Inflationary Pressure Expected to Ease Further

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MARKET INDICATOR

By Obinna Chima

Analysts at the FSDH Merchant Bank Limited have projected that the year-on-year inflation rate will drop marginally to 15.91 per cent in October 2017, from the 15.98 per cent reported in September 2017.

The expected marginal decline in the inflation rate was premised on slower increase in the food and non-food divisions, compared with the previous month.

Based on the data release calendar on the website of the National Bureau of Statistics (NBS), the bureau is expected to release the inflation rate for October 2017 on November 18, 2017.
The monthly Food Price Index (FPI) that the Food and Agriculture Organisation (FAO) released recently showed that the Index averaged 176.4 points, 1.26 per cent lower than the revised value for September 2017, but 2.45 per cent higher than the October 2016 figure. According to the FAO, all categories of commodities used in the calculation of the Index dropped in value with the exception of cereal.
The FAO Dairy Index fell by 4.19 per cent from September 2017 as the prices of butter, skim milk powder (SMP) and whole milk powder (WMP) eased in October.

Also, analysis by FSDH Merchant Bank indicated that the value of the naira depreciated on the interbank market, while it appreciated on the parallel market.
Precisely, the naira lost by 0.02 per cent on the interbank market to close at US$/N305.80 while it gained 0.83 per cent on the parallel market to close at US$/N362.50 at the end of October.
“The naira appreciation in the parallel market and the drop in the prices of food at the international market led to a drop in the prices of some consumer goods in Nigeria.
“The prices of most of the food items we monitored in October 2017 moderated downwards, while a few items recorded price appreciation.
“The movement in the prices of food items during the month resulted in 0.85 per cent increase in our Food and Non-Alcoholic Index to 256 points.

“Our Food and Non-Alcoholic Index increased by 20.24% from 212.90 points in October 2016. We also noticed increase in the prices of Housing, Water, Electricity, Gas & Other Fuels divisions between September 2017 and October 2017,” the bank stated.
Furthermore, it revealed in a report that itmodel indicated that the general price movement in the consumer goods and services in October 2017 increased the Composite Consumer Price Index (CCPI) to 243.04 points, representing a month-on-month increase of 0.77 per cent.
“We estimate that the increase in the CCPI in October 2017 would produce an inflation rate of 15.91 per cent marginally lower than the 15.98 per cent recorded in September 2017,” it added.

Forex Market
In line with its foreign exchange policy, the Central Bank of Nigeria (CBN) injected US$195 million into the interbank forex market last Tuesday, to maintain stability in the naira’s exchange value.
Accordingly, the interbank rate appreciated from N359.49/US$1 last Monday to N355.85/US$1 by midweek.
However, a report by Afrinvest West Africa Limited showed that the rally was reversed on Thursday as the naira closed at N360.40/$1, the same value it closed last Friday. This represented a nine-kobo week-on-week deprecation. Similarly, the official rate traded within a tight band, marginally depreciating 15 kobo to N305.90/$1 from last week’s close of N305.75/$1.
In continuance of recent trend in the parallel market, the naira traded flat at N363/$1 all through last week.
At the I&E Window, the NAFEX rate pulled back losses on Monday (down eight basis points to N360.61/$1) and Tuesday (down six basis points to N360.83/$1) to close the week at N360.57/$1, implying a seven basis pointsloss week-on-week.
Moreover, despite primary market auctions held last week, activity level in the I&E Window weakened relative to previous weak as total turnover fell to $680 million, relative to $750.8 recorded the preceding week.
In the FMDQ OTC futures market, the total value of open contracts of the Naira settled OTC futures for the 12 instruments on the calendar stood at $2.9 billion as atlast Thursday, from $3 billion the previous week.
On the back of the rally in oil prices and re-balancing of FGN debt in favour of external borrowings, Afrinvest expects theexternal reserves to continue to accumulate in the near term.
“As such, we expect the CBN to sustain frequency of interventions and the naira to continue to trade within a tight band at all segments of the forex market in the near term,” the report added.

