How CBN’s orthodox policies will impact equities market

Standard Bank Group analysts are forecasting that the Central Bank of Nigeria (CBN) will implement more stringent measures and raise interest rates to enhance the appeal of naira assets to both domestic and foreign portfolio investors. Muyiwa Oni, the Regional Head of Equity Research for West Africa at Standard Bank Group, recently discussed these predictions and their implications for the economy. Oni highlighted the importance of liquidity in the foreign exchange (FX) market, emphasizing the need for market-driven pricing to attract investors. Currently, the FX market is still in a price discovery phase, with the official exchange rate fluctuating between 780 and 1,100 Naira per dollar. Although progress has been made in restoring liquidity, daily trades in the FX market remain below pre-pandemic levels. Oni suggested that improved market access and competitive yields are crucial factors that investors will consider when evaluating opportunities in both fixed income and equities markets. However, structural obstacles such as Nigeria's exclusion from major indices like the S&P and MSCI limit active participation from funds tracking these indices. Oni explained that resolving issues in the FX market, increasing market access, and demonstrating normalcy are essential steps towards regaining inclusion in global indices. He also pointed out that offshore holdings in Nigeria have significantly declined to $8 billion, down from a peak of $30 billion, affecting overall market liquidity. To attract foreign portfolio flows, Nigeria must restore investor confidence and demonstrate stability in its asset markets. Oni addressed the operating environment for various sectors, noting challenges faced by consumer goods companies due to elevated inflation levels. He highlighted the need for a moderate inflationary environment and lower interest rates to support sustainable growth in the long term. While the near future remains challenging for consumer companies, Oni expressed optimism that improved economic conditions could lead to better pricing strategies and performance. Looking ahead, Oni expects the CBN to maintain a focus on price stability and exchange rate management, with potential adjustments to policy measures like the Cash Reserve Ratio (CRR) to align with the bank's mandates. In response to rising market rates, the CBN has already taken steps to increase rates on HOMO issuances and treasury bills, signaling a proactive approach to monetary policy. Overall, Oni's insights underscore the complex dynamics at play in Nigeria's financial landscape and the importance of prudent policy decisions to navigate the evolving economic environment.