WILL THE NEW CBN POLICY TURN MARKET?

The apex bank reduced the monetary policy rate (MPR) from 10.25 percent to 9.75 percent while cash reserve ratio (CRR) dropped from 4.0 percent to 2.0 percent. Liquidity ratio was sliced from 40 percent to 30 percent as repos transactions against eligible securities would be allowed for 90 days, 180 days and 360 days. The policy mix is primed to attract about N1 trillion in to the economy. Out of this fund, a good proportion is expected into the stock market.
This is likely to increase liquidity in the economy and financially empower investors to take position and stir demand and prices.

The stock market has lost about 27 percent since March. The slide was caused by a number of factors, including the confusion over margin trading; the 100,000 minimum trade before prices could move; and earlier planned recapitalisation of the stock broking firms; now rescinded harmonisation of banks’ year- end; increase in MPR from 9.50 percent to 10.5 percent ; increase in CRR from 2 percent to 4 percent; flight by hedge funds .Each of these factors led to liquidity squeeze in the stock market.

The current effort of government is expected to trigger upward trend in prices. The calculation of government is that reduction of MPR which is the rate the CBN lends money to banks would lead to fall in interest rate and allow customers, including investors to borrow at lower cost. This was meant to increase money supply in the economy, boost liquidity in the capital market and encourage investors to play in the market. Reduction in cash reserve requirement implies that more cash would be available to banks from their reserves and allow them extend credits to desiring investors.

Some of the most potent instruments in stabilising the market are the margin trading shares buy-back and creation of market makers. In share buy back, companies are allowed to buy their shares if they believe that the price is too low. This helps to boost share prices. Margin trading, which was the order of the day before the confusion that surrounded it, allows banks to extend margin credist to stock brokers or investors to take positions in stocks. Margin account was lucrative when the market was bullish. Until late March this year, those who played the market with money borrowed at even high interest rates harvested good returns as some stocks recorded three digit percent price appreciation . The practice was so rewarding that banks exposure in the area was high.

But since the market down turn, many investors have lost so much money that venturing into margin trading, may not worth the plunge. Already, there is share glut in the market now following liquidity squeeze and excess supply of stocks. In response to banks’ pressure to recover their money, stock brokers are said to be selling shares bought with margin credits, a development if allowed, that would further depress the market. To forestall this, the Central Securities and Clearing System, is said to have frozen such accounts.

The share buy back is yet to commence because of the legal hurdle which will take a while to be removed because of the long process of amending the Investment and Securities Act (ISA) to reflect the new rule. The appointment of market dealers would have been one of the best things that would happen to the market. But the logistics are still being worked out by SEC and the Nigerian Stock Exchange. And until that happens, market makers whose responsibility it is to buy off shares from selling investors are not going to be available to bail out the market.

As laudable as the intervention is, it remains an indirect instrument and is yet to impact the market. The truth of the matter is that the market needs direct intervention, if we must achieve similar immediate positive effects like what is happening in Europe and America . The injection of $180 billion by central banks of developed economies, led to market rebound over night because of the direct intervention.

Although the CBN may be cautious of the inflationary tendency of direct injection of funds into the economy, it may be the best option now given the level of loss the stock market has recorded so far. It could be an interim policy, pending when the other policies would start having effect. The apex bank can then mop up as an anti inflationary act.

The suspension of the stabilisation policy, I believe is ill-advised. The decision should be revisited. I do not agree with Finance Minister Shamsudeen Usman that the latest decision to stabilise the market has taken care of the earlier plan for intervention fund. Most of the latest pronouncements to halt the market slide are indirect policies. So, the stabilisation fund would have been a more effective tool.

As for the recovery period for the market, I see that happening soon. A study of the market in the last few days shows that the level of loss is declining. And as the share glut in the market is mopped up following the liquidity- enhancing policies, the market would stage resurgence.