Economy
FSDH Urges MPC to Ease Monetary Policy to Stimulate Growth
By Modupe Gbadeyanka
As the Central Bank of Nigeria (CBN) prepares to hold its first Monetary Policy Committee (MPC) meeting of 2018 next week, one of the leading investment firms in the country, FSDH Research, has advised the committee to consider cutting its rates so as to “boost credit creation and stimulate economic growth.”
In a report released on Thursday, analysts at FSDH said they would expect the MPC to consider a drop in either the Monetary Policy Rate (MPR), which is currently at 14 percent, or the Cash Reserve Ration (CRR), presently at 22.50 percent.
The investment company noted that although the GDP growth rate in Nigeria improved further in Q4 2017 at 1.92 percent from 1.40 percent in Q3 2017, the recovery was still very fragile, emphasising that additional monetary policies were required to stimulate a broad-based growth.
“FSDH Research’s analysis of the growth pattern in 2017 shows that two sectors; agriculture and, mining and quarrying were the major drivers of growth. They were the two sectors out of the six largest sectors of the Nigerian economy that recorded growth in 2017. Other leading sectors which are trade, information and communication, manufacturing, and real estate all contracted. Thus, the need for monetary policy easing,” it said.
FSDH Research said looking at the developments in the international market; the economic outlook in the major advanced countries is strong in the short-term to medium-term, necessitating monetary policy normalisation.
It said the outlook of the GDP growth rate remains strong, the unemployment rate is low in most regions and should remain low in the short-term, while inflation rate is trending up.
The Federal Open Market Committee (FOMC) of the United States (U.S) Federal Reserve (The Fed) increased the Federal Funds Rate (Fed Rate) at its March 2018 meeting. The Fed increased the Fed Rate to 1.50 percent – 1.75 percent from 1.25 percent -1.50 percent.
“FSDH Research expects that the FOMC will increase the Fed Rate to 2.25 percent – 2.50 percent by year end. The increase in the interest rate should lead to increase in the yields on the fixed income securities in the advanced markets, with the attendant possible increase in capital flights from the emerging markets,” the report said.
According to FSDH, the increase in the crude oil price and favourable crude oil production in Nigeria have increased capital inflows and also led to favourable trade balance. Consequently, the country’s external reserves (30-Day Moving Average) increased substantially in the last five months, growing to $46.04 billion as at March 26, 2018.
It said this provides additional short-term stability for the value of Naira.
However, FSDH Research recognised the vulnerabilities of the Nigerian economy to the adverse movements in the crude oil prices. Thus the need to stimulate other non-oil sectors to reduce these vulnerabilities, it said.
Continuing, FSDH Research noted that the current strategies of the Debt Management Office (DMO) to reduce the interest expense on the debt of the Federal Government of Nigeria (FGN) were working.
It pointed out that the latest debt figures show that the interest expense on the local debt has dropped in the last few months.
The investment firm also observed a relative increase in the revenue accrued to the FGN from the Federation Account Allocation Committee (FAAC). These two factors have led to a drop in the ratio of the interest expense to the FGN FAAC revenue which stood at 20% in December 2017. Thus the yields on the fixed income securities in the market have dropped substantially in the last six months, it said.
Although FSDH Research said it believes the yields on the NTBs may drop further, it is of the view that the yields on the FGN Bonds may move up gradually from the current level as the FGN starts to borrow to fund the 2018 budget.
It said despite the drop in the yields on fixed income securities in Q4 2017, Nigeria recorded the highest Foreign Portfolio Investments (FPIs) inflows in 2017 during the last quarter.
This, it explained, implies improving confidence on the short-term outlook of the Nigeria economy.
FSDH Research also noted that the growth in money supply as at December 2017 was lower than the CBN’s target for the year.
The broad money (M2) grew by 2.62 percent, lower than the target of 10.29 percent, while the net domestic credit contracted by 2.95 percent as against the target of 17.93 percent. The net credit to the private sector grew marginally by 1.40 percent, lower than the target of 14.88 percent.
It pointed out that the need to curb high inflation rate and maintain stability in the foreign exchange market were the main reasons for the contractionary monetary policy.
FSDH Research said it believes the inflation rate may drop to single digit mid-year, while the exchange rate should remain stable in the short-term.
“Therefore, there is a need for monetary policy easing to boost credit creation and stimulate economic growth,” it averred.
Concluding, FSDH Research said looking at the short-term outlook of the Nigerian economy, it believes the MPC should begin monetary policy easing to signal the end of its monetary policy tightening cycle.
The CBN will hold its first MPC meeting on Tuesday, April 3 and Wednesday, April 4, 2018.
At its last meeting in November 2017, the committee maintained the MPR at 14 percent, with the asymmetric corridor at +200 and -500 basis points around the MPR; and the CRR and Liquidity Ratio (LR) left at 22.50 percent and 30 percent respectively.
By Adedapo Adesanya
The Naira further depreciated against the United States Dollar by N3.46 or 0.25 per cent to N1,362.21/$1 from N1,358.75/$1 in the Nigerian Autonomous Foreign Exchange Market (NAFEX) on Friday, June 5.
However, it appreciated against the Pound Sterling in the same market window during the session by N4.47 to trade at N1,823.59/£1 compared with the previous day’s N1,828.06/£1, and gained N7.00 against the Euro to sell at N1,574.58/€1, in contrast to Thursday’s closing price of N1,581.58/€1.
For another trading session, the Nigerian Naira maintained stability against the Dollar in the parallel market and the GTBank forex counter on Friday at N1,375/$1 and N1,372/$1, respectively.
