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Nigeria I Economics I January 2014


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Ahead of MPC Meeting January 2014 | 11 Pages

MPR to remain at 12%
but with need for more regulatory oversight








International Economic Developments
Global economy on the uptick
The global economy ended 2013 on a positive note with the euro zone growing
for the first time since 2011, albeit marginally. The US grew 2%, Japan (3%),
China (7.9%) and the UK (2.4%) in 2013.
The euro zone economy grew by 0.3% YoY in Q2:2013 but slowed to 0.1% in Q3 with
expectation of 0.3% and 0.4% growth in Q4:2013 and Q1:2014 respectively. Estimated
inflation rate for the euro zone is about 1.5% in Q4:2013, and is expected to moderate
to 1.4% by Q1 of 2014. The US economy is expected to continue growing at an
average of 2.2% with analysts putting Q4:2013 figure at 2.0% and 2.4% expectation for
Q1:2014. The FOMC is expected to reduce the USD75bn monthly Bond buyback
further at its next meeting but the impact is expected to be minimal as the global
economy seems to be more prepared for the tapering measure.
China is expected to grow by 7.9% in Q4:2013 up 0.2% from the previous quarter with
an expectation of 8.0% for Q1:2014. The Japanese economy expanded by 3.0% in
Q3:2013 and is expected to further gain traction in 2014.The inflation rate edged
higher to 1.1% in Q4:2013, up 0.4% from Q3:2013. However, it is expected to subside
to 0.9% by Q1:2014.
Considering the development above and their implication on potential fund flow,
there appears to be no major impetus to alter MPR in the Monday meeting.

The Monetary Policy Committee will be meeting on the 20
th
- 21
st
January, 2014 to
deliberate and take key monetary policy decisions. We analyze international
economic developments, domestic economic and financial developments, monetary,
credit & financial market developments and external sector developments. On a
balance of factors, our analysis suggests that the Committee will keep MPR constant
at 12%. In addition, we are of the opinion that there should be more regulatory
oversight on Islamic Banks in relation to their Financing To Deposit (FTD),
commercial banks compliance with Minimum Interest Rate on Savings (MIRS) and
BDCs foreign exchange activities.

Nigeria | Economics | Monetary
See page 11 for Analysts Certification and Disclaimer

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Nigeria I Economics I January 2014
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-10%
-5%
0%
5%
10%
15%
2008 09 10 11 12 13e 14f
Nigeria
Russia
Brazil
India
China
S/Africa
7%
9%
11%
13%
15%
2009 10 11 12 13 14f
Macroeconomics Updates
Domestic economy: More growth on the horizon
The Nigerian economy is estimated to have expanded by c.6.5% in 2013 (vs.
6.6% growth in 2012) and forecast to grow by 6.650.2% in 2014. This expected
growth is to be driven largely by increased consumer and government spending,
rising investment across priority sectors such as agriculture, power and
infrastructure, and improved net export position fuelled by governments
import substitution drive. Decline in oil production in 2013 adversely affected
the realized economic growth and efforts will need to be geared towards
improving production levels to realize the projected 2014 growth rate.
Inflation: Tamed but with upside risks on the horizon
Consumer price inflation remained moderate all through 2013 following
tightening measures by the CBN which resulted in an average inflation rate of
8.49%. Headline inflation fell to 7.8% in October, the lowest in 2013. However,
due to increasing food prices, it rose to 8.0% in December. We expect inflation
to remain contained in the first half of 2014. However, there are potential
upside risks to price stability in the second half of 2014 that suggests the need
for continued tightening measures in order to tame it within the single digit
band. There appears no justification to hike MPR in the coming MPC meeting
on the basis of inflation outlook.











Chart 1: Nigerias Economic Growth Performance Relative to BRICS (2011-2013) Nigeria Inflation (Actual and Outlook)

