The interbank market liquidity average in the last month was a deficit of over N390 billion. Last week, the deficit was an average of N600 billion, evidence of the aggressive, tightened stance the CBN has taken to curb inflation. Despite all efforts, the Naira, to the astonishment of many, weakened against the greenback to trade as high as $/N1,650 at the NAFEM window; however, the CBN intervened actively in the interbank market and sold to BDCs at the end of the week. Street markets reportedly closed at $/N1,560 on Friday, while the NAFEM closed at $/N1,596.92.
As the MPC meeting and FGN Bond auction take the center-stage today, the investment community continues to analyze Nigeria’s debt management strategy in view of recent signals of prudence, cost reduction, and fiscal alignment to achieve the set Renewed Hope objectives.
Foreign Exchange
Last week, the FX market witnessed a scare, resulting from a lack of supply to BDCs (further to efforts by the CBN to sanitize the segment) and an uptick in seasonal demand at the start of summer. Earlier this year, in a bid to sanitize the BDC space, the CBN revoked a total of 4,173 licenses. In our opinion, with consistent intervention to boost supply, the Naira will stabilize and trend lower.
Fixed Income
The Treasury Bill and Bond markets were both bearish this week as numerous stakeholders sought to exit positions and short-sell in anticipation of higher yields to come. Trades were largely targeted ahead of the bond auction and MPC meeting.
There is a contrary view in the market that yields may not actually inch up further based on the recent views espoused by the World Bank and some notable industrialists to the effect that monetary policy tightening may not necessarily rein inflation. The reduced volumes offered by the DMO for the entire 3rd Quarter are somewhat reflective of a limited appetite to borrow at present climbing yields. It is not impossible that long dated yields are currently peaking.
MPC Musings
The 4th Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria for the year 2024 is scheduled to commence today. So far, the MPR has been hiked by 750bps this year, and the fundamental question in financial circles is: To what extent can monetary policy measures alone curtail inflation, and at what cost?
Despite expectations that tight market liquidity conditions and, consequently, elevated interest rates would yield the desired results, inflation inched up from 33.95% in May 2024 to 34.19% in June 2024.
Analysts have relied on the CBN Macroeconomic Outlook for 2024 to adduce that until inflation eases, the CBN will continue to hike interest rates. Our interpretation of this stance is certainly more cautious considering the fact that the document was published in March 2024, and since then, Nigeria’s external reserve position has grown from $33.8 billion at the time of publication to $35.9 billion as at July 18th, 2024.
In our opinion, it would be ideal to maintain the present tightened monetary policy stance to allow for fiscal alignment and stabilization factors to kick in. After all, the accelerated inflation in Nigeria can easily be attributed to factors beyond exclusive monetary policy scope. Factors such as corruption, insecurity, importation culture and overall low productivity, amongst others, very well contribute to the inflationary trend. Further tightening the MPC’s stance may have more demerits than merits.
While jacking up interest rates has been adopted globally as a pragmatic option for tackling inflation across various countries, the peculiarity of Nigeria’s economy is somewhat reflective of the need for more fiscal alignment and necessary structural adjustments.
Hiking the Monetary Policy Rate (MPR) any further may have several drawbacks, which can impact various sectors of the economy and the country’s overall economic health. Here are some key demerits:
A higher interest regime will inevitably dash hopes for economic growth as most businesses will struggle with the resulting illiquidity, which would reduce the availability of credit. This can hinder entrepreneurship and economic dynamism.
Higher borrowing costs imply an increase in the risk of loan defaults, particularly among highly leveraged businesses and individuals. This can lead to higher Non-Performing Loans (NPLs) in the banking sector and potential financial instability.
Higher interest rates increase the cost of servicing government debt, putting additional pressure on the national budget. This can lead to higher deficits and potential cuts in public spending on essential services.
Companies with significant debt burdens will face higher interest expenses, which in turn will reduce profitability and limit their ability to invest in growth opportunities. This can negatively affect corporate earnings and stock markets.
With Brent closing at $85.03 the previous week, it opened at $85.10 last week, reflecting a slight increase. On the other hand, WTI Crude Oil closed at $81.02 but opened at $80.96, recording a slight decrease.
Oil prices settled on Friday at their lowest level since mid-June as investors eyed a possible ceasefire in Gaza, while a strengthened dollar drove values down further.
U.S. Secretary of State, Antony Blinken, said a long-sought ceasefire between Israel and the Palestinian militant group Hamas was within sight.
The war in Gaza has led investors to price in a risk premium when trading oil, as tensions threaten global supplies.
If a ceasefire is reached, the Iran-backed Houthi rebels could ease their attacks on commercial vessels in the Red Sea, since the group declared the attacks in support of Hamas.
Seeing that Bitcoin traded as low as $54,320.0 in the week before last, it was impressive to see it rise as high as $67,390.4 last week. The lowest it traded was still above the $60,000 threshold.
In other news, Australian computer scientist Craig Wright, widely known for claiming to be Satoshi Nakamoto, has been compelled to update his personal website’s homepage with a legal notice. This notice, mandated to remain visible for six months, explicitly states that Wright is not the inventor of Bitcoin. It reveals that Wright made extensive false claims in court, asserting his identity as Satoshi Nakamoto and fabricating documents of a significant scale to support his narrative. Describing his actions as a serious abuse of the legal systems in the United Kingdom, Norway, and the United States of America, the notice provides a link to the full judgment and an appendix detailing the forged documents attributed to Wright.
As part of the ongoing case brought by the Crypto Open Patent Alliance (COPA) against Craig Wright, the dissemination order issued by United Kingdom’s Judge, Justice James Mellor, represents a significant legal development in the contentious debate over Bitcoin’s origins. COPA, backed by influential figures such as Jack Dorsey of Block and Coinbase, alongside entities like Human Rights Watch, initiated the lawsuit in 2021 seeking a definitive ruling that Wright is not Satoshi Nakamoto. This legal manoeuvre aimed to thwart Wright from claiming ownership of the Bitcoin whitepaper and using legal threats against developers and critics under the guise of being Bitcoin’s creator.
Earlier this year, Justice Mellor ruled decisively against Wright, affirming that he did not create Bitcoin. In subsequent written judgments, Mellor denounced Wright for falsehoods and the fabrication of evidence throughout the trial proceedings. Mellor’s final judgment went further by referring both Wright and his associate, nChain co-founder Stefan Matthews, to the United Kingdom’s Crown Prosecution Service (CPS) for potential perjury charges.
As of the latest update, Wright had yet to comply fully with the dissemination order on all specified platforms. His recent social media activity includes declarations of intent to appeal Mellor’s rulings, despite Mellor’s assertion that no formal appeal application had been submitted by Wright. This ongoing legal saga underscores the complexities and stakes involved in claims over Bitcoin’s origins, shaping both legal precedent and public perception within the cryptocurrency community and beyond.
While hiking the MPR may be necessary to control inflation, the CBN needs to carefully balance this with the potential negative impacts on economic growth, financial stability, and social equity. A more nuanced approach that combines monetary tightening with targeted fiscal policies and structural reforms may be more effective in achieving a sustainable economy. We expect the MPC to maintain all parameters at its July meeting.
Fixed income yields are likely to decline across the curve in view of FAAC inflows and coupon credits as we enter the week. There is likely to be a scramble for securities till the end of the month. The positive impact on system liquidity should also see interbank rates decline.
