N1tr AMCON bonds,political spending raise market liquidity
The maturity of N1 trillion Asset Management Corporation of Nigeria (AMCON) bonds by October and increased spending ahead of next year’s general elections are taking liquidity pressure on the economy to new heights, analysts have said.
Head of Research, Standard Chartered Bank, Razia Khan said the liquidity surge is likely to set in by September, and that the decision from the last Central Bank of Nigeria (CBN’s) Monetary Policy Committee (MPC) meeting was to check the trend.
“The decision at the last MPC meeting was largely as expected -with all rates kept on hold. While mention was made of the upward pressure on inflation, with the CBN stating that it would be carefully monitoring liquidity levels, the committee nonetheless restated the Governor’s goal of lower interest rates in the long-term,” she said.
She said the committee’s position raises key questions around how the CBN might react when liquidity pressures are even more pronounced than they are now.
“An additional AMCON maturity of just less than N1 trillion is expected in October. The political primary season and pre-election spending are likely to build in intensity from September on,” she said adding that for now, the foreign exchange rate is stable – reflecting continued inflows into Nigeria.
Khan said the macro-prudential measures announced by the CBN, the increased capital requirement for Bureau De Change (BDCs), should help at the margin. But global factors will also be keys – with much pointing to a confluence of greater pressures in fourth quarter of 2014.
While the long-term goal may well be lower rates to boost private sector credit, to achieve some level of policy accommodation in order to ‘support’ the real economy, the way in which the CBN chooses to navigate upcoming challenges will be carefully monitored.
Maintaining faith in the stability of the FX rate, even in the face of these challenges, in an environment of low T-bill yields will be key.
The Monetary Policy Committee (MPC) met on July 21 and 22, 2014 against the backdrop of continuing quantitative tapering by the U.S Federal Reserve which has resulted in the slowing of inflows to emerging markets and frontier economies; and the attendant uncertainties in the outlook for monetary policy and financial stability in the post-tapering period.
The Committee noted that the rebound in global economic activity strengthened in the first half of 2014; although at levels lower than previously projected.
The tapered growth arose mainly from the emerging and developing economies owing to the rising real interest rates and geo-political crisis. On the whole, the effects of the global financial crisis have continued to wane even as the issues of rising income inequality, unemployment and poverty appear to be gaining prominence; engaging the attention of the monetary authorities.
These latest projections indicate that the euro area is gradually coming out of recession, as growth projection for 2014 is positive for all member countries albeit with significant variation.