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Economic Research
24 November 2015

Economic Report Monetary Policy

MPC Meeting Preview: A ratification of on-going easing?
Economic Snapshot
October 2015 Inflation Data/Indices Macro indicators point to extended economic fragility
MoM YoY Prev YoY
Headline 0.42% 9.3% 9.4% Today, the Monetary Policy Committee of the Central Bank of
Food 0.46% 10.1% 10.2%
All Items Less Farm 0.40% 8.8% 8.9% Nigeria concludes its two-day meeting amidst an increasingly
Imported food 0.50% 10.6% 10.8%
Energy 0.42% 9.6% 9.7% uncertain landscape globally and in Nigeria. On the external front,
minutes of the October US Fed meeting revealed a swing in favour of
Currency Markets
Latest Daily Chg YTD a rate liftoff by December even as the ECB hinted at possibility of
USDNGN 199.03 0.00% -8.50%
EURNGN 211.71 0.11% 4.32%
cutting rates further to stave off risk of renewed weakness in the
GBPNGN 300.96 0.47% -6.38%
Eurozone. Elsewhere, China cut its policy rate for the sixth time in 12
JPYNGN 162.04 0.04% -6.28%
months, after output slowed to 6.9% in Q3 15, while the BoJ held
Monetary Aggregates September 2015
(Nbn) MoM YoY
rates, despite its economy slipping back into recession. On the home
M2 18,718 1.2% 11.0% front, though output quickened in Q3 15 (+2.84% YoY) relative to
CPS 18,732 0.5% 6.0%
NCG 2,788 0.9% N/A Q2 15 (+2.35%YoY) non-oil sector growth decelerated for the 3rd
NFA 5,083 -7.5% -34.0%
NDC 21,520 0.6% 34.0% consecutive quarter with the manufacturing sector still in recession
(Q3 15: -1.4 YoY). Furthermore, unemployment rate rose for the
External Position
Latest QoQ YoY fourth consecutive month in Q3 15 to 9.9% (+170bps QoQ). On the
Trade Balance ($mn) -2,308 NM NM
External Reserves ($mn) 30,442 -2.8% -17.4% fiscal side, further down leg in oil prices (-9% since the last MPC and
Foreign Debt ($mn) 10,316 9.0% 10.5%
-22% YTD) amplified revenue strain across tiers of government. The
Growth Data Q3 2015 FGs now expects fiscal deficit to double to N2.1 trillion on lower
(Nbn) %of total YoY
revenues amidst increase expenditure, while our analysis of states
Real GDP 17,976 100% 2.84%
Agriculture 4,817 26.8% 3.46% governments show more than half will struggle to meet recurrent
Oil 1,845 10.3% 1.06%
Services 6,014 33.5% 3.76% expenditure. On a positive note, CPI eased for the first time in
Wholesale and Trade 2,920 16.2% 4.40%
Manufacturing 1,776 9.9% -1.43% 11months to 9.3% (-10bps MoM) and naira remained stable at the
interbank even as forex reserves posted modest gains to $30.3billion
Oyekunle Omotayo-Benson (+1% since the last meeting). In all, broadly weak macro indicators
highlight frailty of the Nigerian economy.

ARM Research
Figure 1: Monthly FAAC (N bln) and oil price ($/bbl)

FAAC Brent oil price (RHS)

1,000 120
900 110
700 80
600 70
400 40
300 30










Source: MoF, Bloomberg, ARM Research

Cut in policy rate to affirm inflection point of monetary policy

Interestingly, the CBNs policy moves since the last MPC appear to have taken
cognisance of this reality. Despite linking the CRR cut in September to the need to
avert potential liquidity squeeze that could be caused by TSA withdrawals, the CBN
allowed system liquidity to climb to a 2 years summit of over N1 trillion post-TSA
implementation in October. Specifically, in addition to the N700 billion CRR credit,
the apex bank allowed another N850 billion in paper maturity over October and
November, without any single mop-up via its usual route of OMO. For us, this
decision to allow this level of liquidity (over N600 billion daily average) since the last
MPC meeting marked the first real signal of a shift in monetary policy to an
accommodative stance from the hawkishness of the past 4 years. The glut has driven
sharp contraction across the yield curve to near five year lows as banks scampered for
quality outlets in the face of heightened credit risks. Short-term rates and long term
rates collapsed 850bps and 450bps from levels obtainable as at the last MPC to 5.2%
and 10.5%, respectively an outcome in sync with apex banks governors call for lower
interest rates.

ARM Research
Figure 2: Benchmark rates and yields

SDF SLF MPR Average T-bill Average bond






Source: FMDQ, CBN, ARM Research

With short-term rates substantially below the MPR, the CBNs anchor rate runs the
risk of being redundant in the current market environment. More importantly, given
that the downleg in market rate is a consequence of the apex banks (non-) response to
the liquidity build-up, we expect the MPC to formalise the accommodative stance,
which essentially commenced weeks ago, with a cut in monetary policy rate.

Furthermore, developments on the fiscal side also support a downward review in

MPR. Specifically, amidst waning revenues, the possibility of the federal governments
doubling expenditure in 2016 raises scope for higher level of borrowings and we
believe the FG might see domestic borrowing as a more viable option in a lower rate
environment. The tactic already has a precedent. At the November bond auction, the
DMO took advantage of the low rate environment to sell 40% more paper than
planned at marginal rates (10.25% on average) that was the lowest since February
2011. Indeed, we highlighted the growing harmony between the fiscal and monetary
authorities in our Q3 15 Strategy Update and expect the appointment of substantive

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ministers (majority of whom seemed to favour lower interest rates) to drive a firmer
handshake, between the authorities, that would stimulate further downleg in rates.
Stacking all these factors together, from weakening macros to depressed market rates
and adding the prospect of increasing monetary and fiscal harmony, the question, for
us, is not whether the MPC will cut MPR at this meeting, but the quantum. Balancing
the current significant undershoot of money market rates relative to MPR against the
need to not be too sudden with policy changes, we project a cut of possibly up to
200bps. On the other hand, we expect the MPC to hold CRR which, admittedly, has
been the preferred tool of control in recent times. We think further downward
adjustment to CRR will be dependent on thinning system liquidity, which is unlikely
to be the case in the near term, as N560 billion OMO paper is set to mature over the
rest of 2015. In all, we see persistently elevated system liquidity (over N700 billion as at
yesterday) as the real evidence of a change in monetary regime, but we believe a rate
cut could be the confirming signal that the new regime is here to stay.

ARM Research
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