Thursday, October19, 2017 11:48 AM /FBNCapitalResearch 

Over to the FGN to clear up the mess: The monetarypolicy committee has not shifted its stance for more than 12 months, arguing inlayman’s language that it did not create the mess in the macroeconomy and isnot therefore responsible for clearing it up. It is adamant that the FGN nowhas to step up to the plate. If its communiques and personal statements do haveone common theme, it is that the committee has its eye on fighting inflation. 

Finally, some easing ahead: Wesee lower inflation in 2018 on the easing of supply-side constraints andpositive base effects. This could bring modest rate cuts totaling 150bps fromthe MPC. 

Gathering momentum of MCP: The CBN’s adoption of multiplecurrency practices (MCP), and NAFEX in particular, has defied all expectations,including its own we suspect.  Offshore players have returned to localmarkets for equities and debt: manufacturers have their imported inputs;reserves are rising towards US$40bn; and the CBN has little need to supplyNAFEX. The authorities are under no domestic pressure to abandon MCP. Theyclearly benefit from the official/interbank rate for favoured transactions. 

Job done yet more for the DMO to do: The DMO hasalready met its funding target for the year but may have to cover an overshootin the FGN deficit in the naira market. Yet the planned debt refinancing, thereturn to the Eurobond market and the broader shift to a focus on externalborrowing from 2018 together provide an attractive investment case for FGNpaper in local currency. 

Room for a little more yield narrowing: These factorsplus the healthy bid from the PFAs point to further gentle narrowing of FGNbond yields over the next quarter. Assuming that the CBN guides rates downcautiously, we see a range of 14.00% to 14.50%. 

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