The Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele,
is upbeat about the convergence of the foreign exchange (FX) rates on
the official and parallel markets, stating that the gains made by the
naira against the greenback in the last five weeks were not a fluke.
Emefiele’s statement came just as global
ratings agency, Standard & Poor’s (S&P), affirmed its ‘B/B’
long- and short-term sovereign credit ratings on Nigeria. S&P also
stated that the country’s outlook remained stable.
Briefing journalists at the end of the two-day Monetary Policy Committee (MPC) meeting of the CBN, where the key policy rates were retained, Emefiele said he was happy that the central bank’s intervention was yielding positive results.
“I am happy, indeed very gratified, that
the interventions have been positive, we have seen the rates now
converging and we are strongly optimistic that the rates will converge
further.
“In terms of sustainability, I think
it’s important for us to say that the foreign reserves at this time are
still trending upwards to almost $31 billion as I speak with you.
“And the fact that we have done this
consistently for close to five weeks, should tell everybody or those who
doubt the strength of the central bank to sustain this policy.
“For me, they are taking a risk and they
will lose in their bid to place a wrong bet. The direction is that
there is a determination to see to the convergence of those rates and
with what we have seen so far, we are very optimistic that those rates
will converge, and all the elements in the foreign exchange policy will
no doubt be implemented,” he said.
The CBN governor also dismissed the
notion that it was the National Economic Council (NEC) that directed the
CBN to introduce the new policy actions in the FX market.
He said it was the central bank that made a presentation on the Nigerian
economy and the FX market, after which NEC advised it to look at all
the issues that had been discussed on the FX market.
“But of course, before then, we had
started to see the depreciation of the naira particularly at the
parallel market and we had taken a decision that there was the need to
reverse the trend and that is the reason we started the FX intervention,
and I am happy that those interventions have been very positive,” he
said.
On the outcome of the MPC meeting, he
said in consideration of the headwinds in the domestic economy and the
uncertainties in the global environment, the committee in a vote of nine
to one member decided to retain the Monetary Policy Rate (MPR) at 14
per cent alongside all other policy parameters.
The dissenting member of the committee, he disclosed, voted to raise the MPR.
Emefiele added that the Cash Reserve Ratio (CRR) and Liquidity Ratio
(LR) were also retained at 22.5 per cent and 30 per cent, respectively.
The MPC also retained the asymmetric corridor at +200 and-500 basis point around the MPR.
The MPC, Emefiele explained, re-evaluated the implications of the
continuing global uncertainties as reflected in the unfolding
protectionist posture of the United States and some European countries;
sustenance of the OPEC-Russian agreement to cut oil production beyond
July 2017; sluggish global recovery and the strengthening U.S. dollar.
“The committee also evaluated other
challenges confronting the domestic economy and the opportunities for
achieving price stability, conducive to growth in 2017.
“In particular, the committee noted the persisting inflationary
pressures; continuing output contraction; high unemployment rate;
elevated demand pressure in the foreign exchange market; low credit to
the real sector; and weakening financial system indicators, among
others.
“Nonetheless, members welcomed the
improved implementation of the foreign exchange policy that resulted in
the naira’s recent appreciation.
“Similarly, the committee expressed satisfaction with the release of the
Economic Recovery and Growth Plan and urged its speedy implementation
with clear timelines and deliverables.
“On the strength of these developments,
the committee felt inclined to maintain a hold on all policy parameters.
Nevertheless, the committee noted the arguments for tightening policy
which remained strong and persuasive.
“These include: the real policy rate
which remains negative, the upper reference band for inflation remains
substantially breached and elevated demand pressure in the foreign
exchange market.
“The reality of the sustained pressure on prices (consumer prices and
the naira exchange rate) cannot be ignored, given the central bank’s
primary mandate of price stability,” Emefiele said.
According to him, the MPC noted that the moderation in inflation in
February was due to the base effect as other parameters, particularly
month-on-month CPI continued to rise.
Tightening at this time, Emefiele said, would portray the bank as being insensitive to growth.
“Also, deposit money banks (DMBs) may easily re-price their assets which
would undermine financial stability. Besides, the committee noted the
need to create binding restrictions on growth in narrow money and
structural liquidity and the imperative of macroeconomic stability to
achieving price stability conducive to growth.