Money Market Outlook

Last week, interbank rates trended lower on the first four trading days due to improved system liquidity attributable to Retail Secondary Market Intervention Sales (SMIS) refund, open market operations (OMO) and treasury bills maturity, which offset OMO mop-ups by the central bank.
However, interbank rates spiked on Friday as banks provisioned for SMIS auction.Hence, the open buy back (OBB) andovernight rates rose to 36.3 per cent and 39.4 per cent, up 20.5 per cent and 20.6per cent, week-on-week respectively.
Also, sentiment in the treasury bills market stayed bullish due to improvement in system liquidity during the week. Hence, average yield on benchmark bills declined 38 basis points week-on-week to 17.5 per cent.
There was a treasury bills auction last Wednesday, where-in investors continued to aggressively bid for longer dated bills although rates were barely changed relative to the last auction.
“In the coming week, an OMO maturity of N233.8 billion is scheduled to hit the system and we expect rates to remain around similar levels despite continued OMO mop ups by the CBN,” the report added.

Bonds Market Review
The domestic sovereign bonds market traded slightly bullish in the week with average yield moderating 0.2 per cent week-on-week as investors’ appetite for long dated instruments stayed strong though more activities remained noticeable at the shorter end of the bond yield curve.
Average bond yield opened the week flattish after closing at 15.3 per cent on Monday, (from 15.3 per cent close the previous week) and remained stable at that level for Tuesday.
By mid-week however, average yield moderated by 14 basis points to settle at 15.2 per cent following positive sentiment towards short and medium dated instruments though average yield on long dated bonds traded flat.

The bullish sentiment was sustained into Thursday as average yield further declined by three basis points and eventually closed on Friday within the positive territory as it settled at 15.2 per cent.
“Whilst we have noticed improved investor attraction for bond securities since the central bank started guiding towards a moderation in short term T-bills and OMO rates, we somewhat attribute the rather bullish investor sentiment on bonds to increased confidence in the credit status of the Federal Government of Nigeria following the slight rally in crude oil prices during the week (Brent crude price traded 1.3% higher week-on-week to close at US$60.92/b),”Afrinvest added.
Nigerian Eurobonds yields on average moderated 15 basis points week-on-week to settle at 4.8 per cent with all the bonds currently trading at premium to par value.
The Kenyan, Zambian and the Nigerian Eurobonds remained the best performingyear-to-date with 10.5 per cent, 9.7 per cent and 8.4 per cent respectively.

Opposition to FG’s Reform

The Minister of Finance, Mrs. Kemi Adeosun last week stated that ongoing efforts by the federal government to institute reforms in the economy have continued to be resisted by those she described as “vested interests within and outside the system.” But the minister maintained that the government would not be deterred, insisting that the reforms would continue.
She said: “But we are not fazed. The work of reform goes on. It is, to borrow from the Nigerian novelist, Chinua Achebe, morning yet on Creation Day. Not very long from now, Nigerians and the world will look back on this recession we have just emerged from, and realise that it was the turning point in Nigeria’s journey to true growth and greatness.
“Let me point out that the most important elements of any reform effort tend to be the least flamboyant. We are confident that in the months and years ahead, Nigerians and the world will see the full impact of the foundational resetting that the Buhari administration has been focused on since 2015.”
She pointed out that since mid-2014, when the price of crude oil fell dramatically, the country’s finances became challenged.

Banking Sector Recapitalisation
Following the intense weakening of Nigeria’s macroeconomic environment, resulting in the deterioration of asset quality and rise in non-performing loans (NPLs) in the banking industry, the International Monetary Fund (IMF) has advised the Central Bank of Nigeria (CBN) to consider asking the country’s lenders to recapitalise.
The Senior Resident Representative and Mission Chief for Nigeria, African Department, IMF, Mr. Amine Mati, gave this advice while presenting a paper in Nigeria. Mati stressed the need for the banks to remain strong so that they would be able to play their roles in the economy.
He explained: “We believe the banking sector should be strong to support the economy. So, it is important we recapitalise the banks to make sure that they are very strong.

“The regulators should try to make sure that the banks operate in line with international standards to be able to withstand any shocks.”
He, however, endorsed the CBN’s tight monetary policy stance, saying it had helped in gradually easing inflationary pressure and brought about exchange rate stability.
But he urged the central bank to continue in its pursuit of a unified exchange rate, just as he acknowledged efforts that had been made by the CBN in eliminating pressure in the forex market.
He noted that the country exited the recession in the second quarter of the year, driven by improvements in the oil and agriculture sectors.