To some analysts in the financial sector, the decisions taken at Tuesday’s Monetary Policy Committee (MPC) meeting will rub off on the economy. But, others say they may affect some players in the economy. TAOFIK SALAKO, COLLINS NWEZE, NDUKA CHIEJINA and OKWY IROEGBU-CHIKEZIE report.
IT was an increase introduced to support the tottering foreign exchange (forex) management and subsequently to woo foreign investors. But experts see the increase in benchmark interest rate by 200 basis points by the Central Bank of Nigeria (CBN) on Tuesday as more burden for the local real sector. To them, it could worsen equity market’s volatility.
The apex bank through its Monetary Policy Committee (MPC) on Tuesday raised the Monetary Policy Rate (MPR) by 200 basis points from 12 per cent to 14 per cent. The bank however retained the Cash Reserve Requirement (CRR) at 22.50 per cent; the Liquidity Ratio (LR) at 30 per cent and the asymmetric window at +2 per cent and -5 per cent.
Though financial analysts and members of the Organised Private Sector (OPS) agreed that the new dispensation could assist in the management of the flexible exchange rate policy by attracting foreign investors and increase inflow of Foreign Direct Investments (FDI), they fear it could narrow access to finance by the real sector, slowdown corporate growth and losses for investors in Nigerian equities.
Some of the analysts said the increase FDI is expected given the jump in inflation rate to 16.5 per cent and warned that it could have far-reaching effects on the economy and the financial markets.
To some analysts in the financial sector, the decisions taken at Tuesday’s Monetary Policy Committee (MPC) meeting will rub off on the economy. But, others say they may affect some players in the economy. TAOFIK SALAKO, COLLINS NWEZE, NDUKA CHIEJINA and OKWY IROEGBU-CHIKEZIE report.
IT was an increase introduced to support the tottering foreign exchange (forex) management and subsequently to woo foreign investors. But experts see the increase in benchmark interest rate by 200 basis points by the Central Bank of Nigeria (CBN) on Tuesday as more burden for the local real sector. To them, it could worsen equity market’s volatility.
The apex bank through its Monetary Policy Committee (MPC) on Tuesday raised the Monetary Policy Rate (MPR) by 200 basis points from 12 per cent to 14 per cent. The bank however retained the Cash Reserve Requirement (CRR) at 22.50 per cent; the Liquidity Ratio (LR) at 30 per cent and the asymmetric window at +2 per cent and -5 per cent.
Though financial analysts and members of the Organised Private Sector (OPS) agreed that the new dispensation could assist in the management of the flexible exchange rate policy by attracting foreign investors and increase inflow of Foreign Direct Investments (FDI), they fear it could narrow access to finance by the real sector, slowdown corporate growth and losses for investors in Nigerian equities.
Some of the analysts said the increase FDI is expected given the jump in inflation rate to 16.5 per cent and warned that it could have far-reaching effects on the economy and the financial markets.
At Capital Bancorp, analysts said the increase could lead to more activities in the fixed income segment of the financial market and that commercial banks would rather choose to place their funds in government securities than lending to the real sector of the economy as the rate of non-performing loans continue to rise.
They said the CBN decision to raise interest rates would positively affect the forex market as more FDIs will begin to flow into the country, targeting investments in government securities which will now return higher. This should immediately improve liquidity in the forex market and reduce volatility.
The Bancorp analysts said: “However, we also expect most borrowing to the real sector of the economy to slow down given that the banks will be unwilling to lend to the real sector and rather place their funds in high yielding government securities which will in turn slow economic activities.
“In the short term, the profitability of some corporate entities will continue to be hampered as a result of high cost of sales and the high interest rate regime. Capital expenditure of governments will continue to remain slow for the remaining part of the year due to low government revenues.
“In summary, we believe that in a bid to initiate recovery, both fiscal and monetary policies need to be harmonized at the earliest time as well as a faster implementation of the 2016 Budget which is expected to spur economic activities and bridge the output gap.”
