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MPC to Maintain Status Quo on Policy Variables Despite Falling Market Rates

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MPC Meeting

By Afrinvestor Research

Since we released our Pre-MPC Note last week, two major developments have surfaced in the global and domestic scene with potential impacts on domestic market condition and near term outlook for monetary policy.

Whilst we consider these events important talking points as the Monetary Policy Committee (MPC) convenes next week (tomorrow) to deliberate, our expectation of the outcome of the meeting remains unchanged as we anticipate committee members to overwhelmingly vote to retain policy rates at current levels.

The first major development is the outcome of the US Fed policy meeting which held midweek. Dismissing the deceleration in US inflation rate below the 2.0% target since the start of the year as a “mystery”, the US Fed Chairman, Janet Yellen, guided on one additional rate hike in 2017 and three more in 2018 in addition to measures to begin slowly reducing the Fed’s US$4.5tn balance sheet.

Although the slightly hawkish statement of the US Fed caught many by surprise, markets’ reaction has so far been calm against the backdrop of the strong and synchronized global growth expansion as well as effective use of forward guidance communication by the Fed to guide on a policy path.

Thus, US equity markets, which have been on a tear this year, traded flattish on Wednesday and Thursday, although yields have risen on US bonds and Emerging Market sovereign and corporate Eurobonds. Nonetheless, we do not expect the MPC to respond as the likelihood of a large-scale capital flow reversal from emerging markets remains low as long as the US Fed sticks to its guided gradual tightening path whilst other major central banks’ policy outlook remains broadly accommodative.

Contrarily, we consider the recent developments in the domestic scene more significant to the MPC’s discourse next week. Over the last three weeks, rates have been dropping sharply in the Treasury Bills market in response to possible near term easing of monetary policy as well as reduction in supply of longer dated bills since CBN stopped offering 364-day bills at its OMO auctions.

Consequently, we have observed a bull flattening pattern (i.e. longer term rates falling faster than shorter ones) at primary and secondary market for Treasury Bills as investors aggressively position in longer-dated bills.

At the PMA held mid-week, the 364-day stop rate fell to 17.0%, 152bps lower than the August 30th Auction stop rate, compared to a 15bps and 56bps drop in 91-day and 182-day papers respectively.

As demand increases relative to supply, secondary market rates on T-bills have also declined across tenors, down 134bps M-o-M as of market close today. The bullish sentiment in the fixed income market is also noticeable in the bond market where yields have dropped 74bps on average M-o-M across benchmark bonds to 16.2%. Given market sentiments are often leading indicators of policy rate changes, we expect the MPC to take notice of recent movements in the yield curve.

 However, as we noted in our Pre-MPC note last week, we believe MPC would maintain status quo on all rates next week given the need to consolidate gains on stabilizing FX and inflation rates. Our expectations are based on the following considerations:

Price level remains sticky as high base effect thins out: the National Bureau of Statistics (NBS) Inflation report for August released today indicated Headline inflation marginally decelerated 3bps to 16.01% Y-o-Y from 16.04% in July. M-o-M CPI growth have remained elevated since the start of the year against the backdrop of a food price pressure which took Food Inflation to an all-time high of 20.3% in July 2017. With the economy now running out of high base effect driven moderation in headline inflation, our model projects inflation rate will rise for the first time since the start of the year in September. Given supposed price-anchored monetary policy regime, the MPC is not likely to cut benchmark rate in a period of rising inflation expectation.

MPR has become a less effective Monetary Policy Tool: the case for easing via benchmark rate reduction becomes weaker if the current disparity between the benchmark rate and short-term fixed income yields is taken into consideration. Although the recent bullish streak in the fixed income market has narrowed this spread, it is not enough to justify a cut in interest.

While our medium term outlook favours a gradual monetary easing, we believe the stabilization of the FX market is paramount to achieving monetary policy objectives. The FX market, despite improvements recorded so far in the year, is still in a fragile state as the CBN is yet to harmonize all rates at the official market. As such, in the event that a unified rate is not achieved, monetary easing poses a threat for FX stability. Furthermore, the current realities of Nigeria’s budget deficit, suggests the need for the fiscal authorities to continuously fund this disparity which current tightening stance enhances; though at a higher cost to government.

