The monetary policy committee (MPC) holds its latest meeting in Abuja today and tomorrow. For two successive meetings we anticipated a small rate cut but we now see another unchanged stance. The committee’s principal fears are that the expansionary fiscal policy will undermine macroeconomic stability and that, in line with trends in selected emerging markets such as Argentina and Turkey, the offshore portfolio community will exit Nigeria in increasing numbers. It does acknowledge the impressive disinflation gains this year but sees them vulnerable in the second half to the FGN’s fiscal stance.
· The headline inflation rate was 12.5% y/y at the time of the last MPC meeting. It has since slowed further to 11.6% in May, and we forecast a further reduction to 10.8% in the report for June that should be released very shortly.
· The positive base effects fade after June, and a pick-up in inflation in H2 2018 is widely anticipated. Our own forecast for December remains 12.1% y/y. Most other analysts and the IMF see a higher rate.
· This pick-up is largely based upon the FGN’s fiscal policy. The MPC cited the 2018 budget (since signed off), the release of funds for outstanding capital items under the 2017 budget, the bunching of spending in view of the electoral calendar, rising FAAC distributions and proposals for a substantial rise in the national minimum wage.
· The 2018 budget is expansionary but in our view, based upon its highly ambitious revenue assumptions, it is most unlikely that the projected spending will be executed in full. FAAC distributions have come to a temporary halt due to stalled negotiations between the parties involved but will obviously resume.
· The minimum wage is a far greater concern. Organized labour is looking for a more than threefold increase on the current N18,000 per month. Some compromise is to be expected and the increase may be staggered. That said, the rise approved by the National Assembly before the 2011 elections destabilized the macroeconomy, not least by boosting recurrent spending by the FGN and therefore the required oil revenues to cover the additional costs. Put differently, it added to the vulnerability of a non-diversified economy.
· Offshore investors have different remits and different investment criteria. We would be surprised by a mass exit in the current oil price environment. We also still feel that such investors would generally exit markets with weak external balance sheets such as Turkey and South Africa long before Nigeria.
· In May the committee considered all three options: indeed one member voted for a modest rate hike. There is still the possibility of a rate cut before year-end if the committee’s fears about the consequences of an expansionary fiscal policy and about a substantial exit by offshore investors are not borne out. We have to acknowledge that prospects of such a cut are fading fast.