fdc economic bulletin september 22, 2015
TRANSCRIPT
Pain today, gain tomorrow
FDC Economic Bulletin
Financial Derivatives Company Ltd.
: 01-7739889 www.fdcng.com
September 22, 2015
As widely anticipated the MPC tweaked the CRR from 31% of total deposit liabilities to 25%, ostensibly
to inject liquidity into what is essentially a fragile but nervous money market in Nigeria. It left all other
ratios unchanged and essentially kicked the can down the road, borrowing a leaf from the U.S. Fed even
though in totally different circumstances.
What did the MPC do?
Reduced the CRR by 600 basis points to 25%. The rate was as low as 12% about 2 years ago. What a
difference 2 years can make. At that time, Nigeria’s external reserves were approximately $47 billion,
oil was trading at $108 pb and the naira exchange rate was $/156 at the official market and $/164 at
the parallel market. Ever since then, the CRR has had a chequered movement spiking to as high as
75% for public sector deposits. This strategy is based on the assumption that banking system is partly
responsible for the speculative demand and attack on the naira. The policy makers are under the
erroneous impression that administrative measures can effectively combat demand for dollars. The
marginal propensity to import has been estimated at 0.63 and is sticky downwards.
Source : CBN
Chart 1: CRR since July 2013
12% 12% 15%
20%
31%
25%
50%
75% 75% 75%
31%
25%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%
Jul-13 Jan-14 Mar-14 Nov-14 May-15 Sep-15
Private sector Public sector
Monetary policy rate (MPR) was retained at 13% p.a.
Liquidity ratio was retained at 30%
The symmetric corridor of +/- 200 basis points around the MPR was retained
Net open foreign exchange trading position was retained at 1%
Implications
The implementation of the TSA has resulted in a net outflow of approximately N250 billion. With a 6%
reduction in CRR, approximately in excess of N700 billion will be injected into the system given that a 1%
reduction in CRR results in an injection of approximately N130 billion into the system. Thus, the net
increase in liquidity will be about N530 billion. Since money supply has decreased both monthly and
annually, we expect inflationary pressures that may result from this CRR reduction to be muted.
Outlook
The issue of the fair value of the naira at the forex market was carefully avoided. President Buhari had
earlier suggested that the naira was in his judgment fairly priced. He however affirmed that the CBN was
making forex available for all necessities. By continuing to manage the exchange rate through several
administrative measures, the CBN is bearing the pain today for tomorrow’s gain. However, what the CBN
cannot control is the price of oil. The CBN has left the window open and is likely to review its position on
currency devaluation depending on what happens to the price of oil. If it stays below $50 pb, then an
adjustment is inevitable.
F D C E co n o m ic B ul l e t i n P age 3
Financial Derivatives Company Ltd.
: 01-7739889 www.fdcng.com
Source : CBN
Chart 2: Exchange Rate (Naira to US$1)
African Context: Is Nigeria an outlier?
Most SSA countries recently maintained their monetary policy stance, except for Ghana, which increased its
MPR to 25%. This is due to inflationary pressure and a depreciating currency in Ghana. The cedi has
depreciated by 20.12% YTD, while inflation declined from 17.9% in August to 17.3% in June. South Africa is
holding its MPC meeting on September 23. It is expected that the South African MPC will leave interest rates
unchanged.
Angola, another oil producing country, has devalued the kwanza 3 times in the last few months, the
cumulative depreciation is 19%. This was after the futility of administrative controls. Angola has also
eliminated subsidies on refined petroleum products. Angola’s external reserves are $24.52 billion. Angola’s
crude oil production was 1.7 mbpd in August compared to Nigeria’s 1.9mbpd.
F D C E co n o m ic B ul l e t i n P age 5
Financial Derivatives Company Ltd.
: 01-7739889 www.fdcng.com
Important Notice
This document is issued by Financial Derivatives Company. It is for information purposes only. It does not constitute any offer, recommendation or
solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of
likely future movements in rates or prices or any representation that any such future movements will not exceed those shown in any illustration. All
rates and figures appearing are for illustrative purposes. You are advised to make your own independent judgment with respect to any matter con-
tained herein.
NIGERIA
Oil Production 1.9 mbpd
Population c. 180 million
External Reserves $30.6 billion
External Reserves per capita $171.9
Cumulative currency devaluation 26%
ANGOLA
Oil Production 1.7 mbpd
Population c. 22.4 million
External Reserves $24.5 billion
External Reserves per capita $991.1
Cumulative currency devaluation 19%