Manageable Challenges For CBN Following Sanusi Suspension

BMI View: The relative stabilisation of the naira and a decline in bond yields over recent days confirm our view that initial financial market weakness was a knee-jerk reaction to the suspension of Central Bank Governor Sanusi Lamido Sanusi. Indeed, we continue to believe that the fundamentals underpinning the markets have not been materially altered. We also believe that concerns over the independence of the central bank have been overstated. The biggest challenge for the authorities will be reassuring market participants that prudent monetary policy will prevail under the new central bank leadership.

After Nigerian financial markets initially showing signs of panic following the suspension of Central Bank Governor Sanusi Lamido Sanusi on February 20, relative stability has been restored. The naira, which declined from an open of NGN164.00/US$ to as low as NGN169.00/US$ at one point on February 20 before trade was suspended, has recovered to trade at NGN165.25/US$ at the time of writing on February 28.

Short end government debt yields also moved higher following the announcement of the suspension but these have subsequently moved lower, back to where they were trading prior to the news.

Naira Partially Recovered
Nigeria - Exchange Rate, NGN/US$

Manageable Challenges For CBN Following Sanusi Suspension

BMI View: The relative stabilisation of the naira and a decline in bond yields over recent days confirm our view that initial financial market weakness was a knee-jerk reaction to the suspension of Central Bank Governor Sanusi Lamido Sanusi. Indeed, we continue to believe that the fundamentals underpinning the markets have not been materially altered. We also believe that concerns over the independence of the central bank have been overstated. The biggest challenge for the authorities will be reassuring market participants that prudent monetary policy will prevail under the new central bank leadership.

After Nigerian financial markets initially showing signs of panic following the suspension of Central Bank Governor Sanusi Lamido Sanusi on February 20, relative stability has been restored. The naira, which declined from an open of NGN164.00/US$ to as low as NGN169.00/US$ at one point on February 20 before trade was suspended, has recovered to trade at NGN165.25/US$ at the time of writing on February 28.

Naira Partially Recovered
Nigeria - Exchange Rate, NGN/US$

Short end government debt yields also moved higher following the announcement of the suspension but these have subsequently moved lower, back to where they were trading prior to the news.

Government Debt Yields Have Also Trended Lower
Nigeria - Implied Government Debt Yields

This stabilisation in financial markets has been in line with our expectations (see 'Sanusi Suspension: Initial Thoughts' from February 20). Indeed, Sanusi was set to leave the bank in June this year so the latest developments have simply brought forward this inevitability. Deputy Governor Sarah Alade has been appointed to fill the role temporarily until Godwin Emefiele, the man chosen by President Goodluck Jonathan to be Sanusi's permanent successor, takes over. We do not believe that a change in policy is likely under Alade's temporary watch so there has been little change in the underlying fundamentals to justify major moves for Nigerian assets.

Furthermore in swiftly announcing Emefiele - an experienced banker widely viewed as a safe pair of hands - as the next central bank governor, Jonathan has gone some way to providing some clarity on post-Sanusi policy trajectory. Most observers agree that Emefiele will keep the reins relatively tight in a bid to support the currency and fight off inflationary pressures. The macroeconomic climate has been more stable under Sanusi's watch than in the years before his term and convincing market participants, foreigners in particular, that policy will remain focussed on price stability, is the most crucial challenge facing the Nigerian authorities.

Some questions still remain about the central bank's independence given the circumstances surrounding the governor's suspension. Coming in the wake of Sanusi making corruption allegations against those responsible for managing Nigeria's oil revenues, many view the suspension as being politically motivated. Discrepancies in official data suggest that there are problems in the management of the oil revenues. However, some believe that Sanusi's allegations were a pre-emptive defence mechanism against corruption allegations that have since been levelled at Sanusi himself. Indeed these accusations of corruption were the basis for his suspension.

Although it is impossible to know exactly what is going on the behind the scenes, it does not seem unreasonable for the president to suspend the central bank governor pending a corruption investigation. The central bank's independence may, therefore, not be under as much threat as many fear. Jonathan and other government officials have been at pains to stress that the bank will retain its independence, over recent days.

×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.

×

REQUEST A DEMO

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.

Thank you for your interest

A member of the team will be in touch shortly to arrange a convenient time for your free demonstration and trial. If your enquiry is urgent, please email our Client Services team here.