Analysts see recession, negatives ahead for households, businesses

• FG‭, ‬banks to benefit from 150bps rates hike‭; ‬naira to gain strength‭, ‬cost of borrowings to rise

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ould the weak macroeconomic fundamentals, runaway inflation and the constraints of the CBN to sustain a dovish stance, due to the external dynamics in operation, bring about a recession in Nigeria?

Almost six years after the CBN (July 2016) Monetary Policy Committee (MPC) raised policy rates by 200 basis points to 14 percent, it has again raised policy rate by a high 150 basis points in line with the expectations of analysts, who have reacted to the hawkish stance of the policy committee at a time when inflation is on an uptrend, national output is on a sluggish growth, indicating that the economy is still recovering from the effect of the 2020 recession and the coronavirus pandemic.

Globally, so far up to May, 32 out of 41 countries have embarked on a monetary tightening spree despite slowing GDP growth while nine have maintained the status quo; but, there is standing along the line, the attendant implications for various sectors of the economy. While analysts have argued that the government and financial institutions will emerge the biggest winners from the event, others have warned of the impending negatives households and businesses will experience as the cost of borrowing surges, while domestic investors hang at the mercy of the unseen.

These analysts have opined that the aggressive hawkish trend globally has prompted the apex bank into the orthodox mode of policy normalisation, which is an attempt to curbing the spiralling inflation which has found comfort over the economy, while asserting that there is an anticipation that the continued hawkish undertone by global systemic central banks and increased liquidity build-up due to pre-election spending could compel the CBN to further hike the MPR before year-end.

A portfolio manager (PM) who spoke with Business A.M. also asserted that, “So, the banks would enjoy, say in the short term, but I don’t see this to be long lived. This is an economy that’s recovering, with a high-interest rate, which means a higher cost of borrowing to business and the harsh business environment, it will pressure profit margins, coupled with our dilapidated infrastructural situation, high energy cost, and high FX above N610 per dollar levels. Over time their loan books would shrink.

“Too much system liquidity in that space would still crash the rate and then we head back to square one. Also, if they are long on those fixed income securities, they would need to book losses as it is only those that have been on the short end of the curve that would enjoy this policy. And FX would not change. Activities of politicians would continue pushing FX and inflation till next year, neither would it really drive FPIs into our market considering country risk premium, and inflation won’t reduce either, because our economy doesn’t follow normal economic principles,” the PM said.

Omotola Abimbola, an analyst at Chapel Hill Denham, a Lagos-based investment bank, said, “Banks are in the money with this decision. Their stocks are expected to rise as the CBN looks set to begin the process of interest rate normalisation. Banks have seen a subdued financial performance since last year due to the low-interest rate environment which curbed their profitability. That has dampened investor sentiment towards bank stocks, causing them to underperform the market.”

For another, they opined that the ripple effect this decision would have across the board would rather see the economy more impoverished as the CBN seem to be sacrificing economic growth in pursuit of low inflation, when it is all known that the main driver of the headline inflation is more of a cost pull than demand-driven.

An economic analyst who spoke with Business A.M. said, “The continuous hawkish increases in rates, either inflation, unemployment, Repo, the interest rate for a developing country like Nigeria is always more of a curse than a blessing on the long-run effect. Countries like the USA, China, etc., are always hawkish though, but at a minimal level.

“150 basis points increase at the verge of economic recovery (post COVID-19 economic disturbance) isn’t a good one for domestic investment and business activities for Nigerians. Yes, it will be more favourable to foreign investors to hop into this, but on what ground? In an economy where insecurity and business growth are major problems, the point of economic policies has its advantages, but in the long-run effect, domestic investment or investors will still be at the mercy of the unseen. We have inflation at 16 percent, unemployment rate increasing, inflation at 8 month high, and Fitch had just revised Nigeria’s credit outlook to Negative, Nigeria factory activities have shrunk since December,” he said.