The Naira is expected to remain strong in the near term, backed by a rise in external reserves, which are nearing $50 billion, enhancing analysts’ confidence about its outlook in the second half of 2026.
Heightened global uncertainty has reduced the incentive for importers and corporates to demand FX, as cautious trade weighs on import needs. Analysts estimate a $40 billion net FX position for the year, a projection anchored in oil windfall gains.
As for the cryptocurrency market, prices remained depressed following a strong US jobs report that spurred markets to price in higher-for-longer interest rates, sending Treasury yields and the dollar up while hammering stocks, especially AI-related names. Crypto markets saw heavy leverage washouts with about $1.6 billion in positions liquidated over 24 hours.
Ethereum (ETH) gave up 4.9 per cent to trade at $1,584.68, Solana (SOL) fell by 3.3 per cent to $63.22, Bitcoin (BTC) crashed by 1.9 per cent to $61,333.23, Dogecoin (DOGE) slipped by 1.8 per cent to $0.0821, and Ripple (XRP) moderated by 1.8 per cent to $1.09.
Further, TRON (TRX) dropped 1.6 per cent to sell at $0.3197, Binance Coin (BNB) slumped by 1.0 per cent to $581.18, and Cardano (ADA) declined by 0.4 per cent to $0.1589, while the US Dollar Tether (USDT) gained 0.07 to sell at $0.9997, and US Dollar Coin (USDC) closed flat at $0.9998.
By Adedapo Adesanya
Crude oil prices fell on Friday as traders gained confidence that renewed conflict between the United States and Iran was growing less likely.
The price of Brent crude futures settled at $93.09 a barrel, down $1.94 or 2.04 per cent, and the US West Texas Intermediate (WTI) crude futures finished at $90.54 a barrel, down $2.50 or 2.69 per cent.
President Donald Trump said the US will win the conflict with Iran either “militarily or on paper,” referring to the fitful negotiations with the Iranian government, and he suggested he could meet with Iran’s reclusive supreme leader “if it was to make a deal.”
He also said he had no desire to meet with Iranian Supreme Leader Mojtaba Khamenei, who has not been seen since the outbreak of violence on February 28 and was reportedly seriously injured in US-Israeli air strikes. He, however, added that if the two sides reached a deal, it was possible the two leaders would meet.
Meanwhile, Hezbollah leader Naim Qassem rejected on Thursday a US-brokered agreement between Israel and the Lebanese government to halt the fighting. Iran has made a ceasefire in Lebanon a condition for any peace deal with America.
Oman said operations at Mina al Fahal port were unaffected after it was reported that oil loading had been suspended following an explosion near its mooring berths. Oman exports 800,000 to 900,000 barrels per day of crude from the terminal.
As the US-Iran war peace talks dragged on, traffic in the Strait of Hormuz, where a fifth of the world’s oil passes, remained limited. Gains have been capped by oil inventories lasting longer than expected, rerouted exports and falling demand.
The Organisation of the Petroleum Exporting Countries and its allies (OPEC) is sticking to its oil demand growth forecast of 1.2 million barrels per day for this year, its Secretary General Haitham Al Ghais said, despite the Middle East conflict and closure of the Strait of Hormuz.
OPEC crude output fell last month, hitting its lowest level in decades as the US blockade of Iran and disruption in the Persian Gulf continued to curb production.
Output from its 11 current members dropped by 1.22 million barrels per day to 16.33 million a day in May, with Iran accounting for more than half of the decline, according to a Bloomberg survey. That was the lowest in at least 37 years. The data excludes the United Arab Emirates, which left the organisation last month after six decades.
Key members of the OPEC+ are expected to nudge up targets by a modest 188,000 barrels again in July during a video conference on Sunday. The session is one of four online meetings OPEC and its allies are due to hold that day.
By Adedapo Adesanya
Crude production under the collective Organisation of the Petroleum Exporting Countries (OPEC ) fell in May to its lowest level in at least 37 years as the blockade of Iran by the United States and disruptions in the Persian Gulf, continued to limit output.
According to a Bloomberg survey released on Friday, output from the organisation’s 11 current members, including Nigeria, dropped by 1.22 million barrels per day to 16.33 million barrels per day last month.
Iran accounted for more than half of the decline. The data excludes the United Arab Emirates (UAE), which departed the cartel last month after six decades of membership.
War between a US-Israeli alliance and Iran has reduced oil supplies from the Middle East, largely closing the Strait of Hormuz waterway. Saudi Arabia, Iraq, the UAE and Kuwait have been forced to cut crude production. Iranian shipments face additional pressure following a US blockade of its ports imposed in mid-April.
Iranian output fell by 710,000 barrels per day to a five-year low of 2.34 million barrels per day in May, the survey showed. Central Command reported that US forces have redirected 127 commercial vessels to enforce the blockade of all maritime traffic entering and exiting Iranian ports.
Kuwait recorded the second-largest decline last month, with production falling by 310,000 barrels per day to 490,000 barrels per day, less than one-fifth of pre-war levels. Saudi Arabia, the group’s leader, saw output decrease by 240,000 barrels per day to 6.57 million barrels per day.
The production reductions have not prevented OPEC and its allies from raising quotas over recent months, continuing a year-long process of restoring output halted several years ago.
This comes ahead of a meeting scheduled to be held on Sunday, June 7, where a sub-group of seven members is expected to increase targets by 188,000 barrels again in July. The session is one of four online meetings OPEC and its partners plan to hold that day.
Delegates indicated the alliance has plans for two additional monthly quota increases in August and September. UAE output rose by 300,000 barrels per day to 2.44 million barrels per day in May, according to the survey.
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