Tough Choices As MPC Holds Last Meeting, Analysts Say Rates To Fall On Inflows

Tough decision s will be made at the end of the Monetary Policy Committee (MPC) meeting which starts today. The decisions are expected to herald monetary activities for year 2016, as well as complement fiscal decisions that will made by the new ministers.
Analysts fear that the recent marginal growth in GDP may not be sustainable as the manufacturing sector is said to have contracted three times this year. They said, the momentary rise in crude oil production was majorly responsible for the lean growth recorded in economic growth.
The MPC will be sitting for its 6th and last session for the year from 23rd and 24th of November, 2015. 
The meeting will have to contend with concerns surrounding foreign exchange (forex) rate amid calls for further devaluation of the naira, slow Gross Domestic Product (GDP) growth, unrelenting inflationary pressure, robust liquidity levels in the financial system. 
Analysts at Cordros Capital believe that at the Interbank market this week, rates will fall in this market segment. Key reasons they gave include a N162.4 billion maturing Open Market Operations (OMO) bills, inflows from October budgetary disbursement to states and local governments and the distribution of NNLG dividend among the three government tiers.
The National Bureau of Statistics (NBS) recently released the GDP figures for the third quarter of 2015. GDP was reported to have expanded 2.8 percent year-on-year ( Y-o-Y) (to N18.0 trillion) in the third quarter of 2015, 0.5 percent higher than 2.4 percent recorded in the third quarter of 2015 but 3.4 percent lower than 6.2 percent recorded in prior year. 
Analysts at Afrinvest said he marginal improvement observed in te third quarter of 2015 was attributed mainly to the increased oil production in the quarter, which resulted in a rebound in oil sector growth. 
Non-Oil GDP growth has however continued to soften, with Y-o-Y growth in the third quarter of 2015 declining to 3.1 percent due to the weak performance of the manufacturing sector which has now contracted for three consecutive quarters.
In a related development, Inflation rate eased marginally to 9.3 percent in October after creeping from 7.0 percent to 9.4 percent in between January and September. The moderation was bolstered by slower pace of growth in the food sub index and the core index which eased to 10.1 percent and 8.7 percent from 10.2 percent and 8.9 percent respectively. 
The MPC will  also be concerned about the level of liquidity in the system. In the money market, the Open Buy Back and Overnight Rate reached year lows of 0.5 percent and 1.0 percent respectively due to high financial system liquidity. The resolution to reduce the Cash Reserve Requirement (CRR) for Deposit Money Banks (DMBs) from 31 percent to 27 percent at the last MPC meeting in order to reduce the strain faced by the DMBs following the full implementation of the Treasury Single Account resulted in a surge in liquidity levels in the financial system. 
The apex bank’s decision to halt liquidity mop ups through the use of OMO auctions, a sort of monetary easing which is expected to spur banks to lend to the real sector also further bolstered liquidity levels — which has averaged at over N600.0 billion in the last two months. 
Credit to Private and Government have grown 0.5 percent and 0.9 percent Month-on-Month (M-o-M) in September to N18.7 trillion and N2.8 trillion. Nevertheless, the high level of excess reserves still held by banks and increased domestic participation in the in the fixed income space (as yields across all tenors fell to year lows) suggests DMBs are still reluctant to lend to the real sector given the current macro-economic challenges. 
On the other end of the capital market, the equities market has not benefitted from the huge level of liquidity in the system as Year-to-Date (YtD) returns stand at -18.8 percent. The negative sentiments towards the Nigerian Stock Exchange (NSE) has been driven by forex uncertainties and depressed economic fundamentals – seen in the poor nine months period in 2015 results of many counters in the market.
On the forex scene, pressures on the naira have persisted despite the administrative measures taken by the CBN to curb speculative actions against the naira. The forex intervention rate has settled at N197.00/$ at the Apex Bank while it steadied at N199.10/$ at the interbank market. In a sharp contrast, at the parallel market the naira traded for as high as N232.00/$ following the full implementation of the Bank Verification Number (BVN) policy which mandates a provision of the verification number in order to execute any Forex transactions at the Bank or BDC. Subsequently, demand for the naira at the BDC has reduced due to customers turning to the parallel market to execute forex transactions given the reluctance to provide their BVN to carry out Forex transactions at the BDC for fear of safety of their accounts.
For Treasury Bills, analysts at Cordros Capital say more liquidity is expected in the system this week, in the form of OMO and Federation Account Allocation Committee (FAAC) allocation flows but surmise that market participants will remain cautious seeking to take cues from the today and tomorrow’s MPC meeting.
They anticipate further pressure in the Nigerian equities market this week. They Particularly expect weakness in banking sector, following Friday’s news that the CBN has given three listed banks till June 2016 to recapitalize.
At the bonds market, trades will be subject to the outcome of the MPC meeting. 
“A largely dovish tone (not necessarily via rate cuts), coupled with expected liquidity injection – as stated above – will be bullish for the market and vice versa”, they said.
Local currency in the interbank market is expected to maintain stability at current levels.

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