FSDH Research, an arm of FSDH Merchant Bank Limited, has predicted that the Central Bank of Nigeria’s (CBN) benchmark interest rate, the Monetary Policy Rate (MPR), is likely to hit 19 per cent in the first half of this year compared with 18.75 per cent at the end of 2023. The firm, which stated this in its “FSDH Economic Outlook 2024” report, however, said it expected that the MPR “will be adjusted downwards as the inflation rate declines in H2.”
According to the firm, the inflation rate is likely to average 27.9 per cent in 2024 compared with the 2023 average of 24.5 per cent. It also said that key challenges such as insecurity, logistics bottlenecks and infrastructure deficit would linger in 2024, thus raising business costs. It added, however, that it expected the inflation rate “to trend downwards in H2’24 as fiscal authorities will intensify their efforts to address some of these challenges.” Specifically, FSDH Research stated: “We expect the Central Bank of Nigeria to pursue an inflation target agenda in 2024. This position implies a mopping up of liquidity via the fixed-income market and suggests a hawkish environment for interest rates. “While interest rate hikes and the issuance of monetary instruments to mop up liquidity are inevitable, we do not envisage excessive rate increases, as the apex bank will also consider the need to boost economic growth and curtail high borrowing costs for both businesses and the government. The MPR is expected at 19 per cent in H1’24 and will be adjusted downwards as the inflation rate declines in H2.”
It further stated: “We anticipate tighter monetary policy in H1 2024 as part of the strategy to lower inflation with aggressive liquidity mop-ups. “Moreover, we expect the FG to raise N6.0 trillion via the domestic debt market (excluding ways & means), which is greater than the total maturity from the sovereign debt market (N3.25tn) plus new pension fund flows (estimated at N585bn). This does not account for new fund flows from DMBs. We expect these bond issuances to strain system liquidity during the year. “In addition, we highlight that total NT-bill maturities for the year as of January 16 are estimated at N6.6 trillion, which we expect to be rolled over given the FG’s
revenue constraints. Overall, we anticipate a higher NT-bills rate on average in 2024.” The firm also said it expected Gross Domestic Product (GDP) growth to average 2.9 per cent in 2024, an improvement from the estimated 2.5 per cent in 2023. “Key growth drivers will include improved oil production volumes and higher government expenditure and consumer spending as they adjust to the impact of the fuel subsidy removal. Sectors such as finance and information communication will continue to drive output in 2024, while modest growth is expected for manufacturing and agriculture, due to harsh operating environment,” it stated.
On the exchange rate, FSDH Research said it anticipated an average exchange rate of N925 per dollar in the official market in 2024. It stated: “The FX market will continue to be under pressure, driven by rising demand for imported goods and services – overall GDP growth is not high enough to meet domestic needs. “Additional FX inflows from crude oil sales and other sources will not be adequate to meet this rising FX demand. “Although foreign portfolio investment inflow is expected to improve relative to 2023 to take advantage of high interest rates, the economy will still be far from attaining the volume of FPIs pre-COVID.” On the outlook for the bond market this year, the firm said: “The FG is expected to continue relying on the domestic debt market to finance the budget deficit. While loans from bilateral and multilateral sources would be available, the Eurobond market would be difficult to approach due to the elevated global interest rate environment. “We project the FG would borrow N6.0 trillion from the bond market with a bias for longer tenors. “Compared to expected maturities for the year coupled with fresh inflows, we expect bond supply to outweigh demand, driving bond yields higher.”
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