A restatement of caution

The CBN last week released the personal statements arising from the last meeting of the monetary policy committee (MPC) in late May. Eight members of the committee voted for no change, and one for a hike in the policy rate of 50bps. We would have welcomed the start of easing but accept that the latest statements suggest otherwise. Their main concerns are that the macroeconomy will be distorted by fiscal challenges and that the offshore portfolio community will rush for the door marked exit en masse.

  • On inflation, one member acknowledged that the policy rate was finally positive in real terms. Another noted that staff forecasts pointed to single-digit core inflation y/y in June.
  • Those same forecasts see upward trending pressures in H2 2018, which the committee explains in the context of fiscal developments: the late passage of the 2018 budget (signed off since the committee met), the expansionary nature of the N9.12trn budget, and the determination of the FGN to disburse undrawn capital releases from the 2017 budget before moving onto those projected for 2018. This is the single largest risk identified in the statements. Additionally, several members made the point that politicians generally inject cash into the economy ahead of Nigerian elections.
  • In our view the MPC’s fears are overstated because projected FGN spending in 2018 is no more than 8% of forecast GDP, and, based on precedent and the late passage of the budget, is most unlikely to be released in full.
  • As a broader point, we have examined the data for the run-up to the 2011 and 2015 elections, and have not found macro turmoil in the series for money supply, inflation and the public finances.
  • On the naira exchange rate, one member called for the CBN to pursue the convergence of the different segments of the market. Such a trend is not evident on NAFEX or from the CBN’s rate for preferential transactions (of c. N305) although it could be discerned from the rates at the CBN’s wholesale auctions. We still do not see the unification of rates anytime soon.
  • One member shared the view that contractors should see the settlement of 40% to 70% of their arrears within the 2018 budget.
  • Our expectation is that because of its stated concerns, the MPC will again make no change when it meets next week. Almost out of hope, however, we still see a rate cut by end-2018 and point to the statement in the communique that it would be prudent to analyze the national accounts for Q2 in detail and assess the FGN’s fiscal stance once the 2018 budget had been approved before revising its own stance.


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