Being an Analyst Note issued by Proshare Research on September 28th , 2022

Analysts Remain Lukewarm as CBN's MPC Raises Rates to Stem Inflation

After its meeting on the 26th and 27th of September 2022, ten of twelve members of the Monetary Policy Committee (MPC) voted to raise the Monetary Policy Rate (MPR) by 150 basis points in a move to mop up liquidity and combat rising inflation. The MPC raised the Cash Reserve Ratio (CRR) by 750bp to 32.5%. Inflation had accelerated aggressively by 280 basis points from 17.71% in May 2022 to 20.52% in August 2022. Analysts believe that the rise in interest rate would slow down the economy and do little to address inflation, given that the price surge is associated mainly with the devaluation of the Naira. While the MPC intends to stem the tide of capital flow reversal by closing the interest rate spread, legacy issues would continue to deter investors. Analysts, therefore, suggest that Nigeria can conserve its FX through an import substitution policy, which would serve as a backstop in the near term. The country's ultimate solution to worries about its FX lies in a well-implemented public asset financialization strategy which would help the country unlock liquidity from its idle public assets (see chart 1 below).

Chart: Monetary Policy Rates (MPR) and Cash Reserve Ratio (CRR) in Nigeria (%) February - September 2022 

Government's Inaction Hinders Growth in Renewables 

According to the International Energy Agency (IEA), governments have a vital and extensive role to play in the transition to renewable energy that goes far beyond just providing funding for Research & Development. The number of small firms participating in renewable energy innovation in Nigeria is on the rise. They have put in a lot of effort while working with limited resources to address issues like power supply shortages, access to clean cooking, and promoting a circular economy throughout the nation. The fact that neither the federal nor state governments in Nigeria have provided these endeavours with extensive backing has significantly slowed their expansion rate and forced them to look to foreign institutions for assistance. Analysts predict that Nigeria's innovation in renewable energy will develop exponentially in the future, particularly with the recent influx of hardware engineers that have begun to emerge across the nation. The launch of several plans or visions, including the Renewable Energy Master Plan (2005), Vision 30-30-30 (2021), and the Global Cleantech Innovation Program (GCIP), should open opportunities for collaboration with these small businesses to expand and support the realization of these set goals. 

Drafting Farmers into the Military Spells Trouble for Russia's Grain Export 

Vladimir Putin has claimed that farmers are among those drafted into the military as part of its partial mobilization. Its bid to increase the military by 300,000 has caused protests from many Russians. Many were arrested and handed draft notices. As a neighbouring country, Finland notes, the number of eligible men leaving Russia after the draft announcement has increased. As the world's largest wheat exporter, the effect of including farmers in the draft could be negative for countries depending on wheat exports from Russia. While winter grain planting was delayed because of rains, Russia could experience reduced planting for the winter season. Farmers drafted into the military could reduce harvests for the coming season. Countries like Nigeria that depend on Russian exports for fertilizer and wheat could be affected by this development. The countries would have to import stocks from Russia at higher prices as supply reduces and could further push food inflation upwards.

Equity Market Slumps as Investors Anticipate Tighter Monetary Policy 

The Equity market resumed its downward trend as the NGX ASI dipped by -0.06% to close at 49161.45 basis points, following the +0.33% gain recorded in the previous trade session. Analysts can attribute the slight decline to the anticipation of another rate hike by the Monetary policy committee (MPC). As of H1 2022, analysts observed an improvement in the YTD return performance of the NGXASI despite a 150bp increase in MPR. However, the rising inflation and subsequent MPR hikes have made the Equity market less attractive for new investors, with the YTD returns declining sharply in Q3 (See table 1 below).

Table 1: Quarterly Market Performance

Large Sell-offs Dominate Bond Market as CBN Goes Aggressively Hawkish 

Upward interest rate risk put pressure on bond prices yesterday, extending the average benchmark yield to 13.41%, with the sell-offs concentrated at the mid-long tenor while the short tenor saw some buying interest. The hawkish CBN Monetary Policy Rate (MPR) of 15.5% was announced towards the end of yesterday's trading session, with the effects seen today. Analysts expect the higher MPR to spur aggressive sell-offs, raising average benchmark yields (see table 2 below).

Table 2: FGN Bonds Market 

Observers Note that Low e-Naira Activity Requires Increased Sensitization  

The Governor of the central bank of Nigeria gave feedback on how the E-naira application is fairing, he stated that the total download of the wallet is 905,588, and the active users are at 282,600. The percentage of active users of the application to the total downloads of the application is t 31.2%. Analysts see the proportion of active users to the total downloads as low. They think that for the E-naira application to gain more ground, there is a need for incentives to help stimulate people to download the application and sensitize them about it.

Regulatory Bodies Call for Proper Regulation of Digital Finance

In a panel discussion themed on decentralized finance in France, the Fed reiterated its support for the proper regulation of the decentralized finance ecosystem by considering how crypto activities work within the purview of the regulatory framework. In response, he was emphatic about how decentralized finance could expand to include multiple retail customers if proper regulation is in place. At the conference, the French central bank governor appeared uneven in market regulation, implying that countries should avoid adopting diverging or contradictory rules, which could create arbitrage risk among players.

The cryptocurrency market painted a bearish trend of losses from the previous day, as Bitcoin and major altcoins reversed sharply from their 24-hour high, losing over -5.47%. Bitcoin trimmed most of its gains as it failed to stay above the US$19,000 level, preceded by a high sell-off from US$20,338.46 to US$18,646.27. Over the past day, Bitcoin lost -7.38%, with 58,119 traders liquidating. The total liquidation came at a value of US$151.51m. Analysts noted that market sentiment continues to deteriorate as investors lose confidence in the market amid an overall negative year-to-date return (see chart 2 below).

Chart 2: Crypto Fear and Greed Index