News Column

Imperatives of Re-Ordering Economic Uncertainties With Viable Initiatives

September 3, 2014

Chijioke Nelson

THE real sector development issues have not been the identification of the challenges, but the will and strategy to effect the needed changes. Indeed, the major problem articulated by real sector operators has been with cost of financing, which poses further danger to their survival in the assessed hostile business environment that is characterized by parlous infrastructure. To many of the operators, if the cost of financing would be bearable, they could still sustain their activities amid independent provision of power, security and transport system, among others, though not the ideal.

Sometimes too, strategic initiatives, which have worked in other economies, with assessable growth figures have lost potency here due to inconsistency and sustainability issues. Policies change as their initiators or promoters change irrespective of its economic importance and development prospect. So, our challenge is not also to initiate a viable idea, as they are available in thousands at all the levels of government. It is the willpower of those in charge.

Last week, the Federal Government unveiled a new real sector financing programme tagged: "Financing Value Chain Initiative (FVCI)", in a bid to support the development of the real economy. Of course, the strength of the real sector of every economy determines its position and economic importance among the league of nations. The scheme, inaugurated at the 42nd yearly general meeting of the Manufacturers Association of Nigeria (MAN), was designed to introduce policies that will be targeted at reducing the cost of funding for small and large scale manufacturing companies.

Currently, SME and large corporate organisations access financing at an average 25 per cent and 16 per cent respectively and this high cost of credit development typically handicaps the growth within the real economy. However, this program is expected to yield benefits similar to the government's recent single digit agricultural intervention fund, which has successfully improved the agriculture sector's yearly contribution to the Gross Domestic Product (GDP). It is worth emphasizing here that each initiative on the horizon raises a level of expectations, as well as suspicion based on antecedents and followers.

According to a report from Afrinvest, currently, the manufacturing sector contributes nine per cent to the country's GDP, but the successful implementation of this policy will enhance the objective of increasing its contribution to the GDP to 15 per cent within the next three years and also reinforce the Nigerian Industrial Revolution plan, which is a roadmap already in place. The manufacturing sector is also poised to receive a lift from the current developments in the power sector, consolidating the contributions of the Federal Government. This is only possible if the probability of the "will" overriding the "inconsistency" is higher and that is what every follower of the initiative is eagerly looking forward to seeing.

Meanwhile, the Interbank money market, last week, ended flat, with the Call trading in the range of 11.1 per cent and 11.3 per cent between Wednesday and Friday, while the Open Buy Back (OBB) traded between 10.9 per cent and 11.0 per cent. Week-on-week, the Call and OBB rates inched higher by 29 basis points apiece to 11.1 per cent and 10.9 per cent on Friday respectively.

The interbank market had commenced the week highly liquid on the back of the Federal Accounts Allocation Committee meeting, which distributed revenues accrued to the three-tiered government and Open Market Operations (OMO) maturities. However, the Central Bank of Nigeria (CBN), which mopped up liquidity simultaneously through OMO issuance at the beginning of the week, offered N70 billion, N249.3 billion at a stop rate of 10.8 per cent for the 136 days OMO auction.

The development, along with the provisions made for the Retail Dutch Auction System (RDAS) at the beginning of the week drove the benchmark Call and OBB rates higher by 17bps to 11.0 per cent and 10.8 per cent respectively on the first trading day of the week and further spiked the NIBOR Call and OBB Rates higher by 21bps apiece to 11.2 per cent and 11.0 per cent apiece on Tuesday.

However, projections are high this week that the maturity of Treasury-bills worth N182.9 billion and simultaneously mops up with T-bills issuances worth N189.9 billion will stabilize liquidity levels in the system, while rates may remain flat as well.

CBN had last week, increased its bi-weekly dollar auction at the primary market by $50 million to

$750 million despite slight moderation of pressure on the Naira the previous week as it appreciated six kobo. The increase in the dollar sales was attributed to preemptive strategy against the anticipated surge in corporate demand for the greenback.

Specifically, CBN offered $350 million and $400 million at the RDAS auctions on Monday and Wednesday, and sold $346.4 million and $398.8 million at the sticky marginal rate of N155.73/$1. However, despite the RDAS auction on Monday and dollar sales from some autonomous sources- oil companies, the heavy corporate demand for the dollar weighed in on the Naira, as it lost 10 kobo to close at N162.10/$1.

On Tuesday, the anticipated dollar sales by oil majors hit the market, with four multinationals selling a total of $172 million between Tuesday and Wednesday, helping the Naira to appreciate by 15 kobo. Week-on-week, the Naira lost 35 kobo to close at N162.35/$1 despite the inclusion of the March 2024 FGN bond into the JP Morgan Emerging Market Bond Index, which was expected to drive demand for the local unit. The depreciation of the Naira can be linked to the overall corporate organisations' demand for the dollar.

However, "we anticipate the Naira will gain ground this week, driven by increased interest by foreign portfolio investors in the local bond market," Afrinvest said.

But the bond market sustained the bull-run last week, as foreign and domestic pressure continued on yields, forcing it to decline by additional 10bps week-on-week for the second straight week to 10.5 per cent, while the planned inclusion of the FGN March 2024 instrument into the JP Morgan's index increased scrutiny and appetite for the domestic paper.

Yields on the shorter term dated bonds- September 2014 and April 2014 shed 120bps and 30bps week-on-week to 9.9 per cent and 10.8 per cent respectively- the highest decline among all tenures. The record was associated with investor's strategic move to lock in to these maturities prior to the JPMorgan inclusion, which may stimulate buying interest and drive yields lower. The April 2017 bond was the only bearish bond for the week, as the yield inched higher by 10bps week-on-week to 11.2 per cent on account of profit taking by investors.

Also, yields on the other medium term notes, including the Aug 2017, May 2018, June 2019January 2022, and the March 2024 were flat week-on-week. Projections presently are that investors may be holding on to the March 2024 note, to take profit when it is finally included in the JP Morgan emerging market bond index.

"The bond market may sustain the bull-run this week on the back of further investors interest in the Nigerian Bond market as the date for the JP Morgan inclusion of the March 2024 note draws nearer.

On the global scene, equity indices within coverage revealed mixed performances last week, but may take an upward directions this week. Within the BRICS' region, the Brazil Bovespa led the gains, appreciating 3.4 per cent week-on-week, followed by the India BSE SEN with 0.8 per cent, while Russia RTS and China Shanghai Com and South Africa JSE lost 3.5 per cent, 1.1 per cent and 0.5 per cent respectively. The decline in the Russian RTS was associated with the continued cross boarder tension between Russia and Ukraine.

Already, the UK and U.S. have begun to consider imposing additional sanctions on Russia.

On the other hand, the developed market indices received a mild lift this week, as the UK FTSE All Share Index and U.S. S&P 500 garnered 0.4 per cent and 0.5 per cent week-on-week. Likewise, the France CAC and the German DAX appreciated 2.8 per cent and 1.5 per centrespectively. Egypt's EGX 30 and Kenya NSE 20 both appreciated 0.7 per cent and 1.2 per cent.


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Source: AllAfrica


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