ahead of mpc 16012014

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Nigeria I Economics I January 2014

www.meristemng.com

Ahead of MPC Meeting January 2014 | 11 Pages

MPR to remain at 12%but with need for more regulatory oversight

International Economic Developments

Global economy on the uptickThe global economy ended 2013 on a positive note with the euro zone growing

for the first time since 2011, albeit marginally. The US grew 2%, Japan (3%),

China (7.9%) and the UK (2.4%) in 2013.

The euro zone economy grew by 0.3% YoY in Q2:2013 but slowed to 0.1% in Q3 withexpectation of 0.3% and 0.4% growth in Q4:2013 and Q1:2014 respectively. Estimated

inflation rate for the euro zone is about 1.5% in Q4:2013, and is expected to moderate

to 1.4% by Q1 of 2014. The US economy is expected to continue growing at an

average of 2.2% with analysts putting Q4:2013 figure at 2.0% and 2.4% expectation for

Q1:2014. The FOMC is expected to reduce the USD75bn monthly Bond buyback

further at its next meeting but the impact is expected to be minimal as the global

economy seems to be more prepared for the tapering measure.

China is expected to grow by 7.9% in Q4:2013 up 0.2% from the previous quarter with

an expectation of 8.0% for Q1:2014. The Japanese economy expanded by 3.0% inQ3:2013 and is expected to further gain traction in 2014.The inflation rate edged

higher to 1.1% in Q4:2013, up 0.4% from Q3:2013. However, it is expected to subside

to 0.9% by Q1:2014.

Considering the development above and their implication on potential fund flow,

there appears to be no major impetus to alter MPR in the Monday meeting.

The Monetary Policy Committee will be meeting on the 20th

- 21st

January, 2014 to

deliberate and take key monetary policy decisions. We analyze international

economic developments, domestic economic and financial developments, monetary,

credit & financial market developments and external sector developments. On a

balance of factors, our analysis suggests that the Committee will keep MPR constant

at 12%. In addition, we are of the opinion that there should be more regulatory

oversight on Islamic Banks in relation to their Financing To Deposit (FTD),

commercial banks’ compliance with Minimum Interest Rate on Savings (MIRS) and

BDCs’ foreign exchange activities.

Nigeria | Economics | Monetary

See page 11 for Analysts’ Certification and Disclaimer

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-10%

-5%

0%

5%

10%

15%

2008 09 10 11 12 13e 14f

Nigeria

Russia

Brazil

India

China

S/Africa

7%

9%

11%

13%

15%

2009 10 11 12 13 14f

Macroeconomics Updates

Domestic economy: More growth on the horizonThe Nigerian economy is estimated to have expanded by c.6.5% in 2013 (vs.

6.6% growth in 2012) and forecast to grow by 6.65±0.2% in 2014. This expected

growth is to be driven largely by increased consumer and government spending,

rising investment across priority sectors such as agriculture, power and

infrastructure, and improved net export position fuelled by government’s

import substitution drive. Decline in oil production in 2013 adversely affected

the realized economic growth and efforts will need to be geared towards

improving production levels to realize the projected 2014 growth rate.

Inflation: Tamed but with upside risks on the horizon

Consumer price inflation remained moderate all through 2013 following

tightening measures by the CBN which resulted in an average inflation rate of

8.49%. Headline inflation fell to 7.8% in October, the lowest in 2013. However,

due to increasing food prices, it rose to 8.0% in December. We expect inflation

to remain contained in the first half of 2014. However, there are potential

upside risks to price stability in the second half of 2014 that suggests the need

for continued tightening measures in order to tame it within the single digit

band. There appears no justification to hike MPR in the coming MPC meeting

on the basis of inflation outlook.

Chart 1: Nigeria’s Economic Growth Performance Relative to BRICS (2011-2013) Nigeria Inflation (Actual and Outlook)

Sources: World Bank, IMF CBN, Meristem Research

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Monetary, Credit and Financial Market Developments

Money Suppy: Rising but below provisional benchmarkBroad money supply (M2) contracted by c.5% in November 2013 compared to

the level as at December 2012 resulting in an annualized decline of 5.2%. Albeit,

it marginally inched up by 1% over end-October levels due to a 4% rise in time

and savings deposit which was partly offset by a 1% drop in narrow money.

