Interest Rate Slash Threatens Foreign Portfolio Investments, Analysts Say
Analysts have said the reduction of the Monetary Policy Rate, also known as benchmark interest rate, may dampen foreign investors in the nation’s stock market.
The Monetary Policy Committee of the Central Bank of Nigeria on Tuesday reduced the MPR from 14 per cent to 13.5 per cent.
The MPR had been held at a record high of 14 per cent since July 2016 when it was hiked by 200 basis points from 12 per cent.
The analysts, who spoke in separate interviews with our correspondent on Wednesday, said the current interest rate, when compared with those of developed and emerging economies, was still quite attractive.
The bonds market recorded a decline as yields dropped to around 13 per cent across maturities on Wednesday on minor buying interest, traders told Reuters.
The traders said low liquidity on the interbank market hampered deals, adding that yields fell from as high as 15 per cent in February after the apex bank lowered the rates at which it sold treasuries at its last auction.
Banking sector credit doubled to N80bn on Tuesday from the previous day but the amount of maturities due to be repaid between now and August is not sufficient to boost liquidity, traders said.
The stock market, which is beset by worries over low growth, dropped by 0.67 per cent on Wednesday as brokers say the rate cut was too little to stimulate the economy.
Sell pressures dominated the equities market as investors lost N78.7bn.
The market capitalisation of equities listed on the Nigerian Stock Exchange dropped from N11.671tn on Tuesday to N11.592tn on Wednesday.
The Managing Director, Afrinvest Securities Limited, Mr Ayodeji Ebo, said there would likely be an initial or short-term reaction at the fixed income market following the cut in MPR.
He said, “I feel that the decline will be short-lived. At the equities market, we should not expect to see any major reaction as it is not expected to benefit from the decline because the structural issues are still there. It is only when we see old policies that can shake investor sentiment before we can see a change in direction in the equities market.
“Foreign portfolio investors have been exiting the market, but we don’t expect them to increase the momentum. We will still continue to see some interest because if the fixed income becomes a bit unattractive, there may be some investors that will try to take position in the equities market but we don’t expect the FPIs to exit.”
Ebo stated that the interest rate, based on current levels, was still attractive compared to what was obtainable in developing markets and across emerging markets.
A research analyst at Vetiva Capital Management Limited, Ifedayo Olowoporoku, said the effect of rate cut on the stock market would be limited majorly because it was not substantial enough to change the sentiment of an investor to re-allocate investment from fixed income to equity.
She said, “In the fixed income market, we have seen yields decline since the start of the year. We can characterise this rate cut as a way of the Monetary Policy Committee catching up to market realities. On average, we do not expect the stock market to react at all.
“In both markets, we may have minimal investor reaction to this cut. For the FPIs, they are invested in fixed income on the secondary market, which has seen a decline of about 200 basis points way before the rate cut.
“In theory, lower interest rates discourage investors, but this was a 0.05 per cent reduction, which is not substantial enough to change their sentiments.”
Olowoporoku forecasted that in the next meeting, the MPC would hold the rate, but might later increase the rate as the Federal Government planned to increase minimum wage, which she said would pump a lot of money into the economy and likely raise inflation level.
Analysts at CSK Stockbrokers Limited said, “We believe the CBN will not be so aggressive with loosening as concerns over portfolio flows should still remain high on the CBN’s priority list.”
