Slow growth worries analysts as MPC eases CRR with N780bn

by _ John Omachonu, Hope Moses-Ashike & Onyinye Nwachukwu

Analysts yesterday expressed concerns over the slow growth of the economy, saying that the N780 billion released to the banking sector, courtesy of the reduction of CRR to 25 percent by the Monetary Policy Committee (MPC) might be redirected to investments in fixed income instruments.

This will subsequently deny the economy the much needed funds for which the Central Bank of Nigeria (CBN) on Tuesday reduced the Cash reserve Requirement (CRR), which is the minimum fraction of the total deposits of customers, which banks have to hold as reserves, either in cash or as deposits with the CBN, to 25 percent from 31 percent.

But Central Bank governor, Godwin Emefiele  has charged banks to invest in critical sectors such as agriculture and manufacturing for the much needed growth.

The MPC on Tuesday unanimously left the Monetary Policy Rate unchanged at 13%+/- 200 basis points around the symmetric corridor but with a 7 to 3 vote, reduced Cash Reserve Requirement (CRR) from 31 per cent to 25 percent to reflate banking sector liquidity.

Emefiele, said while announcing the outcome of the Committee meeting in Abuja that Nigeria’s overall macroeconomic environment remained fragile, and painted a gloomy picture of the economy possibly sliding into recession by 2016 if appropriate steps were not urgently taken

Analysts at Rennaisance Capital (Rencap) said, “  We think the CBN has simply restored system liquidity levels to where they were pre-TSA debits, by releasing to the banks, the naira equivalent of what moved to the TSA (Naira + FX). This is positive for the banks because there were significantly more FX TSA debits than naira last week; which implies that more naira earning assets should be supportive of asset yields, near term.

“Further, banks with more naira than FX deposits should be proportionately bigger beneficiaries from today’s CRR ease – within our universe, Fidelity, Diamond, FBNH and Skye rank tops, but FCMB, Zenith and GTBank are not that far behind.

“N570bn is the latest figure we have for federal FX deposits in the banking system pre TSA. The net naira TSA debit was NGN238bn. Twenty-five percent CRR should release about NGN780bn to the banking system, which we read to mean federal FX TSA withdrawals last week was NGN542bn.‎

A core reason attributed to the CRR ease was the MPC’s desire to see the banks invest more in critical sectors such as agriculture and mining, to help drive growth and reduce unemployment. We do not see this happening near term, and think today’s decision is likely to put downward pressure on treasury yields, as banks aggressively invest the released CRR in T-Bills and bonds.”

They further argue that lowering the CRR  should improve liquidity and also help to lower funding costs near term. “While we concede treasury yields reduce near term, we do not expect the banks to re-price l‎oans that quickly, so some short term margin improvement should come through but more reflective in 4Q15,” they added.

Razia Khan, analyst with standard Chatered Bank, London said, “The key concern remains growth. With no change to current FX policy announced, it looks as though the CBN’s restrictions on FX for certain imports will remain in place, as will the absence of a properly functioning interbank FX market that allows for more price determination.

“The strategy seems to be to keep controls in place until demand adjusts to meet available FX supply.  This is a contractionary growth stance.  Demand for FX will only fall to the extent that the economy slows sufficiently.”

Speaking further, Khan said, “The CBN hopes that restrictions on imports will create the impetus for more domestic production. Nigeria has had substantial experience with similar import-substitution policies in the past.  Rarely have they succeeded in creating a vibrant, competitive industrial sector with the capability of creating the level of employment growth that Nigerian demographics otherwise demand.

“For investors, there will be some disappointment that no FX market liberalisation has been announced.  Many still see an FX adjustment as inevitable, given the absence of fiscal buffers and Nigeria’s constrained economic fundamentals.”

However, Emefiele said that Nigeria’s overall macroeconomic environment remained fragile and painted a gloomy picture of the economy possibly sliding into recession by 2016 if appropriate steps were not urgently taken.

Nigeria, Africa’s largest country by GDP, saw its economy further slow in the second quarter of the year, making it the second consecutive quarterly less-than-expected performance, mainly on account of softening oil prices.

According to the National Bureau of Statistics (NBS), real GDP grew by 2.35 per cent in the second quarter of 2015, a significant decrease when compared with the 3.96 and 6.54 per cent in the preceding quarter and corresponding period of 2014, respectively.

The Bureau projects Real GDP growth just to stabilise at 2.63 per cent in 2015, compared with the 6.22 per cent recorded in 2014.

On prices, Emefiele expressed the Committee’s concern on the rising inflationary trend, given the CBN’s already tight monetary policy stance.

Nigeria’s headline inflation edged upwards to 9.3 per cent in August, the highest in close to 30 months from 9.2 per cent July, 2015, mainly traceable to higher energy prices, delayed harvests and pass through from imports. It however noted with satisfaction the continued moderation in all measures of month-on-month inflation across all the measures.

Emefiele said that the decision was therefore in the consideration of the underlying fundamentals of the economy, particularly the declining output growth, rising unemployment, evolving international economic environment, as well as the need to properly position the economy on a sustainable growth path.

The governor noted apex bank’s concerns that growth had come under severe strains arising from declining private and public expenditures.

In particular, he noted the impact of non-payment of salaries at the state and local government levels as a key dampening factor on consumer demand. Year-on-year headline inflation continued to trend upwards, although the month-on-month measure moderated.

Demand pressure in the foreign exchange market remained significant as oil prices continued to decline.

He said arising from these developments, there were indications that some of the banking sector performance indicators could be stressed if conditions worsen further.

Specifically, he raised well acknowledged concerns that liquidity withdrawals following the implementation of the Treasury Account TSA, elongation of the tenure of state government loans, as well as loans to the oil and gas sectors could aggravate liquidity conditions in banks and impair their financial intermediation role, thus affecting economic growth, unless some actions were immediately taken to ease liquidity conditions in the markets.