Monetary Policy: How feasible


In today’s cut-out from our core strategy document – The Nigeria Strategy Report, we conclude the review of major macroeconomic indices by examining trends in monetary aggregates and policy over 2015 and delineating our outlook for 2016.

In a bid to tackle the sluggish pace of monetary aggregate growth and stimulate output, after GDP softened to lowest in more than five years, the apex bank switched monetary policy in H2 15 to a dovish tone from the hawkishness of the last 5 years.

Retracing the roots of the tightening we note that following the rebound in oil prices in 2010 and expansionary fiscal stance, financial system liquidity tripled YoY to monthly average of ~N400 billion in 2011. However, despite relatively low MPR (6%) and CRR (2%) at the time, there was minimal impact on credit to the “core” private sector (2010: -13% and 2011: -4%) and intermediation spreads in credit markets widened in excess of 20 pps.

Added to this, the excess liquidity threatened price stability, as banks “speculated” in forex market which eventually resulted in devaluation late in 2011. While the era of tightening was indeed possible because of robust macro conditions (GDP growth averaged 6% and external and fiscal balances were relatively comfortable), the deterioration in external balances, triggered by the precipitous drop in oil price since Q4 2014, and spectacularly weak growth in 2015, are giving cause for concern. This dire prognosis—particularly for output growth—favours an extension of the current monetary policy thrust especially as focus has shifted away from forex and attracting FPl to more fundamental domestic considerations.

Going forward, we see current OMO maturity profile over 2016 (N2.2 trillion) and still high CRR (20%) as leaving enough headroom for the CBN to sustain its accommodative policy. In addition to these tools, given the signaling effect of MPR adjustments, we think the odds for further cuts to single digit territory, possible over the H1 16, are relatively high. This could mirror the rapid cuts in MPR (from 10.25% to 6%) over about six meetings, following the 2008 financial crises.

Extended contraction in net foreign assets crimpes money supply in H2

After the brisk pace of growth in the first half of 2015 (+11.8%), broad money supply (M2) contracted 3.2% to through October 2015. Unlike H1 15, where the upswing in net domestic credit (+33%) and other net assets (+29%) offset the contraction (-19%) in net foreign assets (NFA), each of these three major components sank over H2 15.