Monthly Economic Insights – June 2020

In this month’s NOVA Monthly Economic Insights, we feature key happenings in the domestic economic landscape covering the following key points of interest:

• Currency and Reserves: Foreign Borrowings Offer Temporary Reprieve
• Consumer Prices: FX Depreciation and Social Distancing to Propel Inflation
• Fixed Income: System Liquidity to Moderate Impact of Higher Borrowings and FX Pressure

Highlights below:

1. Adjusting our modelled reserve level for the inflow of the remaining expected World Bank, AfDB and Islamic Development Bank borrowings of $2.11 billion, we estimate a year end reserve position of $28.2 billion ($26.1 billion at year end, excluding the borrowings), with our model suggesting further weakening of the NAFEX rate to N410/$. It is worthy of note that, due to the minimal activity at the IEW in April and May, we believe the portion of offshore holdings of maturing fixed income securities, estimated at $1.76 billion, is yet to be repatriated and could be rolled over to the rest of the year.
2. We expect the consumer price index to expand by 1.20% MoM, with headline inflation expanding 12.44% YoY in May. We maintain our expectation of persistent Naira weakness, elevated transportation cost due to social distancing policy and higher prices of essential items due to the partial lockdown. All told, we expect average inflation rate for 2020 to settle at 12.8% on our base case.
3. We expect the CBN to continue to pressure banks to drive OMO stop rates modestly lower, with 1-year stop rate likely to fall lower within the range of 8.5% – 9.5%. Bond rates could fall at the next auction due to demand pressure to 10.8% with a gradual convergence to OMO single digit rates. NTB 1-year stop rate could gravitate between 3% – 4%. Overall, we see average fixed income rates settling in the single digit region in the interim, with real return remaining negative over the rest of the year as inflation spirals.