In light of the above, the more rational decision we foresee the MPC making is to maintain status quo and continue to consolidate on gains in the FX market. Hence, we believe the outcome of the 5th MPC meeting would be to; retain the MPR at 14.0%; retain the CRR at 22.5%; retain the Liquidity Ratio at 30.0%; and retain the Asymmetric corridor at +200 and -500 basis points around the MPR.

Modupe Gbadeyanka is a fast-rising journalist with Business Post Nigeria. Her passion for journalism is amazing. She is willing to learn more with a view to becoming one of the best pen-pushers in Nigeria. Her role models are the duo of CNN's Richard Quest and Christiane Amanpour.

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Economy

FG Pledges Single-Digit Loans for Small Businesses

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external loan

By Adedapo Adesanya

The federal government has pledged to support Micro, Small and Medium Enterprises (MSMEs) with single-digit loans so as to boost their businesses.

This was disclosed by the Minister of State for Industry, Trade and Investment, Mrs Maryam Katagum, on Friday when members of the Nigerian Association of Small and Medium Enterprises (NASME) visited her in Abuja.

According to her, there is a lot of commendation at the recent retreat President Muhammadu Buhari had with the ministers for the MSMEs.

“In his closing speech, Mr President specifically said that every support will be given to ensure that MSMEs have access to credits.

“That is what we always preach and we will give every support to the MSMEs as the engine of economic growth to have access to credits at single digits,” Mrs Katagum said.

The Minister, who pointed out the critical role MSMEs play in growing the economy, said this role was further heightened during the COVID-19 lockdown.

“Even the woman selling groundnut or `akara’ couldn’t come out to practice her passion. Everybody felt the effect of the lockdown.

“We have to appreciate President Muhammadu Buhari for interventions that were provided for MSMEs during the lockdown.

“And once it was identified to put in some mechanism to stop the economy from going under, our ministry is one of the ministries asked to make submissions to see how to keep the economy going and ensure free flow of goods and services across the country.

“Our proposal was very easily accepted and the sum of N75 billion was allocated and we made a lot of progress.

“Average Nigerians appreciated the efforts and we have seen them giving their testimonies and right now we are on the last track which is the guaranteed off-take scheme,” the Minister said.

She appealed to the association to identify innovative ways that the Federal Government can assist MSMEs.

“As partners, your association has to start thinking of new innovative ways that we can assist MSMEs, it’s not just the finance.

“So, when you give them the money, they don’t know what to do with the money so you need to intensify the capacity building and sharing of information to know what is happening and where,” she said.

On his part, the President and Chairman of the governing council of NASME, Mr Abdulrashid Yerima, expressed the association’s commitment to deepening the relationship with the ministry.

Mr Yerima appreciated the ministry for including NASME in various committees set up by the government to support the development of MSMEs in Nigeria.

He, however, sought the appointment of members of the association to the boards of parastatals under the ministry and solicited the ministry’s support for inputs into human capital development for the association.

“Our association serving in the board of revenant agencies under the ministry will help us to make informed inputs into the policies of the agencies that impact MSME growth and development in Nigeria.

“Also support for capital development for our association is crucial for the development of skills and manpower to upscale MSMEs especially NASME,” Mr Yerima said.

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Economy

IGR: Osinbajo Expresses Worry Over Governors’ ‘Laziness’

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yemi osinbajo RCCG Pastor

By Adedapo Adesanya

Vice President Yemi Osinbajo seems to be worried about the inability of state governors to be innovative in boosting their respective Internally Generated Revenue (IGR).

The number 2 man, speaking at the maiden edition of Ekiti State’s investment forum in Ado-Ekiti, has, therefore, tasked them to think out of the box and act like a sovereign state so as to make them challenge countries of the world.

“Thinking differently, there is a need for a sub-national to think like a sovereign state. You have a bigger GDP (gross domestic product) and even more revenues than many nations.

“There is a different mindset when you are sure of a monthly allocation of cash at least enough to pay salaries, whether you generate income or not. This is the challenge. The so-called Dutch disease, one becomes complacent,” he said.