“The committee also considered the arguments for loosening the stance of
monetary policy, noting its desirability in stimulating aggregate
demand if credit increased with lower rates of interest.
“It noted the arguments that a loose
monetary policy was capable of delivering cheaper credit, making it more
attractive for Nigerians to acquire assets, thus increasing wealth and
stimulating aggregate spending and confidence by economic agents, which
would eventually lead to lower non-performing loans in the system.
“However, the counterfactual arguments against loosening were anchored
on the upward trending month-on-month inflation and its impact on the
exchange rate.
“Loosening would thus worsen the already
negative real interest rate, widen the interest rate spread and reverse
the positive outlook for the current account position,” Emefiele
explained.
On the outlook for financial stability, he said the MPC noted that the
banking sector was becoming less resilient as a result of the adverse
macroeconomic environment.
“Nevertheless, the MPC reiterated its
resolve to continue to pursue financial system stability. To this end,
the committee enjoined the management of the central bank to work with
DMBs to promptly address rising NPLs, declining asset quality, credit
concentration and high foreign exchange
exposures,” Emefiele said.
As the CBN governor announced the
outcome of the MPC meeting, the naira recorded its strongest daily gain
against the US dollar on the parallel market on Tuesday, where it rose
by N20 to close at N410 to the dollar, compared with N430 from the
previous day.
Also, the buy rate of the naira climbed to N420 to the dollar Tuesday.
The sustained momentum of the naira was the fallout of the central
bank’s resolve to continue to flood the interbank FX market with
dollars, forcing black market operators and currency speculators to dump
the greenback.
Nevertheless, the naira weakened to N307.50 to the dollar on the interbank market Tuesday.
Reacting to the outcome of the MPC meeting, the Chief Executive of
Financial Derivatives Company Limited, Mr. Bismarck Rewane, said the
wait-and-see approach came as no surprise and was based on the need to
monitor the inflationary expectations as well as assess the impact of
the current FX interventions.
“If they had the boldness and audacity,
they should have brought down the interest rate. So, they didn’t do
anything because they didn’t want to rock the boat,” Rewane said in a
phone chat with newsmen.
He, however, noted that the confirmation of a stable outlook by S&P
for Nigeria was reassuring, especially at a time the country is trying
to restore investor confidence.
“Furthermore, a gradual improvement in
the GDP growth rate, increasing external reserves, and improved oil
production also factored in the MPC’s decision.”
The CEO of Times Economics, Dr. Ogho Okiti, also pointed out that MPC
decision was mostly based on concerns about inflation, the level of
economic growth, fluctuation in crude oil prices, and the direction of
government revenue.
“Maybe by the next MPC when we start
seeing concrete direction in these economic indicators, they may then
begin to reduce interest rate,” the economist stated.
To the Chief Economist, Africa, Standard Chartered Bank, Razia Khan, the
big question for the MPC members was whether there would be any further
policy pronouncements from the CBN, following the endorsement of a
“flexible FX regime” in the federal government’s Economic Growth and
Recovery Plan (ERGP) that was announced recently.
According to her, the CBN’s
interpretation “of that FX flexibility (for now) appears to be a
continuation of more frequent FX sales aimed at achieving eventual
convergence of Nigeria’s different FX rates”.
She noted that the MPC members were
still concerned about the month-on-month rise in inflation.
“There is
concern that easing now would weaken the real rate of interest and
weaken the FX rate.
“Despite a turnaround in monetary aggregates in February, the MPC still signalled some concern about the growth of narrow money.
“Second, the MPC appears to have
resisted pressure from the fiscal authorities for an easing of policy.
By holding rates, and putting price stability at the centre of its
ambition, the CBN could well be preparing for a more meaningful
liberalisation, to come eventually, only when conditions are more
conducive.
“The CBN appeared comfortable that its FX reserves position will be
safeguarded even as it steps up the pace of FX intervention. Oil
earnings are likely to provide a key test to this assumption.
“For now, however, the emphasis is very
much on holding everything steady, and achieving more convergence
between the different FX rates.
“Greater convergence appears to be a necessary pre-condition to any
further FX market liberalisation,” Khan stated in a note Tuesday.
Meanwhile, S&P on Tuesday affirmed its ‘B/B’ long- and short-term
sovereign credit ratings on Nigeria, with a stable outlook.
