Rewane Breaks Down CBN MPC Decision

[00:00:00]We have the CEO of financial derivatives company, Mr. Bismarck Rewane. Thank you very much, Mr. Rewane, for joining us on the news at 10.

[00:00:08]>> Thank you for having me.

[00:00:08]>> I mean, many have said that this decision to retain rates carry far-reaching implications for businesses, for households, for the ordinary man on the street, especially when we remember that there's still a global crisis in the oil industry. Give us some insight into the reason why this was retained, and of course, its implication on the economy of Nigeria.

[00:00:28]>> Okay, thank you once again.

[00:00:30]Let's start from the point of view that the Nigerian Central Bank just won an award of the best Central Bank in the world in London about a week ago.

[00:00:39]And that's no mean feat, because it's a recognition of its autonomy, its independence, and its foresight. So, that aside, we are saying the Central Bank holds as the governor here, why this and why now?

[00:00:52]And what are the implications of this?

[00:00:54]First and foremost, there were five considerations here.

[00:00:58]One, external which is quite prices fluctuating and unstable. It has gone all the way from $68 to $125 and has swinging all over the place.

[00:01:06]And the volatility is higher than normal. Between February 28th this year and today, July 21st, we've seen these swings.

[00:01:16]Now, core inflation is also supports the hold. Core inflation is um stable and food inflation has increased. So, that means that inflationary factors are transient.

[00:01:30]Like here, US Iran shock drivers are largely transitory and the naira is strong, the reserves are high.

[00:01:37]And and the official market is 1382 and the parallel market is 1420.

[00:01:43]But if inflation expectations are elevated, we expect that in the month of July, we'll see inflation which had slightly moderated to go back up marginally again. I think that's very important to note. So, that is why we say why this and why now.

[00:01:58]Now, the Central Bank Governor also and the Monetary Committee actually decided change what we call the oil cost or an oil cost is when you when you lose your money or you you you the money leaks and you don't actually take advantage of it into an oil purse. In other words, saving the money rather than wasting the money. So, you can see Brent is above $55 $85 a barrel. As a matter of fact, today is about $92 a barrel. Yet, inflation expectations stay elevated.

[00:02:28]The MPC decision hinges on which force wins. You can see that's the price that's the barrel of oil.

[00:02:34]>> Yeah.

[00:02:35]>> Our production is increasing and oil theft is actually declining.

[00:02:39]If you go to the next slide, you'll see what I'm talking about.

[00:02:42]So, four things that will drive the Nigerian economy in the next 2 months.

[00:02:46]One, the price of crude oil, which is outside our control.

[00:02:49]>> Yeah.

[00:02:49]>> And like I said, they're going all the way from 68 to 92. Right now, we think the market has priced in the instability and was average at about $85 a barrel.

[00:03:01]The other thing is the price of PMS.

[00:03:03]Every time you raise the price of PMS, it feeds into transport costs and feeds into the logistics costs. It's very very important and that is under the control basically of the Dangote Refinery and the other refiners.

[00:03:17]The other one is the value of the naira, which again lies in the way the Central Bank has managed this currency. You will see as you go to the next slide that this the IMF says the naira is 25% undervalued. We think it's about 14% undervalued, but the Central Bank is being very very cautious instead of allowing that to happen. So, what we expect is our inflation goes up to about 16% from current 15.93 and this is year-on-year inflation, it goes all the way down and begins to pick up to about 16%.

[00:03:48]So, whether there's a ceasefire, we've seen that a ceasefire doesn't mean anything. The markets have priced into that instability of the ceasefire and the difference between a memorandum of understanding and a an agreement.

[00:04:00]Every $10 increase, if you go back a little bit, every $10 increase in the price of oil will increase lead to approximately 0.20 increase in the rate of inflation. So, if the if the price of oil increases and transport costs increase, it kicks in to inflation there.

[00:04:18]Next slide.

[00:04:19]Now, is Nigeria alone? We looked at six countries.

[00:04:23]Nigeria held today.

[00:04:26]Ghana is expected to hold this week at 14% per annum. Kenya is holding at 8.75%.

[00:04:36]Mozambique is to hold at 9.25, but two countries that are likely to hike by 25 basis points, South Africa and Namibia, they're very close and so we don't expect but if you look at the advanced markets, both in the US, the UK, the Federal, sorry, the European Central Bank, we expect to see >> [clears throat] >> all of them maintaining status quo. So, we are not an outlier in this case.

[00:05:00]Next slide, we'll see now inflation drivers are more transient than structural.

[00:05:06]You have the structural forces which are here and then the transient forces. But one thing we have to note is that you know, there are four major drivers of economic performance here.

[00:05:19]We said the value of the naira, the PMS price, the price of crude, and finally, the fiscal policy.

[00:05:30]Fiscal policy, three things are important. One, making sure that revenues collected. Two, that you know, you find leakages, blocking leakages, and also it's to show that spending is efficient.

[00:05:48]What we uh We have a Minister of Finance, Kemi Adeosun, who knows how to block the leakages and also to ensure that expenditure is managed efficiently.

[00:06:00]What he cannot control is the certain things in the system, but definitely with his pedigree, he should be able to hold and make sure that leakages are blocked.

[00:06:11]Now, some myths and truths.

[00:06:14]Some people believe that external reserves are the same thing as savings.

[00:06:16]No. External reserves is the money that belongs to everybody. It's not the government money, right? And so, that's And our gross reserves are equal to net reserves. You can see our gross reserves are about $53 billion.

[00:06:28]Net reserves are over $40 billion.

