Special Commentary

DLM RESEARCH

Special Commentary

Nigeria | Economy| February 21, 2014 DLM RESEARCH

Tola Odukoya * CBN: Quo Vadis? [email protected]

The event. In a development that took the domestic and international markets by surprise, on 20th February 2014, the governor of the Central Bank of Nigeria (CBN) Mallam Sanusi Lamido Sanusi was suspended by the president of Nigeria, Dr Goodluck Jonathan. According to the statement released by the president’s media chief, the suspension was based on reports of the country’s Financial Reporting Council (FRC) and “other investigating bodies”, which allege “financial recklessness, misconduct and far-reaching irregularities” against Mallam Sanusi. In Nigeria, the FRC is empowered by law to

“review financial statements and reports of public interest entities” and “advise the federal government on matters relating

to accounting and financial reporting standards” amongst other provisions.

Initial market reaction. As expected, the domestic financial markets reacted negatively to the development as the news provided additional headwinds to the downward trajectory of the bond and equity markets whilst the naira equally plummeted at the currency market. In the equity market, the all share index declined by 147bps on the day, which nullified all the gains recorded all through the week. Meanwhile, uncertainties in the market led to the shutdown of activities in the

bond, currencies and money markets – to cushion the effect of the shock.

A steady hand. An economist, Sarah Alade has been appointed the acting governor of Nigeria’s apex bank in the intervening period i.e. till June 2014, when Mallam Sanusi’s tenure will expire. Prior to this, Dr Alade was the deputy governor in charge of economic policy where she superintended research, monetary policy, trade & exchange, statistics and financial markets departments. She was appointed to this role in 2007 under former governor Charles Soludo. She joined the CBN twenty -one years ago and has held several portfolios, which include Director of Banking Supervision. In our view, we expect that she will hold the ship steady in the interim period, particularly in the area of monetary policy. Our assessment of the voting pattern at the last thirteen MPC meetings since January 2012 indicate that she, as well as other deputy governors, has always voted in favour of maintaining the MPR at 12% (fig. 1) whilst she also voted for an increase in CRR on public sector funds to 75% at the last meeting in January 2014. We however believe she may not be as resolute as Mallam Sanusi in the defence of the domestic currency given her view on the need to allow for more flexibility in the exchange rate against the backdrop of declining oil revenues, foreign portfolio outflows, depleting foreign reserves and – most importantly – that monetary policy is approaching its limits.

The successor. A banker, Mr Godwin Emefiele, has been nominated by the president to take over the leadership of the CBN come June 2014, whilst stakeholders await the confirmation of his appointment by the Senate. Mr Emefiele is the

current group MD/CEO of Zenith Bank Plc, Nigeria’s third largest bank by assets – N2.85trillion (c.$17.3bn) – and he is considered to be a conservative with a more suitable temperament to be a central banker in a frontier market such as Nigeria. Mr Emefiele has been a banker for the last twenty-six years and he has been a part of Zenith Bank’s management team since inception in 1990. He was appointed to his current role in August 2010 when the founding CEO resigned as a result of new CBN regulations. Mr Emefiele’s policy direction is yet to be seen; therefore, Quo Vadis?

The winners? The discerning investor. In view of the expected decline in asset prices in the Nigerian financial markets in the days ahead, we expect the discerning investor – foreign or domestic – to seek to optimise returns. Whilst we

acknowledge that the effect of the tapering by the US Fed has substantially affected asset prices in Nigeria, this latest development will further increase the pressure on the downside. However, we remain optimistic about Nigeria’s macro story and the subsequent stability of asset prices once stakeholders get over the shock of this latest development. Therefore we are BUYERS of Nigerian assets, especially equities – as we approach the first earnings season – and bonds (yields have increased by c.100bps – and growing - since December) as this presents a good opportunity to lock into double-digit yields in the long term. In our view, we expect the shift in monetary policy within the next six-to-eighteen months from June 2014. Consequently, we expect investors e.g. domestic pension funds, asset managers etc., to take advantage of the lower asset prices.

* Quo vadis? is a Latin phrase meaning "Where are you going?" or "Whither goest thou?"

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Special Commentary DLM RESEARCH

Fig. 1: Nigeria - Monetary policy committee members’ voting on MPR, Jan 2012 – Jan 2014

Mallam Sarah Tunde Kingsley Shehu Uche Salami John Sam Danladi Garba Stephen Barau Daniel Dates Decision Sanusii Aladeii Lemoiii Moghalu Yahaya Chibuike Adedoyin Osilaja Olofin Kifasi Abdul Oronsaye Suleiman Nwaobia

MPR MPR MPR MPR MPR MPR MPR MPR MPR MPR MPR MPR MPR MPR MPR

Jan12 12% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00%

Mar12 12% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00%

May12 12% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00%

Jul12 12% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 11.75%

Sept12 12% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 11.75% 12.00%

Nov12 12% 12.00% 12.00% 12.00% 12.00% 12.00% 11.75% 12.00% 12.00%

Jan13 12% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 11.75% 12.00%

Mar13 12% 12.00% 12.00% 12.00% 12.00% 12.00% 11.50% 12.00% 12.00% 12.00% 11.50% 11.50% 12.00%

May13 12% 12.00% 12.00% 12.00% 12.00% 11.50% 11.50% 12.00% 12.00% 11.50%

Jul13 12% 12.00% 12.00% 12.00% 12.00% 11.50% 12.00% 12.00% 12.00% 12.00% 12.00%

Sept13 12% 12.00% 12.00% 12.00% 12.00% 12.00% 11.50% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00%

Nov13 12%

Jan14 12% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00%

Source: CBN

i Suspended, February 20, 2014 ii Appointed acting governor, February 20, 2014 iii Retired, January 2014