“But what if you had to take responsibility for all those who reside within your borders, pay all salaries, from internally generated revenue?” he queried.

Drawing a parallel, he said that Lagos State improved its IGR from N600 million monthly in 1999/2000 to about N45 billion today, adding that the illegal seizure of the allocations to the state by the then federal government was the shock that forced the state to rethink.

Speaking further, Mr Osinbajo noted that although a state within a federation is not a nation, it must behave like one, to further boost its economic development.

“The economy of the sub-national is a peculiar animal. The state within the federation is not a nation, but it must behave like one, it derives some resources from the federal pool, and generates some income, the overall sum will provide infrastructure and services to the community.

“The size of the sum and the quantum of opportunity available to provide livelihoods for the populace will depend on how the state enables local and external investors, small and large to put their resources into business and commercial activity business in the State.

“The funded portion of the state’s budget is after all a mere fraction of the sum total of economic activity or income-generating activity, formal or informal within the state. So, the attractiveness of a state to commerce is a radical issue,” Mr Osinbajo said.

He asserted that “the very lives and livelihoods of the people within the borders of the State, whether the people will live prosperous and happy lives, be educated, have access to affordable medical care, depends on it.”

He then encouraged them to key into the benefit from a private-sector led economy, noting that the model is the right way to go, as the business is the standpoint of the private sector, while governments should as much as possible facilitate, or at best, collaborate.

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Economy

NGX Group Finally Lists 1.964 billion Shares, Trades at N17.75

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NGX Group lists 1.964 billion Shares

By Aduragbemi Omiyale

A total of 1,964,115,918 shares, representing the issued share capital of the Nigerian Exchange (NGX) Group Plc, were successfully listed on the trading platform of NGX Limited on Friday, October 15, 2021.

Business Post reports that the stocks were listed on the exchange today by introduction at a unit price of N17.75, higher than the N14.68 per unit it last traded on the NASD Securities Exchange on Friday, October 8, 2021, it the shares used to be traded.

This newspaper gathered that at the exchange today, investors traded about 3.6 million units of the company’s equities worth N63.2 million in 31 deals and closed flat at N17.75.

It was listed on the main board of the NGX having satisfied the listing requirements of the exchange and obtained relevant regulatory approvals.

The company is on the bourse in the financial services and capital market infrastructure sector, with the ticker NGXGROUP.

The top members of staff of the company were honoured today with the closing gong ceremony and the Chairman, Mr Abimbola Ogunbanjo, in his speech, stated that, “Today’s listing of NGX Group on NGX is another milestone attained pursuant to the group’s 2018 – 2021 corporate strategy.

“Our shareholder base has more than doubled since our demutualisation in March 2021 and our valued shareholders will benefit from the enhanced liquidity that listing on the exchange will facilitate.

“This listing will also enable a much wider universe of potential investors and market participants to share in our growth journey.

“As a board, we embrace the letter and spirit of the listing requirements and we are committed to transparent disclosure, proactive stakeholder engagement and exemplary corporate governance.”

Also speaking, the Group Managing Director/Chief Executive Officer of NGX Group, Mr Oscar Onyema, disclosed that, “Today’s listing of NGX Group on the nation’s premier exchange will enable institutional investors globally as well as the Nigerian public to invest in Nigerian Exchange Group Plc.

“With strengthening market dynamics, serving the largest economy in Africa, NGX Group’s listing allows us to expand in key capital market infrastructure verticals and look beyond Nigeria’s borders, as we deliver on our growth plans to become Africa’s leading capital market infrastructure group.”

As for the CEO of NGX, Mr Temi Popoola, he described the listing as a milestone, expressing his excitement about the development.

“We congratulate the board and management first on a successful demutualisation and on its subsequent listing. This move is particularly exciting, as it will position NGX Group to provide liquidity to members while stimulating the capital market ecosystem to grow at the same pace as the economy.

“Today, we reiterate our commitment to being a trusted partner to NGX Group and other listed companies as we continue to build a platform that allows our listed companies, investors and other stakeholders to maximise value in our market,” he said.

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