Based on October 2015 data of the Central Bank of Nigeria, CBN, sighted by Vanguard, the yesterday’s decision of the apex bank to effect a 5.0 per cent cut in Cash Reserve Ratio, CRR, a total of N771.4 billion would be released to the banking system for commercial lending to the real sector. The CRR was reduced to 20 per cent from 25 per cent.
This along with the other complementary rate cuts have been considered by financial analysts as the most significant amongst the several decisions of the CBN’s Monetary Policy Committtee, MPC since this year.
The policy complements include the reduction in Monetary Policy Rate, MPR, to 11 per cent from 13 per cent while asymmetric corridor around the MPR at plus 200 bases points and minus 700 bases points was also introduced bringing the Standing Lending Facility, SLF, and Standing Deposit Facility,SDF, rates to 13.0 per cent and 4.0 per cent from 15.0 per cent and 11.0 per cent respectively.
However, the positive outlook of the new policy decisions was received with mixed feelings amongst many financial sector analysts.
Analysts at Afrinvest Group, a Lagos-based investment house, “the lower SDF rate and increase in liquidity level would lower competition for deposits amongst banks and we expect to see a decline in savings and interbank rates.
“The more accommodative stance is also expected to drive yields downwards in the secondary Bonds market as dealers are likely to bid-down on current rates in anticipation of lower yields at the primary market auction.
“We expect NIBOR rates currently at 10.1 per cent on average to adjust to the new SLF rate to an average of 7.1 per cent (if the same spread is maintained) whilst average yields on Treasury Bills and Bonds market (currently at 4.7 per cent and 10.5 per cent) are likely to also correct to 3.7per cent and 9.5 per cent respectively.
“Given the lower financial market rates anticipated, we expect slight reduction in prime lending rate.”
On the expected impact on credit to the real sector, Afrinvest analysts had this to say: “In the short term, we do not expect the ease in monetary policy to immediately translate to increase lending to the real sector, especially given the high risk retail/SME loans segment.
“Structural bottlenecks, weak quality of infrastructure and the current slowdown in economic activities constitute high risk to real sector lending, which would require more adjustments by the fiscal authorities to de-risk the sector.
“However, with the restriction on all cheap income lines, we expect a significant medium term expansion in Credit to the private sector (currently at N19.1tn in October 2015 and up 6.8%) by banks. This will necessitate banks to improve on their risk management framework to identify opportunities and earn a relatively higher margin compared to the cheap rates in the fixed income market and buoy assets turnover and shareholders’ return”.
Commenting on the MPC decisions yesterday Greenwich Trust Limited, another Lagos based investment house, said ‘’We expect increased demand for short tenor instruments (T-bills, Commercial papers & 3-5 year Bonds) over the next week and a short-term rally on select counters at the equity market” adding that the new policy moves will pave the path for Government’s borrowing needs in 2016 to drive its spending plan and repay its existing debt.
The company also stated the policy would have far reaching implication for the inflation and exchange rate. According to them ‘’These two indicators will likely deteriorate in the medium-long term as long as the accommodative policy persists”.
Economics at FSDH Merchant Bank Limited have aggressively rejected rate cuts saying that the fundamentals of the economy do not support such policy direction and the policy would not achieve its intended outcome of increased banks lending to the real sector..
In their MPC Watch they argued that “the excess liquidity in the system has depressed the yields on fixed income securities. The average excess liquidity in the system in the last two months is about N700bn. CBN has not been mopping up liquidity through its Open Market Operation (OMO) in the last two months. Nigerian banks have also reduced lending because of the unfavourable economic conditions and the fear of loan default.
“Our analysis shows that the current liquidity in the system will go if banks increase lending by 10 per cent. The gross loans of Nigerian banks stood at about N14 trillion as at full year 2014. A 10 per cent increase in the gross loans of the banks will lead to a loan creation of about N1.4 trillion. This will completely take out the excess liquidity from the system. A reduction in rate without addressing the fundamental issues in the economy may not stimulate lending”.
In addition the analysts at FSDH said “tight monetary policy would be appropriate in view of the challenges the Nigerian economy is facing. Monetary policy has limitations to fully address the negative impacts of the external developments on the Nigerian economy. We therefore expect the MPC to maintain the current monetary policy stance. We also note that there is a need for a marginal depreciation in the value of the Naira to about US$/N215. This should help to increase the supply of foreign exchange from the Foreign Portfolio Investors, FPIs, in the short-term”.
In its further analysis of the economic fundamentals FSDH economists stated “the GDP growth is lower than the 6.23 per cent recorded in third quarter 2014. We believe the slowdown in the economy reflects the drop in the oil price and the security challenges. The political transition and the delay in the payment of workers’ salaries also contributed to the slowdown. We do not think a rate cut will address any of these issues. The inflation rate dropped to 9.3 per cent in October 2015, lower than 9.4 per cent recorded in September 2015. The current inflation rate and our forecast to end the year 2015 is higher than the CBN target of 6-9 per cent. A rate cut at the moment is not consistent with the inflation rate outlook in the short-term”.
Finally the FSDH analysis focused on the fundamentals of Nigeria’s economy as affected by the developments in the international financial market and the oil sector and they stated as follows: “The Federal Open Market Committee (FOMC) of the United States (U.S.) Federal Reserve System (The Fed) is widely expected to announce a rate hike in December 2015. This will be the first rate hike after June 29, 2006. In anticipation of the rate hike, the yield on the U.S. Treasury Note has been rising. We expect the yield on other Dollar denominated fixed income securities to increase after the rate hike announcement. This will make funds to move from the emerging markets to the U.S. A rate cut in Nigeria at the moment is counter-productive for financial investment and the foreign exchange rate.
“The short-term outlook for oil prices remains weak and tilted to the downside. The oil price declined further between the last MPC meeting and now, reflecting excess supply and weaker global demand. The expectation of a possible increase in the U.S. Fed rate could put further pressure on the oil price. The Bonny Light price decreased by 10.64 per cent to US$42.67/b on November 20, 2015 from US$47.75/b on September 22, 2015. The current low oil price has adverse impact on the foreign exchange rate. A rate cut under the current scenario will put additional pressure on the foreign exchange rate.”