Wednesday, 29 January 2020

NIGERIA WEEK AHEAD - CBN ON MISSION TO TAME INFLATION

Rising fears over the human and economic cost of the coronavirus in Asia should set a negative tone across global markets in the week ahead.

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Appetite for riskier assets including stocks and emerging markets are likely to diminish as investors rush towards prime destinations of safety like Gold. The Nigerian Naira like many other emerging market currencies could weaken on renewed global growth concerns with falling Oil prices adding insult to injury.

The economic calendar for Nigeria is relatively light this week, as most of the action may be on Friday when foreign exchange reserves and manufacturing PMI data are published. While a positive set of economic releases could boost sentiment towards the Nigerian economy, much of the focus will remain on the outcome of last week’s Central Bank of Nigeria (CBN) policy meeting, the pending Federal Reserve meeting and coronavirus fears.

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As widely expected, the Central Bank of Nigeria left interest rates unchanged at 13.5% in January. However, the CBN looked beyond the usual monetary policy tools by tweaking the Cash Reserve Ratio (CRR) to 27.5% from 22.5%. The increase in CRR reduces the amount of money available for banks to lend, essentially pressuring liquidity with a goal of reducing inflation levels. With the CBN on a quest to tame inflation, speculation around a rate cut anytime has been thrown out of the window.

 Outside of Nigeria, the Federal Reserve policy meeting on Wednesday will be in focus. The central bank is widely expected to leave interest rates unchanged thanks to a robust US labour market, moderating inflation and positive economic data. However, if the Fed expresses optimism over the US economy, the Dollar could appreciate consequently pressuring the Naira.

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In the commodity markets, Oil prices have tumbled over 3% on Monday and shed more than 10% since the start of 2020. Rising fears over the coronavirus impacting demand for Oil could drag the commodity deeper in the abyss. Falling Oil is significant for Nigeria, especially when considering how roughly 90% of export earnings and over 70% of government revenues are from Oil exports. What is even more concerning is Nigeria’s 2020 budget which has set the benchmark for Oil at $57. With Brent crude currently trading at $59 and WTI Oil around $52.50, the Oil revenue goal of N2.64 trillion is under threat.

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