that April’s 12.34% year on year inflation compare to 12.26% in March could rise further.
However, the decision has lower-for-longer implications for interest rates as it appears that the apex bank is comfortable with low interest rate environment.
“Liquidity at Nigerian investing institutions is high and T-bill rates at around the 3.0% -mark are useful for government as it finances its expanded N5.3 trillion (US$13.6bn) deficit”, the Merchant Bank explained.
Furthermore, Coronation expressed that the acceleration in growth of non-oil GDP over the past three quarters has come to an end.
Non-oil GDP contributed 90.5% of Nigeria’s GDP in Q1 2019 (92.68% in Q4 2019) and its growth in Q4 declined to 1.55%.
It stated that the slowdown in the overall growth rate was largely due to slowdowns in the growth rates for Telecoms, Manufacturing and Trade.
While the slowdown in manufacturing is a concern, a larger impact is made by Agriculture (accounting for 21.96% of GDP), whose rate of growth slowed from 2.31% in Q4 2019 to 2.20% in Q1 2020.
There are several drivers of these sector changes.
It said these include low purchasing power of consumers as inflation rates continues to rise amidst border closure, FX restrictions as well as reduced international trade as a result of supply chain disruption caused by the COVID-19 pandemic.
The Merchant Bank stated that financial institutions posted the highest growth for the quarter at +24.00% year on year.
It said the credit expansion drive by the CBN since mid-2019 and the decline in interest rates during the quarter were responsible for the growth.
However, Coronation stated that the availability of credit facilities did not spur significant growth in Manufacturing, Agricultural and Telecoms.
It explained further that; of the six largest sectors, four grew and two contracted.
Agriculture grew 13 bps slower than the previous quarter, but 42 bps slower than its three-year average of 2.62%.
Although the sector is resilient and did not go into recession with the rest of the country in 2016.
Coronation expressed that the slow-down in the growth rate is a concern because of Nigeria’s population growth at approximately 2.50% per annum.
“The sector may show further deterioration in Q2 due to the COVID-19 lockdown and restrictions on interstate travel.
“The Trade sector has been in recession since Q2 2019 and fell further south to negative 2.82% y/y development in Q1 2020.
“While the sector is volatile, its sensitive nature to regulatory changes makes its growth prospects uncertain”, it stated.
“A combination of border closure, interstate lockdowns, technical devaluation of the Naira and delay in goods clearing at Nigerian ports led to the deepened decline”, the Merchant bank expressed.
The high level of bank credit is due to the sharp falls in T-bill and credit rates and the enforcement of the 65% loan-to-deposit ratio (LDR) on commercial banks.
“We observed an increased flow of credit to a pool of high-quality obligors since second half of 2019 before a widening of the credit basket to other enterprises.
“The longer the policy is sustained, in our view, the more businesses are likely to secure financing at low interest costs.
“In our opinion, inventory build-up is therefore likely and some measure of expansion in manufacturing capacity utilisation is likely to ensue.
“This improves the outlook for manufacturing in 2020 but progress is likely to be difficult against the twin headwinds of falling consumer demand and shortage of US dollars for imported raw materials”, Coronation stated.
Earlier this year, the outlook for Nigeria’s GDP was optimistic, the World Bank and IMF forecasted 2.10% and 2.30% growth respectively.
However, recent events – the decline in oil prices and the COVID-19 pandemic – has led to a review of the economic outlook and a likelihood of a recession.
Going forward into Q2 and Q3, we expect three sectors to either continue with negative growth, or to start to report negative growth, Coronation estimated.
“First, we expect Trade to continue with negative growth, given the fact that US dollars are in short supply and that logistical issues appear not to be fully resolved.
“Second, we expect Manufacturing, which was perilously close to recession in Q1, to move into recession, given the twin pressures of shortages in supply of raw materials (in part due to shortages of US dollars) and a decline in consumer purchasing under lockdowns, furloughs and outright unemployment.
“Third, and despite rising oil production, we expect the Oil & Gas sector go into recession”, the Merchant Bank stated in the report.
However, Coronation stated that it is difficult to know exactly when the effects of low prices will translate into negative growth, as oil can be sold three or six months’ forward.
But by Q3, it would expect this volatile segment of the economy to be in recession.
“These three sectors account over 30% of the economy, so a deep slowdown in this zone points to a recession overall.
“We think the IMF forecast of negative growth of 3.4% in 2020 is a reasonable assessment, given the various uncertainties we have highlighted”, Coronation stated.
‘MPR Cut Positive for FG Borrowing Plan, Negative for inflation’