In a much anticipated press briefing the Central Bank Governor, Godwin
Emefiele yesterday announced that the Monetary Policy Committee had
taken a decision to effectively devalue the Naira from N155 to N168.
This obviously is in response to the dip in oil prices and the run on
our forex reserves which has seen the naira crash to as low as N182 this
week. The CBN also took a decision to increase the Monetary Policy rate
(MPR) to 13% from 12% which in financial terms is quite a huge jump.
The MPR is the rate at which the CBN essentially lends money to banks
and is in turn a benchmark for bank lending to the wider economy. The
CBN also decided it was going to increase Private Sector Cash Reserve
Requirement (CRR) to 20% from 15%. The CRR is a limit imposed on private
sector deposits that the bank will have to keep with the CBN,
effectively meaning they only get to lend out 80% of our deposits with
them.
Just like many have asked me on twitter, in my blog and via
messages, I am sure you must be wondering too, what does this all mean
to me? How does it affect my savings, spending and investments? I will
attempt to explain in plain terms.
I want to buy or sell forex
By
devaluing the naira by a whopping N13 the CBN is basically telling the
markets that it can no longer sell dollars at the Retail Dutch Market at
its official price of between N155 – N160. The official rate is the
rate sold to qualified importers and industries who rely on forex for
business. Whilst the common man does not buy dollars from the RDAS we
have the interbank market (a secondary market) and the parallel market
as areas where we can buy dollars. For years the difference between the
Official CBN rate and the Interbank has been about N5 whilst between the
Interbank and black market has been about N5 thus keeping that margin
at no more than N10 between the CBN rate and Parallel (black-market)
rate.
PTA & BTA – For those looking to travel abroad
and looking to buy dollars from the bank, the exchange rate for you is
perhaps between N173 and N177 assuming the naira does not crash further.
If you use our local debit and credit cards abroad, then you are
essentially paying the same amount with the interbank rate.
Black
Market Buyers – For those who prefer to buy or sell dollars at the
black market, this new rule could only affect you if the naira crashes
further. After all, the reason why the CBN decided to depreciate was
because it could no longer hold on to that huge spread when the naira
was still officially pegged at N155-160. Visitors into Nigeria who have
dollars with them are set to benefit immensely. It means their money is
worth much more now than before. Salary earners in dollars also earn
more when they convert to Naira
I have a bank loan or I am looking to secure one
The
increase in MPR as explained above, means the CBN has now effectively
increased lending rate in the country. Usually when this occurs,
commercial banks also increase their lending rate to borrowers. For
those who have consumer loans such as car loans, mortgages, credit card
debts, personal loans etc. don’t be surprised if your bank sends you a
letter this week or next informing you of an increase in your borrowing
cost.
This also extends to small businesses with loans that are
kept at floating rates (changes with market conditions). The banks may
decide to increase your borrowing rates depending on how they perceive
your risk profile. Those who have dollar denominated loans are also
heavily exposed to higher pay out especially if you took out a dollar
loan even when you earn your income in naira. You income has now
effectively reduced in dollar terms meaning you have to spend more to
pay off your dollar loans.
What happens to my investment in Treasury Bills, Fixed and savings deposits?
The
money market has been relatively volatile as investors reacts to the
wave of economic news emanating out of Nigeria. With this MPC decision,
particularly the one increasing MPR as well as CRR, I believe TB rates
will increase in the primary market. If you got 10% for a 6 month
treasury bills investment, then it might just increase to 12% in
reaction to tightening liquidity. This off course depends on the diverse
expectations of bidders for treasury bills. Fixed deposits from banks
will also likely increase in response to the increase in CRR as well as
increase in lending rate. You should attempt to renegotiate your rates
with your bank to also reflect the current market conditions. Remember,
the naira is worth less now in dollar terms so you need to grab as much
value as possible.
What happens to my stocks?
Many
believe the stock market has probably priced in the devaluation of the
naira. This is because the stock market is like a leading indicator and
reflects the mood of things to come before any other market does so.
However, some stocks do come under scrutiny considering the outcome of
the MPC meeting. Companies that have heavy dollar exposures are examples
as they may need to incur higher forex cost by year end, if they had
not hedged. Banking stocks also come under further pressure due to the
increase in CRR as their Net Interest Margins may reduce thus affecting
profits. However, it is thought that may be neutralized by gains in the
forex market. Oil and gas stocks are also at risk of reporting lower
earnings if the price of oil continues to slide further. This may not be
market for short term buyers of equities, however long term buyers can
find good bargain stocks.
Spending and family budget
As
the year runs on, if it’s not unlikely that prices of goods and
services will go up. Examples are foreign goods which most people rely
on, gift items, baby products etc. Luxury items might also be even more
expensive with the devaluation of the naira. The Nigerian economy is
essentially dollarized due to our high taste for imports, so I won’t be
surprised if things get more expensive. It may therefore be wise to buy
your Xmas goods early enough as consignments coming in from next week
will probably be more expensive when they are sold.
http://nairametrics.com/how-the-devaluation-of-the-naira-affects-your-money/
No comments:
Post a Comment