Sources: World Bank, IMF CBN, Meristem Research

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Monetary, Credit and Financial Market Developments
Money Suppy: Rising but below provisional benchmark
Broad money supply (M2) contracted by c.5% in November 2013 compared to
the level as at December 2012 resulting in an annualized decline of 5.2%. Albeit,
it marginally inched up by 1% over end-October levels due to a 4% rise in time
and savings deposit which was partly offset by a 1% drop in narrow money.
From another perspective, developments in money supply reflected lower Net
Foreign Assets (-2%) but increased Net Domestic Asset (7%) relative to October
levels. The lower NFA was shared broadly across all holders from Monetary
Authorities (CBN and FMF) to banks (Deposits Money Banks, Merchant banks
and Non-interest banks). The NGN421billion addition to NDA was driven by
NGN465bn net addition to the stock of domestic credit being slightly offset by
increased deficit on other domestic assets. Net domestic credit (NDC) expanded
by 4% and 3.4% Month on Month in October and November respectively to peg
annualized growth at 12%, which, though higher than 9% as at the last MPC
meeting, underperforms the 2013 provisional benchmark of 23%.
Islamic Banks: FTD trending down but still above 100%
While NDC by conventional banks grew 9% from December 2012 to November
2013, financing by Islamic bank recorded 3-digit growth of 263%. Furthermore,
evidence from countries with strong Islamic banking institutions suggest that
Financing To Deposit (FTD) ratios is usually in tandem with Loan To Deposit
(LTD) by conventional banks. However, the Nigerian experience appears to be
an exception with Islamic banks having 102% FTD (although down from 139% in
2012 Dec) while conventional banks have 36% LTD. Although this might be
peculiar with their early stage in the industry life cycle, the CBN will need to
further up its regulatory oversights on this segment to avert any potential crisis
due to exposure to excessive risk factors in a bid to improve their average rate
of return.







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Nigeria I Economics I January 2014
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0
5
10
15
20
2005 06 07 08 09 10 11 12 13
NGN'trn
Broad Money
0
1
2
3
4
5
2005 06 07 08 09 10 11 12 13
NGN'tn
Base Money
Currency in Circulation
Bank Reserves
0%
50%
100%
150%
200%
250%
300%
Jun-12 Oct-12 Feb-13 Jun-13 Oct-13
FTD - Islamic Banks
LTD -Conventional Banks








Money Suppy: Rising but below target
Reserve money (RM) contracted further by 1% in November compared to
October. This was as a result of a 1% and -2% changes in currency in circulation
and bank reserve. 2013 annualized growth of the RM stood at 24%. The level of
RM at the end of November fell short of the fourth quarter indicative
benchmark of NGN5tn by 11%.












Chart 3: Movement of Broad Money and Reserve money
Outlook)

Source: CBN
Chart 2: Islamic Bank FTD vs. Conventional Banks LTD
Outlook)

Source: CBN

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-1.00
-0.50
0.00
0.50
1.00
1.50
2005 06 07 08 09 10 11 12 13
MPR and Prime Lending Rate
MPR and Maximum Lending Rate
Interest Rate
Savings rate: Yet to inch up to regulatory minimum
Average savings rate of commercial banks at 2.5% is yet to match up with the
regulatory minimum of 3.6%, 30% of MPR. While some banks are willing to offer
significantly higher than the benchmark due to the need to cushion their
liquidity positions, a number of other banks groaning under reduced income
heads and higher cost are offering lower than the set benchmark. The CBN, in
an effort to grease monetary policy transmission channel and support its
policy objectives, is set to ensure higher levels of compliance by banks through
stricter regulatory oversights and this might be addressed at the upcoming
MPC meeting.
Lending rate: Not cheering even for prime borrowers
Prime lending rate hit its high for the year in November and this is not surprising
given the need to maintain a high margin in the face of increasing cost higher
savings rate, gradual phase-off of COT and cap on some lending fees and
commission among others. The prevailing risk factors facing banks do not
support a reduction in lending rates and we view them being sticky at their
current high levels. Furthermore, the 5-year rolling correlation between MPR
and prime lending rate on one hand and maximum lending rate on the other
hand stand at -0.4 and 0.66 respectively. Of striking importance is the latter
which increased from 0.03 in December 2012 to 0.66. This relationship is
stronger when viewed in a 3-year rolling correlation context.
.









0%
5%
10%
15%
20%
25%
30%
2005 06 07 08 09 10 11 12 13
Savings Rate
Prime Lending Rate of Commercial Banks
Maximum Lending Rate of Commercial Banks
MPR
Chart 4: Movements in MPR vs. other Bank rates 5-year Rolling Correlation between MPR and rates
Outlook)

Source: CBN

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8
9
10
11
12
13
21-Nov-13 5-Dec-13 19-Dec-13 2-Jan-14
OBB InterBank
Money market rates moderate
Interest rates in all segments of the money market reflected the liquidity
conditions in the banking system. OBB rates during the period recorded an
average of 10.66% (vs. 11.73% as at the last MPC) while Inter-Bank rates
recorded an average of 11.12% (vs.12.50% as at the last MPC meeting).









