The Central Bank of Nigeria (CBN), which has been clawing back a competitive edge over it’s peers in Africa and globally, risks reversing four years of progress if Sanusi Lamido Sanusi, the governor is forced to resign unceremoniously, say analysts.
The leaked news of the altercation between the President, Jonathan Goodluck and the CBN governor is swelling concerns that the issue could subsequently see the Central Bank forced back to dependency.
“We suspect the risks that the next CBN Governor will be a closer ally of the current administration – and less independent – have increased,” says Samir Gadio, emerging market strategist, standard bank, London.
Razia Khan, analyst with Standard Chartered Bank, London, said the suggestion that a CBN Governor – any CBN Governor – may be ‘punished’ for asking for greater transparency, sends a very negative signal to investors. This is especially so in an environment of less easy global liquidity, and the potential for heightened risk aversion to accompany QE tapering.
The altercation which became publicly known yesterday, leaves the myriad of investors and analysts who been betting heavily on Nigeria’s economy, wondering the future direction of the country’s monetary policy.
“This may not necessarily mean that the new governor will depart from the Central Bank’s historic FX stability stance, especially given the currency’s critical relevance in the forthcoming election, but there may well be concerted political pressure to lower policy rates and shift to a more expansionary monetary regime, ahead of the next elections,” says Gadio.
He said, should this be the case, the risks to USD/NGN would probably still initially be to the upside, but it may well be that a temporary period of NGN weakness would force the new monetary authorities to tighten liquidity conditions again before the general elections. Such action would actually place upward pressure on yields.”
Khan observes that calls for Sanusi’s resignation, even in the face of ‘commitment to greater transparency’ are a significant concern to investors who are worried about the sustainability of the policies for which Nigeria has been rewarded with billions of dollars of capital inflows typified with a firm commitment to price stability with a credible anti-inflation strategy.
She listed the achievements for which Nigeria was applauded even by international investors, to include the abolishment of the one year minimum holding period for investment in FG bonds, which she said, “spoke even more loudly than the receipt of a credit rating in terms of highlighting to investors very clearly, Nigeria’s commitment to reform.
To her, “Investors will continue to watch with great interest any changes at the CBN. Support for reformers will be key to sustaining investor confidence and naira stability.”
Analysts at Afinvest said, “The much hyped political risk of 2014 is crystallising earlier than expected. The alleged forceful resignation of the CBN governor at the tip of his tenure (expiring June 2014) just rang the “alert bell” to both local and foreign Portfolio Investors who are skeptically waiting for the next CBN governor.”
Johnson Chukwu, chief executive of Cowry Asset Management limited however said that investors may not expect a drastic change in monetary policy direction at least in the short term, since market operators and other economic agents are fully aware that his tenor will end in the first half of this year and have factored in the risk of some policy adjustments by the monetary authorities upon the appointment of a new CBN governor.
“I therefore think that if there are concerns on the CBN Governor’s exit date, it will be less on the impact on monetary policy but more on the manner of his exit as it relates to his professional reputation as a former CBN Governor,” Chukwu said.
Commenting on the effect of the tapering on the economy, he said, “The expected pull back this year, in Quantitative Easing by the US Fed is bound to have some unfavourable impact on Nigerian’s external reserve due to the contribution of inflows from foreign portfolio investors in the country’s foreign exchange position.
With shortfall in crude oil export earnings occasioned by the continued attacks on crude pipelines, Nigeria’s foreign exchange reserve owes its current $43.3billion position largely to inflows from foreign portfolio investors.
As interest rates rise in US, these investors are likely to rebalance their portfolios away from frontier markets, in favour of more advances economies of US and Europe. The expected negative net investment flow will exert a lot of pressure on the exchange rate, with strong possibility of Naira depreciation in 2014.”
By: John Omachonu
