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Analysts say naira still vulnerable despite CBN’s tight grip on rates

By on March 31, 2014

In line with expectations of financial markets analysts, the Central Bank of Nigeria’s Monetary Policy Committee, at its last week’s meeting maintained its grip on Monetary Policy Rates (MPR) which was retained at 12 per cent, but voted to increase Cash Reserve Requirement (CRR) on private sector deposits by 300 basis points to 15 per cent.

CBN Acting Governor, Sarah Alade’s explanations at the end of the meeting showed that five of the nine members that attended the meeting voted to keep MPR at 12 per cent, while four members voted for an increase in MPR; seven members voted to retain the MPR corridor at /-2%, while two (members voted for an asymmetric corridor; seven members voted to increase CRR on private sector deposits by 300 basis points to 15 per cent, while two members voted to retain the CRR on private sector deposits at 12 per cent.

Two major concerns of watchers of the recent developments in the Nigerian economy bordered on the decline in the foreign reserves and the increased pressure on the naira although these fears were downplayed at last week’s meeting.

According to Alade, the Committee noted that the recent pressure in the foreign exchange market was in response to key developments in the US over the Fed’s unwinding of its assets purchase programme, adding that in addition, the pressure on external reserves was deemed to be consistent with the seasonal annual payment of dividends to foreign investors.
But informed analysts described the decision of the committee not to tamper with the naira rate as a temporary relief, arguing that all indices showed that the apex bank can only hold on to the current naira exchange rate for the time being.

This was the position of the Managing Director of Finance Derivatives Company, Mr. Bismarck Rewane, in an interview with THISDAY last week.
Rewane said the CBN may be compelled to tinker with the current exchange band before the May edition of the MPC meeting given the current pressure on the foreign exchange account which has been used mainly to stabilise the exchange rate in recent times.

Standard Chartered’s Head of Africa Research and a well-known commentator on African markets, Razia Khan, who offered explanations on the specific implications of the MPC decisions, told THISDAY that “The CBN MPC put on a brave face. And they did the right thing by tightening further. However, the road ahead is going to be fraught with additional challenges, and now is the time that we should be getting some sense of how the CBN will deal with these challenges longer-term.”

On the impression the Sarah Alade-led CBN would be sending to the international finance community by last week’s decision, Khan said “To some extent, it will be seen as business as usual, but for investors the key issue is the make-up of the MPC after June. How much will a new governor change things? Will existing policy be reversed? There is still much uncertainty. This is why more bold measures might have been welcomed.”

Speaking on the fate of the nation’s foreign reserves, she said unless we see much more oil savings, the reserves will be down even further in the months ahead. It was portfolio inflows – primarily – that allowed the CBN to accumulate reserves.

“Given current conditions – QE tapering, concerns about bigger policy changes ahead, a shortfall in oil earnings, a secular narrowing of the current account surplus and the election cycle – each successive round of tightening is likely to be even less effective in attracting new inflows into Nigeria.

“The spread between the interbank and RDAS FX rates is likely to remain in place. In all likelihood, pressure on FX reserves – now less than USD 38billion – will persist.
This is the consequence of structural factors. With continued depletion of FX reserves, speculation that the CBN’s official band will have to give eventually is only likely to increase. The CBN might have dealt with this from a position of strength, at a time of relative calm in the markets. Or it might choose to make the adjustment at a time of increased stress, with the likelihood in that case that we see considerable FX overshooting,” Khan said.

In his opinion, Head, Research and Investment Advisory at Sterling Capital, Mr. Sewa Wusu, noted that the committee raised the CRR on private sector deposits by 300 basis points to 15 per cent, while retaining other monetary variables.

“For me I think the action is expected to douse the tension that has hovered around the Nigerian financial system as a result of recent developments. This is clearly a matured move to calm the system and ensure that investors’ confidence is restored. I think the Sarah Alade-led Committee has weighed the options of retaining some of the monetary policies variables in order to unfluster the system.”

He however raised the fear that the increase in CRR for private sector would be a drawback in liquidity flow, saying “The only major concern is that the 300 basis points increase in CRR for private sector deposit is expected to shrink liquidity flow. This is deliberately done to create some level of stability in foreign exchange market, particularly, the inter-bank and BDC markets which have come under intense pressure lately.”

He said although many had initially predicted further tightening following the recent pressure on the naira, tapering of Quantitative Easing in the US as well as concern about the country’s political cycle and anticipated spending pressures from the 2015 general elections; the truth is that, the market should still expect this to happen in the near term. Tightening bias should give needed impetus to strengthen the naira and ensure that foreign inflows are attracted into the economy than capital reversals.

“The need to maintain price and foreign exchange stability has culminated in the decline in the foreign reserves to about $37.8billion as CBN continued to draw down to support the currency. But there is respite to build up the reserve again as oil price at the international markets continue to rise. This will help to shore up the short fall witnessing in the reserves currently.

“Again, if the oil prices continued to remain high while production level also continues to improve, then we might see some accretion to the foreign reserves. The government is to spend about $1billion to fight oil theft and if this is successful in reducing the level of oil theft, then we might see the needed improvement in production level, while the rise in prices will help improve the revenue base and impact positively to boost the foreign reserves.

