Pre-MPC September 2021: The Doves Likely to Prevail Despite External Imbalances

September 14, 2021/Cordros Report

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The Monetary Policy Committee (MPC) is expected to hold its penultimate meeting of the year on the 16th and 17th of September 2021. We expect the Committee to examine developments in the global and domestic macroeconomic landscape and provide forward guidance on when the overarching objective of price and exchange rate stability will trump its current pro-growth goal. 

Base Effects to Keep Economy on Growth Trajectory

The Nigerian economy sustained its expansion as base effects propelled domestic economic activities to grow by 5.01% y/y in Q2-21 (Q1-21: +0.51% y/y), marking the third consecutive quarter of growth since the pandemic-induced recession in Q3-20. However, the growth was not broad-based as it was largely concentrated in the Trade (+22.49% y/y vs Q1-21: -2.43% y/y), ICT (+5.55% y/y vs Q1-21: +6.47% y/y) and Utilities (+78.16% y/y vs Q1-21: +8.66% y/y) sub-sectors which contributed 3.21ppts, 0.99ppts and 0.37ppts, respectively to the 5.01% y/y growth recorded during the period. Meanwhile, growth in the Agriculture sector (+1.30% y/y vs Q1-21: +2.28% y/y) slowed to the lowest since Q2-18 (+1.19% y/y) as persistent security challenges and seasonality effect outweighed the impact of government fiat-led intervention to the sector. 

Overall, we expect the economy to grow by 3.76% y/y in Q3-21 (Q2-21: +5.01% y/y), primarily driven by the favourable base effect from the prior year. Consequently, we believe the Committee would be cautious with the growth outlook given that the Q3-21 GDP figures like the Q2-21 numbers would be flattered by a favourable base effect from the prior year. Besides, the growth is still uneven, even as the domestic economy remains vulnerable to external shocks. Therefore, we believe the fragile recovery process would induce the Committee to favour standing pat on its monetary policy decisions.

Base Effects to Underpin Moderation in Inflation Over the Short Term

The headline inflation moderated for the fourth consecutive month to 17.38% y/y in July (June: 17.75%), driven mainly by the sustained deceleration in the food basket amidst a favourable base effect from the prior year. Specifically, food inflation moderated by 80bps to 21.03% y/y in July as the impact of green harvest in the country’s southern parts outweighed the lean season in the Northern region. Meanwhile, the core basket was up by 63bps to 13.72% y/y on account of price pressure witnessed across all the sub-baskets safe for the Health (-7bps) and Processed food (-66bps) sub-baskets.

We expect the Committee to reiterate that the sustained moderation in inflationary pressures is due to the CBN’s intervention to boost output in the critical sectors of the economy. Given the slowdown in the Agricultural sector’s output in Q2-21, we expect the Committee to reiterate the need for the Federal Government to step up its fight against insecurity and improve critical infrastructure to make the business environment more conducive. Against this backdrop, we believe the Committee will feel the need to maintain its monetary policy stance to allow its interventions to continue to support recovery in economic activities. 

Exchange Rate Stables at IEW but Goes Wild at the Parallel Market

Since the last policy meeting in July, the Investors and Exporters Window (IEW) exchange rate has depreciated marginally by 0.3% to NGN412.75/USD as of 13th September. At the same time, the parallel market exchange rate has depreciated by 9.3%, with a YTD depreciation of 15.6%. Recall that the CBN Governor announced the discontinuation of the sale of FX to the BDCs at the July meeting, given their rent-seeking behaviour. Since then, the parallel market exchange rate has depreciated to NGN557.00/USD as of the time of writing from NGN505.00/USD on 27th July (when the announcement was made). We note that the gross FX reserve has increased by USD1.53 billion (+4.6%) since the last policy meeting to USD34.86 billion as of 10th September 2021. The increase is tied to the IMF’s disbursement of Special Drawings Rights (SDR) worth USD3.35 billion to the country. However, the gross FX reserve is yet to capture the total amount, given that it is calculated based on a 30-day moving average.

Accordingly, we expect the gross FX reserve to sit at USD36.52 billion by 30th September, when we expect the SDR to have fully reflected in the FX reserve. In addition, we expect the Eurobond issuance (USD3.00 billion) in October to further support the FX reserve accretion over the short-to-medium term. Accordingly, we expect the currency to remain relatively range-bound (NGN410.00/USD – NGN415.00/USD) at the IEW.

Global Central Banks have Signalled Tapering Asset Purchases

The Governing Council of the European Central Bank (ECB) has already guided that the pace of monthly asset purchases will moderate, albeit the Council did not provide further details on the tapering schedule. For us, the reluctance of the Council suggests that uncertainty regarding the evolution of the pandemic could mean that early reduction of asset purchases may undermine the progress made in supporting economic recovery and pushing inflation higher. As such, we think the Council will continue to assess incoming data in the short term and provide factual information on the timing of the complete withdrawal of the pandemic-induced stimulus package at the December meeting. Similarly, we believe concerns over rising infection rates in the United States and the weak job market data in August will likely make the Federal Reserve kick back providing a timeline on winding down its asset purchases at its September meeting slated for 20th and 21st.

Overall, we believe the Committee will strike a neutral tone on the global economy’s health, and the attendant impact of reduced monetary stimulus on capital flows into emerging markets and exchange rate pressures.  

MPC to Maintain Accommodative Stance but Soften Dovish Tone

All in, we expect the Committee to maintain the status quo on all monetary policy parameters at this meeting. However, we expect the Committee to soft-pedal its dovish tone in the light of mounting external sector pressures amidst risk factors that could reverse the downtrend in inflation.     


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