Analysts Predict Monetary Policy Easing

• Analysts Predict Monetary Policy Easing

Analysts at WSTC Financial Services Limited in its 2018 forecast has predicted a 200 basis point (bps) reduction in the Monetary Policy Rate(MPR). The firm stated this in its 2018 projection titled: “Nigeria in 2018, A tale of two halves”.

The Lead Analyst, WSTC, Mr. Olutola Oni noted that “monetary easing is now a matter of when, not if.”

The report added: “We expect the CBN to adopt a dovish stance in 2018, although this should bear some implications on inflation and capital flows.

“The CBN will witness renewed pressure to complement the economic growth agenda of fiscal policies ahead of February 2019.

“The ongoing sovereign debt portfolio restructuring will enable the CBN mop up excess liquidity at lower cost .We expect a 200bps reduction in MPR in 2018, with the first rate cut in March or May.

“However, considerations about ensuring positive real-returns and stability in the FX market should ultimately place a floor on monetary easing and yield compression.”

The firm also anticipated stability in the foreign exchange market, stating that there were few incentives for the harmonisation of rates across various forex market segments in 2018.

It noted that increased exchange rate exposure, resulting from the FGN’s debt substitution strategy, would be an additional reason to avoid convergence of rates in the year.

“Inflows from oil earnings and proceeds of external borrowings will further prop-up external reserves in first half 2018. We expect a slowdown of inflows in the second half of 2018 as election-related uncertainty kicks in.

“However, both the MPC and the Presidency will favour forex stability ahead of the February 2019 general elections, hence, we reckon that FX rates will be managed across the different market segments,” it added.

Commenting on its outlook for the stock market, the report stated: “The equities market is expected to be driven by liquidity in the forex market, improving economic activities, impressive corporate performance and softer yields on fixed income securities in first half 2018. FMCG, Industrial Goods, Banking, Construction, and Upstream Oil & Gas are poised to benefit most.”

Continuing, it stated that regulation constitutes a key risk to the downstream oil and gas industry.

“We expect a modest contraction in net interest margin in the banking industry in the first half of 2018. Also, high oil prices, easier access to forex and improving economic activities should strengthen asset quality and enhance modest credit growth. Healthier consumer spending will be supported by declining inflation & election- induced public spending.

“The performance of the Consumer Goods & the Industrial Goods sectors will be driven by stable product prices, healthier sales volume, lower debt burden, lower borrowing cost & improved forex liquidity.

“Stability in forex and declining inflation are expected to support lower input and operating costs. Thus, we expect healthier margins from companies in these sectors.

“However, we reckon that a resurgence of tighter liquidity in the forex market and heightened election-related uncertainties in the year may dampen overall market performance in H2 2018.”

Furthermore on oil outputs, it added: “Crude oil started off in 2018 with a multi-year high of $67 per barrel, boosted by supply disruptions, record level of compliance among OPEC members (and some other major non-OPEC producers) to the ongoing production cut agreement and strong global demand.”

“With the ongoing alignment between OPEC and non-OPEC members, the odds are stacked in support of favourable oil prices in 2018. Heightened geo-political risks in the Middle East may further unsettle market disequilibrium for longer in 2018.”

“On the domestic scene, we believe that the FGN will be more inclined to managing the demands of militants in the creeks. Hence, we expect a more stable production and evacuation of crude oil from the Niger Delta,” it added.