NIGERIA MONETARY POLICY COMMITTEE – Finally, the hawks prevail – Businessamlive


What shaped the last week?

Global: Global investors continue to favor stocks from the Asia-Pacific region as a weaker yen and easing restrictions in parts of China boost buyer action in the region. The Hang Seng, Nikkei-225 and Shanghai Composite all closed in the green w/w, up 3.43%, 2.80% and 0.23% respectively. Investors also reacted positively to the latest economic data from the region; in Japan, gross domestic product contracted by 0.5% YoY in Q1’22, compared to a contraction of 2.2% in Q1’21. Meanwhile, in China, May inflation came in at 2.1% y/y according to data from the National Bureau of Statistics. In Europe, investors remain bearish due to the impact of runaway inflation and rising energy prices on corporate earnings in the region. Germany’s DAX, France’s CAC and London’s FTSE-100 all fell sharply w/w, losing 3.70%, 4.01% and 3.14% respectively. On the data front, the Eurozone recorded a 5.4% year-on-year GDP expansion, while European Union GDP grew 5.6% year-on-year. In addition, the European Central Bank (ECB) announced its decision to “leave the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility unchanged. The bank has indicated that it plans to raise its key rates by 25 basis points at the July meeting. Additionally, the bank disclosed that the Asset Purchase Program (APP) will end on July 1. Finally, in North America, sentiment also remains bearish, with the latest US inflation figures dampening investor sentiment. US inflation hit a 40-year high of 8.6% in May after moderating to 8.1% in April. At the time of the S&P 500 release, the Nasdaq and Dow Jones were down 3.84%, 2.22% and 3.34% respectively.

Domestical economy: According to the Debt Management Office, Nigeria’s outstanding debt rose 5.1% q/q to ₦41.6 trillion in Q1’22. The slight rise was mainly due to a net accumulation of £1.3 trillion from domestic sources and the issuance of $1.25 billion Eurobonds in March. As a result of this rise, Nigeria’s debt-to-GDP ratio fell to 24%, below the DMO’s medium-term threshold of 40%. Although the debt-to-GDP ratio is quite modest, the stock of external debt continues to rise amid falling gross revenue and a weaker naira. Despite the increase in external borrowing in recent times, the debt composition showed that Nigeria has more domestic debt stock (60% of debt stock) than external debt (40% of stock debt). debt). The pace of external borrowing could ease as tighter financing conditions prevent Nigeria from raising $990 million on the international debt market. Thus, we expect more domestic borrowing in the near term as the government prepares to fund its amended budget.

Shares: It was a mixed week of trading across the NGX; however, the bulls emerged victorious as they boosted activity in the latter stages of the week, supporting the market. The local market rose 0.50% w/w as interest in the telecommunications space helped drive the market higher. MTNN rose 4.35% w/w to ₦240.00; the title remains the second most capitalized title of the NGX after its rival AIRTELAFRICA. As mentioned earlier, sentiment in the market was mixed with the Banking and Consumer Goods sectors trading lower w/w, while the Industrials and Oil & Gas sectors closed higher w/w . In the banking sector, losses in ETI, FCMB, ZENITHBANK and FBNH sent the sector down 2.18%, while in the consumer goods space, the sell-side action of brewer NB and other mid- and small-cap players in the space dragged the sector down 0.12%. % weight/weight. on the other hand, WAPCO has seen renewed interest following last week’s selling action at the counter; the cement maker saw its stock rise 3.70% w/w to ₦28.00. Finally, in the Oil & Gas sector, interest in oil marketers was the main driver of its performance, as the sector rose 1.14% w/w.

Fixed Income: In the fixed income market, trading activity was mixed this week, with yields trending higher in the NTB and OMO spaces, while the bond segment was mostly focused on longs. In the fixed income sector, investor activity was largely mixed with a bullish bias as we saw aggressive action on the buy side in the short-medium segment of the market, while some counters in the long segment also saw some demand pockets. As a result, benchmark bond yields fell 3 basis points w/w. Move to Treasury bills segment; Market action was broadly bearish this week as investors sold short-term tenors, as a result yields rose 19 basis points on average. Finally, the OMO space also saw a sell-off at the short end of the curve as average yields rose 15 basis points w/w.

Currency: The naira depreciated by ₦1.50 w/w at the I&E FX window to close at ₦421.25.

What will shape the markets over the coming week?
Stock market: Despite today’s positive close, market sentiment remained slightly bearish as the session ended with more losers than winners (18 vs. 14). Although we expect further rallies in some of the stocks with beaten prices, we do not rule out heavy selling in specific counters next week.

Fixed Income: In the absence of significant market catalysts, we expect further bearish trades in the bond market next week. Meanwhile, the NTB and OMO spaces should trade quietly, as attention turns to next week’s T-Bills PMA.

Currency: We expect the Naira to remain broadly stable across the various windows of the currency space as the CBN maintains its interventions in the FX market.

NIGERIA MPC – Finally, the Hawks prevail
At its third meeting of the year, the Monetary Policy Committee (MPC) raised the monetary policy rate (MPR) by 150 basis points to 13.0%. While six members voted to raise interest rates by 150 basis points, four members favored a 100 basis point hike, while one opted for a 50 basis point hike.

Nigeria joins other African economies like Egypt (+200bps YTD) and Ghana (+450bps YTD) in raising interest rates to curb inflation. On a comparative basis, however, Nigeria’s negative real rate of return is still higher than Egypt’s and South Africa’s levels. If there were no capital controls, the MPR must rise to 15.0% – 15.5% to match the current real rate of return in Egypt and South Africa, respectively.

The decor remains the same
The context behind this decision is similar to that of the last meeting – the ongoing war in Ukraine, the backlash from sanctions against Russia, lockdowns in China, the rapid change in monetary policy stance and the risk aversion in global financial markets.

The war between Ukraine and Russia has worsened supply chain disruptions, with major trade routes closed due to sanctions against Russia. If the war were to escalate, it could worsen already high food inflation, with food prices reaching levels not seen in 40 years. In our view, the resurgence of the pandemic in China could spill over to resource-dependent emerging economies in the form of lower external demand and lower current account balances, while reducing demand for oil. . The decline in Chinese demand is not enough to stop the oil bull, however, with oil prices sitting comfortably at $114/barrel. China could decide to buy Russian crude at a discount, risking international sanctions, which could cause a boomerang in emerging markets in the form of higher imported inflation.

Soaring inflation has led many central banks to raise interest rates and reduce external pressures on their economies. Nonetheless, there have been net portfolio outflows from emerging markets since the US Fed began raising its policy rate in March this year. The dollar’s strengthening to multi-year highs has drawn portfolio interest and reduced demand for safe-haven assets such as gold, a trend that has occurred in previous bull cycles. Thus, the stock market rout is far from over. Nigeria appears to be exempt with a positive YTD return of 21.6% in naira terms. However, this is due to the existence of capital controls and currency arrears, which have eroded the foreign appetite for Naira assets.

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