From another perspective, developments in money supply reflected lower Net

Foreign Assets (-2%) but increased Net Domestic Asset (7%) relative to October

levels. The lower NFA was shared broadly across all holders from Monetary

Authorities (CBN and FMF) to banks (Deposits Money Banks, Merchant banks

and Non-interest banks). The NGN421billion addition to NDA was driven by

NGN465bn net addition to the stock of domestic credit being slightly offset by

increased deficit on other domestic assets. Net domestic credit (NDC) expandedby 4% and 3.4% Month on Month in October and November respectively to peg

annualized growth at 12%, which, though higher than 9% as at the last MPC

meeting, underperforms the 2013 provisional benchmark of 23%.

Islamic Banks: FTD trending down but still above 100%While NDC by conventional banks grew 9% from December 2012 to November

2013, financing by Islamic bank recorded 3-digit growth of 263%. Furthermore,

evidence from countries with strong Islamic banking institutions suggest that

Financing To Deposit (FTD) ratios is usually in tandem with Loan To Deposit

(LTD) by conventional banks. However, the Nigerian experience appears to be

an exception with Islamic banks having 102% FTD (although down from 139% in

2012 Dec) while conventional banks have 36% LTD. Although this might be

peculiar with their early stage in the industry life cycle, the CBN will need to

further up its regulatory oversights on this segment to avert any potential crisis

due to exposure to excessive risk factors in a bid to improve their average rate

of return.

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0

5

10

15

20

2005 06 07 08 09 10 11 12 13

NGN'trnBroad Money

0

1

2

3

4

5

2005 06 07 08 09 10 11 12 13

NGN'tnBase Money

Currency in Circulation

Bank Reserves

0%

50%

100%

150%

200%

250%

300%

Jun-12 Oct-12 Feb-13 Jun-13 Oct-13

FTD - Islamic Banks

LTD -Conventional Banks

Money Suppy: Rising but below targetReserve money (RM) contracted further by 1% in November compared to

October. This was as a result of a 1% and -2% changes in currency in circulation

and bank reserve. 2013 annualized growth of the RM stood at 24%. The level of

RM at the end of November fell short of the fourth quarter indicative

benchmark of NGN5tn by 11%.

Chart 3: Movement of Broad Money and Reserve money

Source: CBN

Chart 2: Islamic Bank FTD vs. Conventional Banks LTD

Source: CBN

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-1.00

-0.50

0.00

0.50

1.00

1.50

2005 06 07 08 09 10 11 12 13

MPR and Prime Lending Rate

MPR and Maximum Lending Rate

Interest Rate

Savings rate: Yet to inch up to regulatory minimumAverage savings rate of commercial banks at 2.5% is yet to match up with the

regulatory minimum of 3.6%, 30% of MPR. While some banks are willing to offer

significantly higher than the benchmark due to the need to cushion their

liquidity positions, a number of other banks groaning under reduced income

heads and higher cost are offering lower than the set benchmark. The CBN, in

an effort to grease monetary policy transmission channel and support its

policy objectives, is set to ensure higher levels of compliance by banks through

stricter regulatory oversights and this might be addressed at the upcoming

MPC meeting.

Lending rate: Not cheering even for prime borrowersPrime lending rate hit its high for the year in November and this is not surprising

given the need to maintain a high margin in the face of increasing cost – higher

savings rate, gradual phase-off of COT and cap on some lending fees and

commission among others. The prevailing risk factors facing banks do not

support a reduction in lending rates and we view them being sticky at their

current high levels. Furthermore, the 5-year rolling correlation between MPR

and prime lending rate on one hand and maximum lending rate on the other

hand stand at -0.4 and 0.66 respectively. Of striking importance is the latter

which increased from 0.03 in December 2012 to 0.66. This relationship is

stronger when viewed in a 3-year rolling correlation context.

.

0%

5%

10%

15%

20%

25%

30%

2005 06 07 08 09 10 11 12 13

Savings RatePrime Lending Rate of Commercial BanksMaximum Lending Rate of Commercial BanksMPR

Chart 4: Movements in MPR vs. other Bank rates 5-year Rolling Correlation between MPR and rates

Source: CBN

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8

9

10

11

12

13

21-Nov-13 5-Dec-13 19-Dec-13 2-Jan-14

OBB InterBank

Money market rates moderateInterest rates in all segments of the money market reflected the liquidity

conditions in the banking system. OBB rates during the period recorded an

average of 10.66% (vs. 11.73% as at the last MPC) while Inter-Bank ratesrecorded an average of 11.12% (vs.12.50% as at the last MPC meeting).

