Change in guard at the Central Bank of Nigeria (CBN). Last Thursday, February 20, was a very eventful day in Nigeria, at least for the capital market. President Goodluck Jonathan suspended Sanusi Lamido Sanusi as CBN governor for “financial recklessness and misconduct” (following Sanusi’s revelations about missing billions of dollars from the state oil company), appointed Deputy Governor Sarah Alade as acting governor until June, and nominated the managing director of Zenith Bank, Godwin Emefiele, as the next CBN governor. We think Sanusi’s departure and what we see as the compromising of the CBN’s independence will put downward pressure on reserves and in particular undermine the ability of the CBN to defend the target exchange rate (see Figure 1). We think this implies a bigger and earlier naira devaluation than we had initially expected.
What do we know about Emefiele? Our bank analyst, Nothando Ndebele, describes him as very conservative. Under his stewardship Zenith has established itself as a leading, well-capitalised and stable bank with a high portion of assets sitting in T-bills and bonds. We believe he is likely to maintain a firm policy environment and would be inclined to tighten policy in the current environment of naira weakness.
What does this mean for monetary policy until June? Acting Governor Alade said yesterday that the CBN will remain committed to price stability. Given that she is in essence a caretaker governor until June, we do not expect her to make any major policy moves at the next monetary policy committee (MPC) meeting on 24-25 March. We think the MPC will hike the policy rate by at least 1 ppt and the public sector cash reserve requirement (CRR) to 100%, which the banks expect. But we think it is less likely that the CRR on private sector deposits will be increased, because only two MPC members, including Sanusi, voted for this at the January MPC meeting, implying it was a minority view. We think there is a small risk of a devaluation of the naira in March, partly because Alade said in January that she would support a review of the mid-point of the exchange rate band (currently NGN155/$). This would help stabilise the market, in our view, assuming the exchange rate target band adjustment met the market’s expectation. We think there is a real risk that the MPC meeting will come sooner than the scheduled March dates.
What does this mean for monetary policy post-June? This week’s developments will put downward pressure on reserves, implying the likelihood of our YE14 projection of $35bn in FX reserves is declining. This means the probability of the risk scenario we outlined in our 13 Feb note (Kazakh tenge devaluation – Why is Nigeria compared with Kazakhstan?) has increased. If Alade does not devalue the naira before June, we think incoming Governor Emefiele may be compelled to devalue the mid-point of the exchange rate band to NGN170/$ at his first MPC meeting in July. We estimate this will lead to inflation of around 11-12% at YE14, which implies rate hikes to help preserve real rates of at least 5% that make the carry trade attractive. Higher inflation is likely to be negative for consumers, but we expect the effect of this on GDP growth to be mitigated by the positive impact of higher liquidity on the back of an increase in election-related government spending. We also estimate a slightly bigger C/A surplus, assuming a weaker naira tempers imports.
Which stocks are best placed for a devaluation? In terms of the MSCI Nigeria Index itself, it is largely a 100% domestic index as there are no real exporters or naira hedges. A devaluation is negative for the consumer stocks as it implies higher inflation, which the companies will find hard to pass on to consumers. During our recent Investor Conference, Nestlé Nigeria said it was preparing for a potential naira weakening by bolstering the resilience of its sales and supply networks. The more liquid Tier 1 banks implied they would prefer the policy rate to be used to manage inflation, as this would boost their margins. We believe the relative winners would be Zenith (BUY, TP NGN29.20, CP NGN20.80) and GTB (BUY, TP NGN33.50, CP NGN25.90). The Tier 2 banks are likely to see their funding costs come under pressure (again) in a tightening environment.
Source: Renaissance Capital