Economic analysts at Afrinvest Research, in a comment on the matter said, “Taming the fast-rising inflationary pressure post-pandemic has become the major focus of central bank chiefs across the world, including the CBN. We believe the MPC’s decision is a step towards curbing spiralling inflation which could possibly lead to stagflation (high inflation & unemployment rates and slower growth), eventually pushing the economy into a recession in the medium term.

“Nevertheless, we do not expect inflationary pressures to moderate significantly despite the MPR hike as the pressure on prices is majorly fuelled by structural constraints. Looking ahead, we anticipate that continued hawkish undertones by global systemic central banks and increased liquidity build-up due to pre-election spending could compel the CBN to further hike the MPR before year-end,” they concluded.

Also reacting, Cordros Securities, which had expected a 50 basis points rate hike before the meeting, in a note to clients, believes the “the hawkish rendition among global central banks further compelled the MPC to make a U-turn on its pro-growth objective to mitigate capital flow reversals and stem currency pressures.”

Analysts at Financial Derivative Company noted that the return of orthodox monetary policy system means that, “For the government, debt service burden will rise to 95 percent of revenue; for the banks, private sector borrowing cost will increase, the default rate on debts will increase, impairment charges for these banks will increase. Also, in the stock market, investors to rotate portfolios in favour of fixed income securities while stock prices will fall; in the Fx market, there may be a reduction in capital flights, a possible increase in FX inflows, strengthening of the Naira, while a further slowdown in the pace of recovery will become slow due to rate hike.”

In the meantime, as has been noted by many analysts, the cost of funds will increase due to an increase in deposit rates; the value of financial assets holding will fall due to an increase in yield; and the reprisal of maturing assets in line with the new interest rate regime, while new risk assets will be priced appropriately. 

“Overall, it is a good thing for the nation’s economy at this time as it may strengthen the local currency since more foreign direct investors will channel flows to our country given the improved returns on investments. The increase in policy rate is long overdue as most economies of the world have also increased benchmark rates including the United States of America,” they said.

It was a surprising turn of events after the last Monetary Policy Committee (MPC), as the monetary policy parameters were retained (CRR at 27.5%, Liquidity ratio at 30% and Asymmetric corridor at +100/-700bps) while the interest rate was raised by 150 basis points to 13 percent as the committee unanimously voted to hike interest rates signalling a firm commitment to taming inflation, which has been soaring for three months.

However, the committee noted the shocks to food prices from the adverse impact of insecurity and legacy infrastructure challenges, including transportation and storage. This is in addition to external shocks on food and energy prices from the Russian – Ukraine war. 

In the communiqué signed by Godwin Emefiele, CBN governor, the apex bank, notwithstanding, expressed the need to retain rates on the development finance initiatives of the apex bank at five percent till March 2023.

Members said they were faced with a dilemma of whether to hold, tighten, or loosen the rate, given that “loosening in the face of the rising policy rates in advanced economies may result in a sharp rise in capital outflow and faster dry-up of foreign credit lines. MPC also feels that loosening could lead to further liquidity surfeit and inflationary pressure. So, to whether to hold, MPC feels its stance would strengthen the perception that the CBN has abandoned its primary mandate of taming inflation.

As a result, the committee highlighted the rise of monetary aggregates, particularly broad money supply (M3), whose year on year growth has accelerated to the mid-to-high teens range since 2021, compared to pandemic-induced year on year growth in the low-single-digits through 2020. Also, a notable point made was the effect of making the government’s domestic borrowing more expensive, particularly given its rising debt profile, and debt sustainability concerns.

Meanwhile, data from the CBN shows that the credit to the government expanded sharply by 35 percent year on year in March. Over the last year, credit to the government has grown faster than credit to the private sector, averaging 25 percent year on year, compared with credit to the private sector average of 14 percent year on year. Also, CBN’s loans to the federal government via ways and means of financing amounted to N18.2 trillion in January 2022 or a growth of 36 percent year on year.