Also reacting, Meristem Securities stated: “We opine that the hike in benchmark interest rate will negatively impact the cost of borrowing to the real sector as banks reprice current interest rates on existing loans.
“We note that this will particularly affect the small-medium enterprises, hindering expansion plans and thus necessitating the need to pass-on the higher operating costs to consumers.”
To Dr. Franks Jacobs, President, Manufacturers Association of Nigeria (MAN), the rate hike is unfavourable to the manufacturing sector.
He said: “MPC at 14 per cent to the commercial banks will go higher when manufacturers finally obtain loans from banks because they will mark it up. Currently, we learnt that some banks are lending at 26 per cent, it is not possible to sustain the manufacturing at this level.
“Already, manufacturers are faced with myriad of challenges with issues such as poor infrastructure provision, multiple taxation, poor regulatory framework and unhealthy operational environment.”
The Director-General of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Mr. Emmanuel Cobham, picked holes in the MPC.
Noting that it would compromise the real sector, Cobham wondered how manufacturers would finance their raw materials and operation with such high interest rate from banks.
He said: “The common man will be emasculated, crime would increase and small business which is known as an engine of growth in any economy would fizzle out as they can’t compete in the hostile operating environment.
“Unfortunately, we don’t have any effective consumer advocacy agency that can check the excesses of some businesses so that prices and even quality are contained.”
Head, Research, FSDH Merchant Bank, Ayodele Akinwunmi, who said the CBN faces a policy dilemma between growth and curtailing the rising inflation, noted that what the economy needs is policy to drive growth now than inflation.
Akinwunmi said: “Increasing the MPR will increase the finance cost for companies and may reduce their profit margin because of their inability to shift the cost to the final consumers due to the weak consumers’ purchasing power in the country at the moment.
“The current high inflation rate we have in the country is cost push inflation caused by higher input costs as a result of fuel price hike and currency devaluation.
“This cannot be addressed by higher interest rate. It can only be addressed by increase in productivity and supply. I do not see the MPR increasing attracting foreign investors. Using the Open Market Operators would have addressed that.”
According to him, the rate hike may further fuel higher inflation rate and depress the Gross Domestic Product (GDP) with negative impact on the equity market.
Not a few analysts agreed that the hike could be generally negative for the volatile equities market, but that substantial undervaluation of several equities could stimulate investments.
Meristem Securities officials noted that the rate hike and the impact of the recently implemented forex policy will boost activities within the fixed income market as yields become attractive to both local and foreign investors.
They said the attractive yield environment could attract investors away from riskier equities investments, thus pressuring the returns in the equities market.
Their Afrinvest Securities counterparts said the rate hike was primarily to attract foreign capital inflow, which they noted has not reacted to the recently introduced reforms in the forex market. They concluded that increased capital inflow will have a positive feedback on the financial market.
Head of Currencies Unit at Ecobank Nigeria, Olakunle Ezun, said the main focus of the deliberations at the MPC were factors affecting growth output, the outlook for inflation and the fiscal uncertainties, which inadvertently, hampered investment spending and flows.
He said the MPC also focused on other external factors such as policy developments in the United States (U.S.), United Kingdom (UK), European Union (EU), China and Japan.
The MPC was critical about the outlook for inflation, which spiked significantly to 16.48 per cent year-on-year in June from 15.58 per cent the month before; eroding real purchasing power of fixed income earners and dragging growth.
Ezun described as worrisome the rising inflationary pressure which according to him, was largely a reflection of structural factors, including high cost of electricity, high transportation cost, high cost of inputs, low industrial activities as well as higher prices of both domestic and imported food products.
He said the outcome of meeting underlined the tightening monetary environment and further suggested that the CBN believed that it was crucial to adopt measures that could reduce the country’s vulnerability to shock, re-anchor inflation expectations and sustain macroeconomic stability.
He said the overall strategy of the MPC appears to be one of maintaining a tight monetary environment in order to slow inflation while at the same time providing support to the local currency.
However, the success will largely depend on how much of capital inflows seeking to buy high yielding government securities are attracted to stimulate domestic growth, he said.