S&P, in a report on its assessment
on Nigeria, also affirmed its long- and short-term national scale
ratings on Nigeria at ‘ngBBB/ngA-2’, just as it maintained its transfer
and convertibility on the country at ‘B’.
It, however, pointed out that the ratings on Nigeria were constrained by
the country’s low level of economic wealth, as real GDP per capita
trend growth rates below those of peers with similar levels of
development, and future policy responses that may be difficult to
predict because of the highly centralised political environment.
“We expect Nigeria’s economy to achieve a
real GDP growth of 1.5 per cent in 2017 and 3.4 per cent on average
over 2017-2020, supported by improvements in the oil sector and improved
government budget execution under its recently released Economic
Recovery and Growth Plan (ERGP) 2017-2020.
“A gradual increase in foreign currency
inflows through rising export revenues and government external borrowing
could help reduce foreign currency shortages in the non-oil sector and
allow industry and financial sectors more leeway to contribute to
economic growth,” S&P added.
S&P stressed that Nigeria has significant infrastructure and energy
shortfalls and low income levels, with GDP per capita at $1,800 in 2017.
“Although oil revenues support the
economy when prices are high, we view them as exposing Nigeria to
significant volatility in terms of trade and the government to swings in
the revenue base.
“Nevertheless, the oil sector has a significant indirect impact on the
economy. A marked contraction in oil production, slower implementation
of fiscal policy, and a restrictive exchange-rate regime resulted in
Nigeria’s economy contracting, in real terms, by 1.5 per cent of GDP in
2016.
“Since then, oil production has
increased back above two million barrels per day (bpd) in early 2017
(against the about 1.6 million bpd reported at times in the second half
of 2016).
“Oil production has been supported by reduced incidents of sabotage in
the Niger Delta as the government’s engagement with community leaders
appears to have borne fruit, while repairs are being completed on key
export pipelines,” it added.
To this end, S&P marginally
increased its oil price assumptions to an average $53 per barrel (/bbl)
over 2017-2020, compared with $51/bbl in its previous review in
September 2016.
“Overall, we forecast that Nigeria’s general government debt stock
(consolidating debt at the federal, state, and local government levels)
will average 23 per cent of GDP for 2017-2020, comparing favorably with
peer countries’ ratios.
“We also anticipate that general
government debt, net of liquid assets, will average 16 per cent of GDP
in 2017-2020. We include debt of the Asset Management Corporation of
Nigeria (around five per cent of GDP)–created to resolve the
non-performing loan assets of the Nigerian banks–in our calculation of
gross and net debt, in line with our treatment of such entities
elsewhere.
“Over 80 per cent of government debt is
denominated in naira. Despite the low government debt stock, general
government debt-servicing costs as a percent of revenues are high and
have increased in recent years from below 10 per cent in 2014 to our
projection of 18 per cent on average in 2017-2020,” it added.
Furthermore, S&P noted that despite
changes to the CBN FX policy, the country still maintains FX controls on
both current and capital transactions, including import restrictions on
41 categories of goods.
It also stated that banks continue to face shortage of US dollars,
“which has caused them to shrink the volume of letters of credit they
could extend to their customers and for some of them to restructure or
pay back their facilities as correspondent banks tested their ability to
pay”.
“The central bank has recently started
to provide additional U.S. dollars to the banks, and to private
individuals at a rate up to 20 per cent higher than the official rate.
However, in the event of devaluation, banks’ asset quality and
capitalisation would be further constrained.
“We believe at least three banks are within 150 basis points of their
minimum capital adequacy ratio owing to the 2016 devaluation of the
naira and weak earnings.
“Further losses or devaluation could
trigger an element of regulatory forbearance within the sector. It is
therefore likely that a few banks will either actively shrink their
balance sheets or seek capital injections in 2017, which could prove
difficult in the current market and economic environment.
“We forecast that the Nigerian banks
will suffer increased credit losses of 3.5 to 4 per cent in 2017 in
aggregate, after an anticipated three per cent in 2016. Asset quality
problems are expected to be most pronounced from domestic oil companies,
power companies, manufacturing, and real estate.
“We also see particular risk from borrowers of foreign currency without foreign currency receivables,” S&P added.
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