Flash Report / Nigeria

Nigeria unexpectedly cuts rate; decision unlikely to move yields in the market

  • Central bank cuts rate by 100bps to 12.5% – the first since March 2019 and the largest since 2016
  • Lower rate expected to boost lending and reverse recessionary trend, as inflation risk takes back seat
  • Rate cut largely inconsequential to the domestic fixed income market as liquidity generally drives rates

The Central Bank of Nigeria (CBN) unexpectedly cut its benchmark lending rate on Thursday to 12.5% from 13.5%, to stimulate growth following the downturn brought on by the coronavirus pandemic and sharp falls in crude oil prices. This rate cut takes Nigeria closer to negative real rates, as inflation rate stands at 12.34% vs the MPR at 12.5%. The CBN, however, retained its Cash Reserve Ratio (CRR) at 27.5% and Liquidity Ratio at 30%. 

The MPC decision came as a surprise as the central bank has closely monitored rates for the last two years to curb inflation, support the naira and attract foreign investors to its debt market. Considering the high and rising inflation (12.34% in April) – the highest in more than two years – and recent naira devaluation, the CBN clearly appears to be more worried about growth and trying to stop an even deeper recession than inflation risks, which might suggest further cuts are possible over the coming quarters.

Avoiding deeper recession

The lower rate is expected to stimulate credit expansion to critical sectors, which should, in turn, encourage employment, revive economic activity and stimulate economic growth. However, we note that there might be questions about the effectiveness of the monetary policy transmission mechanism in boosting growth in Nigeria, and the extent to which it can really counteract the huge negative terms of trade shock from lower oil prices.

The latest decision to cut rates was unanimous as all 10 members of the MPC voted for a rate cut, with 7 members voting for a 100bps cut, 2 voted for a deeper 150bps cut and 1 voting for 200bps cut. Although the 100bps rate cut should see the CBN's Standing Lending and Deposit facilities (SLF and SDF) fall to 14,5% and 7.5%, respectively, meaning that banks can access cheaper funding for liquidity shortfalls in the CBN's lending window, overall lending rates might not come off significantly as inter-bank market rates (OBB and overnight rates) will continue to be determined by the level of system liquidity.

Nigeria’s Q1 20 real GDP meanwhile (measured at basic prices) recorded a growth of 1.87% yoy, although this was down by 23bps from Q1 19 and by 68bps from Q4 19. However, a sharper deterioration in activity is expected in Q2 20 due to the impact of the lockdown, which disrupted both supply and demand, and lower oil prices; the impact of which would be expected to continue to play out in subsequent quarters. Recall that earlier this month, the finance minister had alluded to the economy potentially contracting by as much as 8.9% in a worst-case scenario analysis on the back of a plunge in crude prices (the IMF expects a 3.4% contraction). The fall in oil prices has resulted in severe revenue shortfall for Nigeria (crude accounts for c80% of foreign currency earnings) with the government slashing its budget and increasing borrowing (last month, Nigeria secured US$3.4bn in emergency funding from the IMF). 

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Macro Analysis / Kenya

Kenya cuts policy rate, slashes growth forecast on Covid-19 damage

  • Revised growth forecast still higher than World Bank's 1.5%, but lower than parliamentary projections
  • Rate cut positive, but increasing loan accessibility remain low due to Covid-19 impact on businesses
  • About 3% of industry loans now restructured due to negative Covid-19 impact
Faith Mwangi @
Tellimer Research
30 April 2020

The Central Bank of Kenya cut its benchmark lending rate by 25bps to 7.0%, in line with expectations, at the meeting on Wednesday. According to the Bank, the cut was in light of the continued grim outlook on the economy amid the Covid-19 pandemic. So far, since the first Covid-19 case was reported in Kenya, the country has had 384 confirmed cases, 129 recoveries and 15 deaths. 

While the latest rate cut is positive, its intended impact of increasing loan accessibility may remain low with the business environment hampered by curfews and lockdown measures. GDP growth projections have also been revised down to 2.3% from 3.4% previously. The new projections are lower than the 2.8-3.2% forecast by Kenya's parliamentary budget office, and higher than the 1.5% growth (and 1% contraction in a worst-case scenario) by the World Bank. 

Since the last meeting where the regulator cut the policy rate and the cash reserve ratio, the committee noted that 43.5% of funds released into the banking system were utilised mainly by tourism, real estate, trade and agriculture sectors. As of 18 March, restructured loans amounted to KES81.7bn (c3% of total industry gross loans as at January 2020). According to the regulator, restructures were mainly in Tourism, Restaurants and Hotels (31%); Real Estate (17.2%); Building and Construction (17.0%) and Trade (12.4%).