“We expect the hike in the policy rate to have a negative impact on current portfolio holdings, in terms of pricing, while increasing bond yields; in turn, this will help to provide forex liquidity to stabilise the naira,” Ezun said.
He urged domestic investors to remain confident on short term government securities, saying that they might need to reassess portfolio composition in order to take advantage of the expected rise in bond yields while minimising any potential losses arising from the fall in bond prices.
He said: “Overall, the short end of the yield curve will remain attractive, as concerns over naira and inflation outlook continue to influence CBN’s monetary policy regime in short term.”
The Chief Executive Officer, Sofunix Investment and Communications Ltd, Sola Oni, said the apex bank was working on the assumption that the existing nominal anchor is a disincentive to investment for both foreign and indigenous investors, particularly when compared to the current inflation rate.
Oni said: “In portfolio management, the logical assumption is that relationship between interest rate and stock market is inverse. This implies that when interest rate is low, speculators move their funds from the money market instruments to the stock market to make a kill.
“As a corollary, the same speculators move from the stock market to other asset classes, especially, fixed income securities when the interest rate is high.
“By this logic, one can assume that the current increase in the MPR would boost investment in the fixed income securities while it may depress investors’ appetite for equity investment.”
Capital Bancorp said companies under the burden on loans will come under more pressure as the cost of servicing their loans will significantly rise thereby increasing the pressure on their profit margins, especially in the face of slowed public and private expenditures.
It said: “Listed companies who rely majorly on imported raw materials for their production will continue to grapple with the high cost of sales as a result of the continuous depreciation of the naira.”
Analysts at Meristem Securities however noted that the rate hike could boost banks’ performance as liquid banks will boost gross earnings through non-funded income generation by investing in fixed income assets as market yields are affected upwards by the hike in the rate.
President, Time Economics Ltd, Dr. Ogho Okiti, said the rate hike was against the expectation that the rate will be left unchanged.
He noted that tightening the MPR which will reduce negative real interest rate will come as good news, particularly for foreign portfolio inflows.
“It will also help to stabilise the naira in the currency markets which is one of the core mandates of the CBN”, he said.
He, however, pointed out that the latest move will unlikely curtail today’s inflationary pressures since the factors driving the current increase in general price levels are largely cost-shocks and not demand related.
Okiti said: “Given the nature of Nigeria’s financial system, interest rates generally paid on savings by commercial banks in Nigeria are usually not dependent on the benchmark MPR.
“Therefore, we think that savings account holders who have seen the real returns on their savings wiped out by rising inflation are unlikely to be beneficiaries.
“Furthermore on the downside, we also think the move could not only help to exacerbate the current difficult operating environment for firms but would also lead to an increase in cost of funds for net borrowers and thus dampen corporate investments.”
Echoing the same sentiment, Lead Economist, Centre for Economic Development, Abuja, Dr. Wale Odutayo, said the rate hike might be wonderful but “in the long run it does not favour the citizenry.
“Externally they want foreign investment to come in but internally it doesn’t help the people in the long run.”
Increasing the MPR from 12 per cent to 14 per cent during Tuesday’s MPC meeting was wrong.
In his reaction, the Chairman of Pan Africa Development Corporate Company (PADCC), Mr. Odilim Enwegbara, said: “It was so wrong that someone could be tempted to call it a kind domestic economic sabotage. It’s as bad as like someone suffering from low blood pressure instead of taking drug to boost his blood pressure decided to take a drug that will further lower the blood pressure.
“What the blood pressure patient has done, in an effort to save his life is unknowingly taking a deadly poison that could quickly send him to his grave. That is how bad the MPR was by increasing it at a time the country’s economy is still hovering around recession.”
Enwegbara argued that the price instability the MPC and CBN were pursuing is “not only beyond MPC’s control but are in fact externally generated. No chief banker of a nation should be bold to be blindly fighting inflation with such a monetary policy that by increasing MPR goes further to increase the same inflation since the high cost of money by increasing the cost of doing business in the country further raises inflation.”
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