CRR: Any review expected?
Liquidity ratio dropped from 60% to 48% as banks re-allocated their assets to
higher yielding instruments. Although banks are still shy of creating risk assets,
the terrain is gradually improving with loan to deposit ratios at 36% in
November compared to 34% just before the increase in CRR on public sector
funds in July.
The last MPC meeting for 2013 recorded two votes for increase in CRR on public
sector funds from 50% to 75% and 100% respectively and this has an undertone
of reversion to the old liquidity management system of withdrawal of public
sector funds from commercial banks to the CBN. We however do not foresee
any review in CRR in the Monday meeting but there is the possibility of review
later in the year.



Chart 5: OBB and Interbank Rates (Nov 13-Jan 14)
Source: CBN

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0%
2%
4%
6%
8%
10%
12%
14%
Dec-12 Mar-13 Jun-13 Sep-13 Dec-13
Interbank rate

BDC Rate

0
2
4
6
8
10
12
14
Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13
Import Cover
WAMZ Benchmark
International Benchmark
External Sector Developments
MPC likely to consider BDC-targeted policies
From the last MPC, the Naira has remained stable against the US Dollar at the
official market. However, the BDC market has continued to trade at a significant
premium to the official rate evidenced by NGN17.28 spread over the CBN rate
from NGN13.30 on the 19th of November. From the last auction in December,
the premium widened at the interbank (4%), BDC (NG12%) and parallel markets
(10%) but they have all reversed to December 18 levels.
Although the BDC rate has initiated a slight correction, it might be premature
to draw an inference on its sustainability. We therefore expect the MPC to
consider policies that will catalyze the observed correction.
The CBN rates averaged NGN155.72 over the review period, opening at
NGN155.70 on the 19
th
of November and closing at NGN155.72 on the 13
th
of
January. This represented a depreciation of NGN0.02k (0.01%).
The interbank market averaged NGN159.00 over the period, opening at
NGN159.04 and closing at NGN159.65 representing a depreciation of
NGN0.61k (0.38%).
The BDC rate averaged NGN171.41 over the same review period, opening at
NGN 169.00 and closing at NGN173.00 representing a depreciation of
NGN4.00 (2.37%).












Chart 6: BDC and Interbank rates premium to official rate Reserve Adequacy
Outlook)

Source: CBN

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Reserve: Though adequate for import, needs cushioning
Nigerias external reserve has declined 0.96% to USD43.3bn as at Jan 10, 2014
(vs. USD44.8bn as at the date of the last MPC meeting). Despite the decline, the
reserves is still able to cover 9months of import, well above the WAMZ and
International benchmarks of 6 and 3 months respectively. This decline can be
attributed to the 28.7% shortfall in the Excess Crude Account to USD3.3bn as at
December 2013 at a time when crude oil prices remained above USD100/barrel.
With a significant portion of the reserves accounted for by Foreign Portfolio
Investments, a decrease in the MPR is unlikely in the face of potential capital
reversal fuelled by the on-going US Fed tapering. It is our view that the MPR be
kept at the current 12% to keep funds attracted to the Nigerian market and to
help stabilize the foreign exchange rate.
Conclusion
On a balance of factors, we are of the opinion that the MPR be retained at 12%.
However, there is also need for more regulatory oversights especially with
regards to the activities of the BDC operators, Non-Interest Banks, as well as
compliance of commercial banks to the Minimum Interest Rate on Savings
(MIRS).
It is also noteworthy that the tenure of 5 of the 12 members of the MPC will
expire this year and the re-composition has a strong bearing on policy direction.












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0
5
10
15
20
25
2008 09 10 11 12 13
WAMZ Benchmark International Benchmark
Months of Import Cover



Sanusi's Tenure

Pre-
Sanusi
A Review of monetary performance











-10%
0%
10%
20%
30%
2005 06 07 08 09 10 11 12 13
Headline Inflation

Sanusi's Tenure Pre-Sanusi
110
130
150
170
190
2008 09 10 11 12 13
Official Rate Interbank BDC Parrallel Market





Sanusi's Tenure

Pre-
Sanusi
0%
10%
20%
30%
2005 06 07 08 09 10 11 12 13
Savings Rate
Prime Lending Rate of Commercial Banks
Maximum Lending Rate of Commercial Banks
MPR




Sanusi's Tenure

Pre-Sanusi
Source: CBN

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