[00:06:31]So, gross reserves are always higher than net reserves and external reserves are not savings with. That's final. What you we look out for is excess crude account, which is naira value of oil price above the budget benchmark.

[00:06:42]They are not It's not a piggy bank. And so, there are some things that need to be done.

[00:06:46]Right? So, here we go.

[00:06:49]Fiscal goals: maximize GDP growth, block leakages. That's what I was talking about. Ensure transparency and increase fiscal revenue. This is responsibility of the Ministry of Finance Minister of Finance and the Coordinating Minister of the Economy. I think he can block leakages.

[00:07:04]Like he can't do much too much about GDP growth. He will then He will He will ensure transparency and increase fiscal revenues. Monetary goals: this is Central Bank. Maintain price stability, maintain a sound banking system, and boost investor confidence. This is Nigeria is doing well here. Investment goals: diversify the economy away from oil, attract foreign direct investment, expand infrastructure. Again, there's also a debt Nigeria has a debt problem as well.

[00:07:29]So, what what do we see? Oil has gone up by 40%, but the naira has only appreciated by 2%.

[00:07:34]Means that some There's some work to be done.

[00:07:37]So, it went from 72, 85, 105, but because we had spent uh we had committed a lot of our foreign oil price oil commitment forward and that has not helped our situation that much.

[00:07:52]So, now this is where we are.

[00:07:55]The undervalued is we say it's 14.8%.

[00:07:59]IMF says 25%. Now, the parallel market is at 1420 today and the official market is at 1380. The PPP is at 1175.

[00:08:10]And then the hamburger index is at 2,342 naira to a dollar. So, in terms of foreign exchange stability, the naira is doing well.

[00:08:18]Factors that will determine the value of the naira as we go along, the price of oil and the production of oil. Higher crude oil means leaves the dollar.

[00:08:27]Net external reserves, the CBN buffer to defend the currency and meet FX demand.

[00:08:31]Monetary policy rates and liquidity set incentive to hold the naira assets.

[00:08:35]They've done a good job there. And inflation can erode purchasing power, but that is money that's been well managed. Investor confidence will drive portfolio capital inflows. Next slide.

[00:08:46]So, this is how it affects you and I.

[00:08:49]First and foremost, we have chicken at 6,000. It was In June it was 6,500.

[00:08:55]And then rice was 70,000. It's It's going expected to go to 80,000. Beans from 110 to 120, it's going to go up by 4%.

[00:09:04]Irish potatoes dropped and sweet potatoes have increased by 66% to 5,000.

[00:09:11]And cooking gas, of course, is the main culprit there.

[00:09:14]So, sector adjust minimum wage. In all of this, if you don't increase the wages or increase the wages without increased productivity will lead to inflation. The big elephant in the room is what to do about the Dangote refinery. Right now, Dangote's I think the government has renewed the oil for naira swap, but they are Dangote is only getting 20% of the volume it requires. Therefore, he has to go and buy outside to to to refine for Nigeria.

[00:09:44]Next slide.

[00:09:45]So, of course, I've talked about the minimum minimum wage, but the important thing is that the minimum wage review is not the same thing as a a general wage review. Next slide. So, let's go. This is what happens.

[00:09:57]They say, "Pay your dues or join the queues."

[00:09:59]Dangote's it's actually has increased prices.

[00:10:04]They've increased prices recently because the price of oil has increased.

[00:10:07]And this is Dangote Refinery. If they don't get the crude they want, then you you end up with queues as you see here.

[00:10:13]Pump price has increased by 9.5%, but it's not Basically, he's having to buy crude in the international market to refine to sell in the local market. And so, the government has to do something about it.

[00:10:25]Right. And now, you have the IPO. So, what's going to happen?

[00:10:29]We're going to have Christmas in September this time because everything is front-loaded. Elections are in January.

[00:10:36]Salah is Feb- February 7th February 8th.

[00:10:39]And so, everything that was going to be done in December is going to be done in September. So, you have December Christmas in September. Dangote Refinery is an IPO.

[00:10:48]Take it now.

[00:10:49]Like we say, "Buy on the rumor, sell on the news."

[00:10:51]And general elections, political cycle spending, and Ramadan fast in February 2027.

[00:10:57]So, this are the ports You can see already that people are importing things on the ports. You can see that from 25 ships with awaiting backup 21, now to 27. But you see that two in Apapa, 12 in Lagos Tin Can, five in Warri Port, and seven in the Lekki Deep Sea. So, if I have almost 90% of the ships are in the Lagos area.

[00:11:19]So, [clears throat] what I expect in September, transport fare remains flat, house rent will increase, electricity cost is going to go up, food up, utilities up.

[00:11:30]For corporates, diesel flat, borrowing cost flat, international school fees higher, airline tickets higher, and salaries stay flat.

[00:11:38]For the elites, luxury goods stay flat, taxation up, VAT up, capital gains tax up. So, generally speaking, this is the outlook.

[00:11:47]Brent $90 a barrel, oil production 1.5 million barrels a day, naira 1,400 to 1,430.

[00:11:55]Not bad.

[00:11:56]July inflation slight rise, real GDP subdued, and equities horizontal. But again, you've got to There's a private placement of 2.5 billion dollars and the IPO which is coming up in September. So, like I said, you know, buy on the rumor, sell on the news.

[00:12:16]>> All right.

[00:12:17]>> Thank you.

[00:12:17]>> Thank you very much, Mr. Bismarck Rewane, CEO of Financial Derivatives Company. Thank you for your time on the News at 10.