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Withdrawal of private sector deposits poses threat – Analyst

By BusinessNews Staff on April 25, 2014

The Managing Director, Dunn Loren Merrifield Asset Management and Research Company, Mr. Tola Odukoya, says the recent withdrawal of about N400bn from the banking system by the Central Bank of Nigeria may affect the financial markets.

Specifically, he said the decision of the CBN’s Monetary Policy Committee to increase the Cash Reserve Ratio on private sector deposits from 12 to 15 per cent in its March meeting could affect the markets later in the ‘absence of a reversal’.

Odukoya made the position known during an economic review of the first quarter by his firm recently.

He said, “The increase in the CRR on private sector deposits from 12 to 15 per cent has not had any significant impact on the market. However, we foresee a future impact in the absence of a reversal.”

The analyst recalled that after the MPC meeting in January, the CBN had increased the CRR on public sector deposits from 50 per cent to 75 per cent.

He noted that the impact of the increase was minimal compared to the initial increase from 12 per cent to 50 per cent in the last quarter of 2013.

He said, “The MPC met two times during the first quarter and the monetary policy rate was held at 12 per cent while the CRR on public sector deposits was increased from 50 per cent to 75 per cent in January. The CRR on private sector funds also increased from 12 per cent to 15 per cent in March.

“We maintain our stance in reiterating the critical need for a dual approach with a goal to attaining optimal growth with lowest possible inflation rather than the sole inflation-targeting approach.”

The recent downward review on Nigeria’s sovereign credit by Standard and Poor’s does not pose significant concerns to the flow of foreign direct investment, according to the DLM analyst.

He, however, said the development should sound a note of caution to the nation’s economic managers.

The S&P had revised its outlook on Nigeria’s sovereign credit to ‘negative’ from ‘credit watch negative’ on the back of heightening political and institutional risk.

The credit rating agency, however, affirmed its ‘BB-’ long-term sovereign credit rating on the country.

Odukoya also expressed concern over the decline in external reserves, re-iterating the need to rebuild the nation’s fiscal buffers.

He said, “The weakening of fiscal buffers increased the economy’s reliance on portfolio flows which is a key driver of the risk of exchange rate stability.

He explained, “There was aggressive defence of the naira during the first quarter. The amount sold at the Wholesale Dutch Auction System rose significantly to a monthly average of $3.21bn, up from a monthly average of $1.28bn and $1.70bn in the first quarter of 2013 and 2012, respectively. Otherwise, the domestic currency would have found a new equilibrium around the N165- N170/$ levels.

“This led to further decline in external reserves to $37.8bn at the end of March 2014 from $43.6bn in December 2013. The increased funding of the foreign exchange market by the CBN to stabilise the naira also depleted reserves.”

[Punch]

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