“Sarah Alade-led CBN has given the international business community, especially those that had anticipated a more hawkish position, a matured approach to monetary management. This is clearly not the time to adopt more monetary tightening measures. There is need to restore confidence in the system and be sure that there is stability after the development that led to the suspension of the CBN governor. That is why we saw that the only variable fiddled with was the CRR for private sector deposits,” Wusu said.Caption: CBN Acting Governor, Sarah Alade

Despite CBN’s Tight Grip on Rates, Analysts Say Naira Still Vulnerable
Festus Akanbi

In line with expectations of financial markets analysts, the Central Bank of Nigeria’s Monetary Policy Committee, at its last week’s meeting maintained its grip on Monetary Policy Rates (MPR) which was retained at 12 per cent, but voted to increase Cash Reserve Requirement (CRR) on private sector deposits by 300 basis points to 15 per cent.

CBN Acting Governor, Sarah Alade’s explanations at the end of the meeting showed that five of the nine members that attended the meeting voted to keep MPR at 12 per cent, while four members voted for an increase in MPR; seven members voted to retain the MPR corridor at /-2%, while two (members voted for an asymmetric corridor; seven members voted to increase CRR on private sector deposits by 300 basis points to 15 per cent, while two members voted to retain the CRR on private sector deposits at 12 per cent.

Two major concerns of watchers of the recent developments in the Nigerian economy bordered on the decline in the foreign reserves and the increased pressure on the naira although these fears were downplayed at last week’s meeting.

According to Alade, the Committee noted that the recent pressure in the foreign exchange market was in response to key developments in the US over the Fed’s unwinding of its assets purchase programme, adding that in addition, the pressure on external reserves was deemed to be consistent with the seasonal annual payment of dividends to foreign investors.
But informed analysts described the decision of the committee not to tamper with the naira rate as a temporary relief, arguing that all indices showed that the apex bank can only hold on to the current naira exchange rate for the time being.

This was the position of the Managing Director of Finance Derivatives Company, Mr. Bismarck Rewane, in an interview with THISDAY last week.
Rewane said the CBN may be compelled to tinker with the current exchange band before the May edition of the MPC meeting given the current pressure on the foreign exchange account which has been used mainly to stabilise the exchange rate in recent times.

Standard Chartered’s Head of Africa Research and a well-known commentator on African markets, Razia Khan, who offered explanations on the specific implications of the MPC decisions, told THISDAY that “The CBN MPC put on a brave face. And they did the right thing by tightening further. However, the road ahead is going to be fraught with additional challenges, and now is the time that we should be getting some sense of how the CBN will deal with these challenges longer-term.”

On the impression the Sarah Alade-led CBN would be sending to the international finance community by last week’s decision, Khan said “To some extent, it will be seen as business as usual, but for investors the key issue is the make-up of the MPC after June. How much will a new governor change things? Will existing policy be reversed? There is still much uncertainty. This is why more bold measures might have been welcomed.”

Speaking on the fate of the nation’s foreign reserves, she said unless we see much more oil savings, the reserves will be down even further in the months ahead. It was portfolio inflows – primarily – that allowed the CBN to accumulate reserves.

“Given current conditions – QE tapering, concerns about bigger policy changes ahead, a shortfall in oil earnings, a secular narrowing of the current account surplus and the election cycle – each successive round of tightening is likely to be even less effective in attracting new inflows into Nigeria.

“The spread between the interbank and RDAS FX rates is likely to remain in place. In all likelihood, pressure on FX reserves – now less than USD 38billion – will persist.
This is the consequence of structural factors. With continued depletion of FX reserves, speculation that the CBN’s official band will have to give eventually is only likely to increase. The CBN might have dealt with this from a position of strength, at a time of relative calm in the markets. Or it might choose to make the adjustment at a time of increased stress, with the likelihood in that case that we see considerable FX overshooting,” Khan said.

In his opinion, Head, Research and Investment Advisory at Sterling Capital, Mr. Sewa Wusu, noted that the committee raised the CRR on private sector deposits by 300 basis points to 15 per cent, while retaining other monetary variables.

“For me I think the action is expected to douse the tension that has hovered around the Nigerian financial system as a result of recent developments. This is clearly a matured move to calm the system and ensure that investors’ confidence is restored. I think the Sarah Alade-led Committee has weighed the options of retaining some of the monetary policies variables in order to unfluster the system.”

He however raised the fear that the increase in CRR for private sector would be a drawback in liquidity flow, saying “The only major concern is that the 300 basis points increase in CRR for private sector deposit is expected to shrink liquidity flow. This is deliberately done to create some level of stability in foreign exchange market, particularly, the inter-bank and BDC markets which have come under intense pressure lately.”

He said although many had initially predicted further tightening following the recent pressure on the naira, tapering of Quantitative Easing in the US as well as concern about the country’s political cycle and anticipated spending pressures from the 2015 general elections; the truth is that, the market should still expect this to happen in the near term. Tightening bias should give needed impetus to strengthen the naira and ensure that foreign inflows are attracted into the economy than capital reversals.

“The need to maintain price and foreign exchange stability has culminated in the decline in the foreign reserves to about $37.8billion as CBN continued to draw down to support the currency. But there is respite to build up the reserve again as oil price at the international markets continue to rise. This will help to shore up the short fall witnessing in the reserves currently.

“Again, if the oil prices continued to remain high while production level also continues to improve, then we might see some accretion to the foreign reserves. The government is to spend about $1billion to fight oil theft and if this is successful in reducing the level of oil theft, then we might see the needed improvement in production level, while the rise in prices will help improve the revenue base and impact positively to boost the foreign reserves.

“Sarah Alade-led CBN has given the international business community, especially those that had anticipated a more hawkish position, a matured approach to monetary management. This is clearly not the time to adopt more monetary tightening measures. There is need to restore confidence in the system and be sure that there is stability after the development that led to the suspension of the CBN governor. That is why we saw that the only variable fiddled with was the CRR for private sector deposits,” Wusu said.

 

 

[This Day]