CRR: Any review expected?Liquidity ratio dropped from 60% to 48% as banks re-allocated their assets to

higher yielding instruments. Although banks are still shy of creating risk assets,the terrain is gradually improving with loan to deposit ratios at 36% in

November compared to 34% just before the increase in CRR on public sector

funds in July.

The last MPC meeting for 2013 recorded two votes for increase in CRR on public

sector funds from 50% to 75% and 100% respectively and this has an undertone

of reversion to the old liquidity management system of withdrawal of public

sector funds from commercial banks to the CBN. We however do not foresee

any review in CRR in the Monday meeting but there is the possibility of review

later in the year.

Chart 5: OBB and Interbank Rates (Nov ’13-Jan ’14)

Source: CBN

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0%

2%

4%

6%

8%

10%

12%

14%

Dec-12 Mar-13 Jun-13 Sep-13 Dec-13

Interbank rate

BDC Rate

0

2

4

6

8

10

12

14

Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13

Import Cover

WAMZ Benchmark

International Benchmark

External Sector Developments

MPC likely to consider BDC-targeted policiesFrom the last MPC, the Naira has remained stable against the US Dollar at the

official market. However, the BDC market has continued to trade at a significant

premium to the official rate evidenced by NGN17.28 spread over the CBN rate

from NGN13.30 on the 19th of November. From the last auction in December,

the premium widened at the interbank (4%), BDC (NG12%) and parallel markets

(10%) but they have all reversed to December 18 levels.

Although the BDC rate has initiated a slight correction, it might be premature

to draw an inference on its sustainability. We therefore expect the MPC to

consider policies that will catalyze the observed correction.

The CBN rates averaged NGN155.72 over the review period, opening atNGN155.70 on the 19th of November and closing at NGN155.72 on the 13th of

January. This represented a depreciation of NGN0.02k (0.01%).

The interbank market averaged NGN159.00 over the period, opening at

NGN159.04 and closing at NGN159.65 representing a depreciation of

NGN0.61k (0.38%).

The BDC rate averaged NGN171.41 over the same review period, opening at

NGN 169.00 and closing at NGN173.00 representing a depreciation of

NGN4.00 (2.37%).

Chart 6: BDC and Interbank rates premium to official rate Reserve Adequacy

Source: CBN

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Reserve: Though adequate for import, needs cushioningNigeria’s external reserve has declined 0.96% to USD43.3bn as at Jan 10, 2014

(vs. USD44.8bn as at the date of the last MPC meeting). Despite the decline, the

reserves is still able to cover 9months of import, well above the WAMZ andInternational benchmarks of 6 and 3 months respectively. This decline can be

attributed to the 28.7% shortfall in the Excess Crude Account to USD3.3bn as at

December 2013 at a time when crude oil prices remained above USD100/barrel.

With a significant portion of the reserves accounted for by Foreign Portfolio

Investments, a decrease in the MPR is unlikely in the face of potential capital

reversal fuelled by the on-going US Fed tapering. It is our view that the MPR be

kept at the current 12% to keep funds attracted to the Nigerian market and to

help stabilize the foreign exchange rate.

ConclusionOn a balance of factors, we are of the opinion that the MPR be retained at 12%.

However, there is also need for more regulatory oversights especially with

regards to the activities of the BDC operators, Non-Interest Banks, as well as

compliance of commercial banks to the Minimum Interest Rate on Savings

(MIRS).

It is also noteworthy that the tenure of 5 of the 12 members of the MPC will

expire this year and the re-composition has a strong bearing on policy direction.

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0

5

10

15

20

25

2008 09 10 11 12 13

WAMZ Benchmark International Benchmark

Months of Import Cover

Sanusi's Tenure

Pre-

Sanusi

A Review of monetary performance

-10%

0%

10%

20%

30%

2005 06 07 08 09 10 11 12 13

Headline Inflation

Sanusi's TenurePre-Sanusi

110

130

150

170

190

2008 09 10 11 12 13

Official Rate Interbank BDC Parrallel Market

Sanusi's Tenure

Pre-

Sanusi

0%

10%

20%

30%

2005 06 07 08 09 10 11 12 13

Savings RatePrime Lending Rate of Commercial Banks

Maximum Lending Rate of Commercial Banks

MPR

Sanusi's TenurePre-Sanusi

Source: CBN

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