Interest Rate Hike in US, Hold in Nigeria: What Next?

Culled—Proshare

6/10/2018/ FSDH

Here is the monthly Economic and Financial Market Outlook Report for the month of October 2018 from FSDH for your information.

The major highlights of the report:

Domestic Scene:

  • The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) maintained all the policy rates at its meeting in September, in line with the expectations of FSDH Research
  • The MPC however expressed concerns on some of the pressure points in the economy including high liquidity, rising inflation rate, foreign exchange demand pressure, weak credit growth and sluggish economic growth
  • FSDH Research expects monetary policy response in the form of an increase in the issuance of Open Market operations (OMO) to mop up liquidity
  • The yields on the Nigerian Treasury Bills (NTBs) and Federal Government Bonds may increase. This will prevent capital flight, encourage Foreign Portfolio Investment (FPI). This response presents investment opportunities in Nigeria
  • We expect an increase in CRR in Q4 if there is elevated liquidity in the financial market
  • FSDH Research warns that the Federal Government of Nigeria (FGN) needs to urgently implement policies that will grow and diversify the revenue base of the country to avoid imminent debt crisis
  • Our analysis of the ratio of the interest payment on domestic debt relative to the FGN allocation from the Federal Account Allocation Committee (FAAC) shows that the FGN is spending too much of its revenue to pay interest on loans
  • This leaves the government with little resources to spend on critical sectors of the economy that could support strong growth and maintain a healthy economy to generate revenue
  • The inflation rate rose to 11.23% in August 2018, from 11.14% recorded in July
  • FSDH Research forecasts that inflation rate will trend upwards in September 2018 on account of high food prices largely due to the drop in food supply
  • The persistent demand for foreign exchange in the face of declining inflows, led to a consistent drawdown in the external reserves in September
  • The CBN may be able to maintain short-term stability in the foreign exchange market if the current rising crude oil price is sustained and Nigeria is able to produce and find buyers for all its crude oil
  • We have observed an upward trend in the yield on Nigerian Treasury Bills (NTBs) to attract more foreign inflows into Nigeria. The current yields on the NTBs should also attract more foreign investors and reduce capital flight as foreign investors’ rollover their maturing NTB investments
  • FSDH Research notes that most share prices are in oversold positions and these stocks may soon start to attract domestic bargain-hunting investors

 

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