Credit to private sector drops to N15.2trillion on rising bond yields

Bismark Rewane, MD/CEO, Financial Derivatives

Credit to the private sector dropped by 8.1 per cent to N15.2 trillion last month, from nine per cent decline in February, the Managing Director and Chief Executive Officer, Financial Derivatives Company Limited, Bismack Rewane, has said.
The drop has been linked to the 10.5 per cent rise in bond yields in March as against 9.42 per cent the previous month.
Rewane, in a report by the company last week, said indicators that determine the direction of the benchmark rate, including rates cut from 12 per cent, appear positive except for the continuous weakening of the naira.
He said the national inflation rate slowed to 8.6 per cent year-on-year in March from 9.5 per cent in February. The 0.9 per cent decline in the inflation rate makes the Consumer Price Index the lowest since April 2008 when it was 8.2 per cent.
“Credit to the private sector growth slowed to 8.1 per cent equivalent of N15.26 trillion year-on-year in March from nine per cent year-on-year in February, due to the rise in debt yields to 10.5 per cent in March from the previous month’s 9.42 per cent,” he said.
He argued that since the inflation is below the nine per cent benchmark, the interest rate debate will become more acrimonious and controversial, adding that it will also lead to short position taking by fixed income traders and portfolio managers until May 21, the date of the next Monetary Policy Committee (MPC) meeting.
Rewane said the depreciating value of the naira could be linked to falling oil revenue, resulting from the state of the oil sector, where oil output is plummeting and global oil prices are falling below estimates. Nigeria’s oil production has been declining steadily due to widespread oil theft and pipeline vandalism.
In March, Nigeria’s production declined to 1.97mbpd according to the Organisation of Petroleum Exporting Countries (OPEC). Recently, the Shell Petroleum Development Company of Nigeria (SPDC) declared a force majeure on its production of Bonny Light crude, effectively shutting down 150,000bpd worth of crude.
He said weak global market sentiment and soft demand for oil have played a key role in the downward trajectory of oil prices, adding that the decline in oil prices and production are pointers to the risks posed to Nigeria’s revenue framework, forex inflows and external reserves. Consequenty, he said, the Federal Government might be forced to make necessary adjustments that could be fiscal, monetary and/or structural.
He said interest rate moderation was mainly attributed to base year comparison, adding that there seems to be some fundamental downward drift in prices. He said inflation could rise in April due to the wearing off of the impact of the fuel subsidy strike on the base year.
“Anticipated inflation is more important in determining the direction of monetary policy, especially under an ‘inflation targeting’ policy framework. However, several other factors, such as the growth rate, exchange rate, and external reserves are also considered in monetary policy decisions,” he said.
But Razia Khan of Standard Bank Research, Africa, said the drop in inflation was due to a substantial base effect. She said the figure, which reflects in part, the stability in the forex rate seen in recent months, will lead to new calls for interest rate cut. “Should the improvement in inflation be sustained, then the risk of any easing is certainly higher. However, the recent decline in the oil price remains a key risk factor,” she said.
For her, a second risk factor relates to the price outlook once the substantial base effect has run its course, saying the case for sustained easing may not yet be that clear-cut.
Analysts at Renaissance Capital (RenCap), an investment and research firm, said downward adjustment of the Cash Reserve Requirement would be more effective at relaxing the interest rate, than a rate cut.
The CBN had at its last meeting retained the interest rate at 12 per cent with a corridor of plus or minus two per cent, Standing Deposit Facility at 10 per cent and Standing Lending Facility at 14 per cent. It also maintained the Liquidity Ratio (LR) at 30 per cent and Cash Reserve Ratio (CRR) at 12 per cent.
The firm explained that the decision means that other forms of monetary policy, such as Open Market Operations (OMO), will continue to be the preferred method for managing liquidity.
 The Nation