Key highlights from the central bank meeting 

  1. Current account deficit is expected to remain at 5.8% in 2020. This is based on lower oil imports, which are expected to offset the expected reduction in remittances. Key risk on this projection is the fall in horticultural exports and tourism services. Although the flower industry is starting to see some demand, it is unlikely that these receipts will suffice. 
  2. Sector NPL ratio stood at 12.5% in March compared to 12.7% in February. The improvement was on higher loan growth within the quarter. We believe this respite is temporary as the impact of Covid-19 is expected to filter through the numbers in Q2 20. Though the regulation to allow restructuring of loan terms will soften the impact of NPL formation, we still expect asset quality to continue declining. 
  3. Private sector credit grew 8.9% yoy. Sectors that boosted growth were manufacturing (17%); building and construction (9.5%); trade (7.8%); transport and communication (7.1%); and consumer durables (24.1%). 
  4. Inflation is expected to remain within the target range (2.5% to 7.5%) in the near term. The regulator's outlook is hinged on lower oil prices, recent reduction in Value Added Tax, and favourable weather conditions. We believe there is a risk of higher inflation figures as the country faces a likely food crisis from the locust invasion, which has already caused a 1.5% hit on GDP and continued disruption of the food supply chain with market closures implemented due to Covid-19. 

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Macro Analysis / Poland

Polish central bank concerned about the strength of the zloty

ING Think
16 June 2020

Poland's central bank has responded to the Covid-19 health pandemic by launching an unlimited quantitative easing programme and lowering the interest rates by 140 basis points. 

Right now, the base rate is just above zero - at 0.1%. The last cut by 40bp in May came as a surprise, but before the meeting today, some monetary committee members - most notably G.Ancyparowicz, R.Sura, C.Kochalski and J.Żyżyński - reiterated they strongly oppose negative interest rates and see no further need for any more monetary easing.

The main factor of concern is the Polish zloty exchange rate

The Council confirmed its dislike of negative nominal rates and returned to the "wait-and-see" mode. The main factor of concern is the Polish zloty exchange rate. 

In the Councils' opinion, the exchange rate has remained relatively strong despite policy loosening which might slow the recovery of the economy. We suspect this was the key reason behind the last rate cut decision.

Nonetheless, we think interest rates in Poland have already reached their bottom, at least during this policy cycle. Further rate cuts would substantially strain the stability of weaker participants of the financial sector. Also, the experiences of other countries show that near-zero rates result in the deterioration of credit availability rather than improvement.

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Macro Analysis / Global

Emerging Market sovereign bond issuance rebounds but market access is uneven

  • EM hard currency sovereign bond issuance was US$43.5bn in April, after an extended lull
  • Too soon to say that EM issuance will return to the heady heights of 2017-19.
  • The impact of the pandemic and global economic crisis on EM may not be fully seen for some time
Stuart Culverhouse @
Tellimer Research
1 May 2020

EM hard currency sovereign bond issuance staged a significant recovery in April, after a two-month lull caused by the coronavirus pandemic. We estimate EM sovereign bond issuance was US$43.5bn last month, bringing total issuance YTD to US$84bn. Last month's issuance far exceeded the US$29bn bumper month in January (see here). Issuance slowed to just US$8.6bn in February (and that all took place at the beginning of the month) and collapsed to just US$2.5bn in March (and that came from just one investment grade (IG) issuer, Panama, which was at the end of the month). Hence, the period of inactivity lasted around seven weeks. 

Figure 1: EM hard currency sovereign bond issuance YTD by month (US$bn) 

Source: Tellimer Research, Bond Radar. *We exclude Israel, Latvia, Lithuania and Slovenia based on the IMF definition of EM. 

The pick up in issuance likely reflects three factors in particular: 

  1. The (relative) stabilisation of market conditions. This may be evident in EM spreads, with the benchmark EMBIGD spread broadly stable in recent weeks, after accelerating in March;
  2. Pent-up supply given the freezing of the new issuance market in the preceding weeks; and
  3. Government efforts to finance their own Covid-19 responses (as some issuers have explicitly highlighted in their use of proceeds). 

But it is too soon to say that EM issuance will return to the heady heights of 2017-19. On the one hand, the maintenance of ultra-loose monetary policy in the G3 as part of the global economic policy response to Covid-19 will provide some support to risk assets, while EM will look to cover higher financing needs from somewhere. On the former point, Fitch notes that global QE is set to reach US$6tn this year; already, in one year, half the total amount of QE that we saw over the whole decade since the GFC. However, on the other hand, the economic and societal impact of the coronavirus pandemic and global economic crisis on EM credit fundamentals, GDP growth, jobs, fiscal and external accounts, and debt sustainability, may not be seen for some time. 

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