Analysts Foresee Intensified Excess Liquidity Mop Up

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Obinna Chima
The Central Bank of Nigeria (CBN) is expected to be more aggressive in mopping up excess liquidity in the money market in order to manage exchange rate pressure in 2019, analysts at CSL Stockbrokers Limited have predicted.

The firm stated this in a report on its 2019 macroeconomic outlook obtained by THISDAY.
It also anticipated that the federal government would borrow at the long end of the fixed income securities curve to finance its budget deficit.
This is expected to result in an upward shift of the entire yield curve.

Owing to this, the firm recommended that domestic investors be active in the short-end of the market and their keep their exposure in treasury bills, while looking to add foreign currency exposure or add assets that have a natural hedge.
“Nigeria is no longer included in key global local currency bond market indices, thus there are no forced buyers of naira denominated government debt. To the opportunistic fixed income International investor, we believe that 2019 will offer similar rewards as 2018.

“Although the risk adjusted returns (taking into account FX volatility) may be difficult to match since the naira remained relatively stable in 2018, the fundamentals of the carry trade are unlikely to disappear, in our view.
“The simplest option for benchmarked investors is to have a market-weight allocation. A decision to go overweight will depend on relative value considerations with other emerging market countries.

“At the moment with the impending election, global economic uncertainty and political ‘noise’ (in Democratic Republic of Congo, Gabon, Sudan) coming out of Africa, we would recommend a market- weight allocation in foreign currency,” it stated.
However, for investors in Nigerian Eurobonds, it recommended that they look to move “overweight if Nigerian Eurobonds witness a sell-off as Nigeria’s track record of honouring its external debt obligations is good.”

The Monetary Policy Committee (MPC) of the CBN maintained a tight stance through 2018.
This was in tandem with further tightening of financial conditions in the United States by the US Federal Reserve Bank. Committee members felt the need to maintain the country’s attractiveness to foreign investors in a bid to sustain the inflow of foreign exchange.
Hence, the Monetary Policy Rate (MPR) was left unchanged at 14 per cent. Inflationary pressures also eased more aggressively in the first half of the year on lower food price pressures.

Inflation however remained sticky at 11 per cent in the second half of 2018 as food price pressures intensified.
“Slowing inflation had a beneficial impact on Nigeria’s real interest rate as it turned positive with the slowing in inflation. As at November 2018, Nigeria’s real interest rate stood at 2.44 per cent, from -1.19 per cent recorded at the end of 2017 and was higher than a real interest rate of 0.05 per cent recorded in the US.

“In the year ahead, we are of the opinion that the risks to monetary policy and inflation are skewed to the upside. With the US Fed poised to raise their benchmark interest rate at least twice in 2019, we anticipate foreign capital outflows could intensify.
“In addition, the uncertainty surrounding the 2019 elections could deter further foreign investment as foreign investors take cover in higher-yielding, less risky investment securities in the US.

“On the back of this, the MPC might be compelled to raise the MPR in a bid to stem the outflow of foreign capital,” the report added.
The firm envisaged a steep increase in inflation to a range of between 15-20 per cent at year-end 2019, even though it expected inflation to remain at current levels till after elections.

“We expect inflation to accelerate post-elections as the new government ramps up spending. Also, we expect a further depreciation of the naira which can result in a spike in the cost of imported items and feed into consumer prices,” it also projected.
Global food prices could come under upward pressure due to climate change especially as 2019, according to the UN meteorological agency, is likely to be an El-Nino year.

Developing countries that are dependent upon agriculture and fishing are usually most affected. In previous years, in response to poor harvest, countries banned exports of grains leading to a sharp rise in food prices.
“This could pass through to consumer prices in the domestic economy and intensify inflation. Oil price sustained its recovery earlier in the year before slipping to bear market territory in the fourth quarter 2018.

“Brent prices topped US$80/bbl for the first time since 2014 and supply disruptions in Venezuela, Libya, Canada, Angola, Nigeria and Iran sent panic signals to the oil market which resulted in an exaggerated run-up in prices. Prices also rallied on the threat of Hurricane Florence and its potential impact on oil infrastructure in the US,” it added