The one-track mind of policymakers
· Ineffective monetary tools for the job: The CBN and the MPC are not inclined to use the tools at their disposal to counter the recession and the spike in m/m headline inflation. They suggest, and we sympathise with their thinking, that the causes of these macro ills are beyond their influence.
In layman’s language, they did not create the mess and are not responsible for clearing it up. The MPC has not altered its stance this year and we do not expect any change until next year.
· Gentle easing in 2018: We see lower inflation in 2018 on the easing of the supply-side constraints and modest rate cuts totaling 100bps from the MPC in response.
· A bold experiment but unlikely to succeed: Policymakers are focused on fx, and little else. They have identified inflows from the offshore portfolio community as the fastest route to tackling fx shortages and come up with NAFEX alongside the several other windows. Promising early signs have taken some of the pressure off the CBN.
However, we doubt that this new window will generate the autonomous inflows to allow the CBN to take a step back. It cannot sustain the pace of its fx interventions indefinitely. An adjustment (devaluation) beckons.
· Limits to the budget expansion: The new 2017 budget is expansionary but not hugely when we allow for inflation and its size in relation to GDP. The DMO has already raised 60% of its funding target for the year. We are also confident that, if revenue collection underperforms (as it will this year), the FGN will rein back its spending plans rather than let the budget deficit soar.
· Scope for a little bond yield narrowing: These supply and fiscal factors, together with the solid bid from the PFAs, point to a gentle narrowing of FGN bond yields over the next quarter. We therefore see the yields within a range of 15.75% to 16.25%. If somehow NAFEX was to take off, we would be telling an aggressive buy story.