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Coronation Research’s Nigeria weekly update: CBN goes for growth

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We are accustomed to the Central Bank of Nigeria (CBN) limiting Naira liquidity for fear of upsetting the foreign exchange market. Now the CBN is unafraid of liquidity and is pushing growth – for now. Fixed income rates are falling. See page 2.

FX
This year US$18.79bn has flowed into the NAFEX market with Foreign Portfolio Investment (FPI) accounting for 65.40% of inflows (US$12.29bn). The CBN’s supply of US dollars to the NAFEX market has been 3.02% of inflows (US$0.57bn). In effect, FPI is supplying sufficient US dollars to take the pressure off the CBN, hence our confidence that the exchange rate will hold this year. And the CBN has new-found confidence to target growth.

Bonds & T-bills
The yield on a Federal Government of Nigeria (FGN) Naira bond with 10 years to maturity fell by 24bps to 13.95%, and at 3 years declined by 25bps to 13.20% last week. The yield on a 364-day T-bill fell by 51bps to 12.50%. The yield on a T-bill with 3 months to maturity declined by 27bps to 10.30%.

Investors are reacting to the CBN’s revised Standing Deposit Facility (SDF) placement by banks which is now capped at N2.0 billion (US$5.7 million) from N7.5 billion previously. The T-bill market is currently characterised by high demand and strong market liquidity which depressed yields this past week. In the absence of frequent Naira fixed income auctions by the CBN, we expect yields to be stable and not derail significantly from current levels. With this amount of liquidity in the market the initiative lies with the CBN to set rates.

Oil
The price of Brent rose by 3.99% last week to US$66.72/bbl. The average price, year-to-date, is US$66.10/bbl, 7.80% lower than the average of US$71.69/bbl in 2018, but 20.75% higher than the US$54.75/bbl average seen in 2017.

The 2019 oil market is themed by supply cuts, for the most part. The latest report from the International Energy Agency (IEA) shows that oil supply exceeded demand by 0.9 million barrels per day for the first half of the year. This comes on top of pre-existing stockpiles and rising shale production. With oil price protection in view, OPEC’s tightening measures are understandable, especially with the US/China trade war still unresolved.

Equities
The Nigerian Stock Exchange (NSE) All-Share Index lost 2.41% last week, resulting in a year-to-date return of negative 9.11%. Last week Cadbury Nigeria (+8.64%), Flour Mills of Nigeria (+8.00%) and Unilever Nigeria (+3.13%) closed positive while Forte Oil (-23.33%), PZ Cussons (-10.14%) and Nestle Nigeria (-8.92%) fell.

Last week saw the listing of Airtel Africa which closed the week at N323.50/share, down 18.98% from its listing price of N363.00/share. Such a reception continues to show weak investor sentiment in the market. While investors maintain a cautious stance on investing in equities, some stocks are trading close to multi-year lows and present a good entry point for investors, in our view.

The CBN pushes the growth pedal
The last few weeks have seen a flurry of activity from the CBN; a circular on mobile money & financial inclusion; hints of banking sector re-capitalisation 2.0; another circular prohibiting banks from a loan to deposit ratio less than 60%; and finally a ‘no thank you’ note to banks which may wish to park excess cash in the CBN vault, for excess cash balances above two billion Naira (US$5.6m).

What is the overall signal?
The CBN’s recent focus for the past two years has been on monetary stability. Following a 7.50 percentage point decline in inflation, a rise in foreign exchange reserves and hard-earned currency stability, one could argue that it has won the battle. And it has been helped by the downward prospects for US dollar interest rates, which take the pressure off emerging market currencies to some extent. Now the CBN can return to its other agenda. It wants economic growth.

Nigeria’s GDP growth rate mimics the growth rates of developed countries even though it isn’t one. One sign of sluggish growth has been slow growth in commercial bank loans, which suggests, among other things that the supply side of the economy is weak. The CBN’s approach to galvanising growth had been skewed towards the supply side, and it has deliberately held down loan rates in several areas, such as agriculture, in order to implement its policy. The problem with this initiative is that commercial bank loans have not grown as a result, leading the CBN to come up with more radical measures than before.

Typically banks keep cash balances when the CBN Open Market Operation (OMO) auctions are imminent, driving up overnight lending rates around auction dates. But there is a clear downward trend this year in the rate at which very short-term unsecured loans are traded between banks around OMO auction dates.

In fact, on 4 July the cost of overnight loans between banks fell to its lowest this year (4.86%) suggesting that for a given level of liquidity mop-up by the CBN, banks are willing to lend to themselves at cheaper rates than before. During H2 2018, this relationship was upward trending (when adjusted for outliers).

The CBN is attempting, through its circulars, to unlock excess liquidity trapped within the banking system in the hope that it will be channeled towards the real economy. Banks now have an extra incentive to target firms, and the affluent with (soft) loans when other forms of risk-free income become pressured.

All of this reads well for consumer spending, which is the dominant component of aggregate demand, but it may mean thinner margins for banks. The argument that banks may still expect to improve or maintain their margins without a corresponding expansion in loan books must be nuanced with the guidance that the CBN may restrict banks’ participation in the OMO and T-bill market for their own account. By and large, the CBN’s actions are likely to drag down interest rates until the point is reached where it finds Naira liquidity is negative for the currency.

Indeed, in our view the CBN may be wary of a steep reduction in market interest rates and what they could mean for the Naira exchange rate, on two counts. One, some of the excess liquidity in the banking system could find its way into the FX market. If stability remains a priority, the CBN will have to part with more of its dollar reserves. Two, moderating market interest rates could erode the appeal of the naira carry trade prompting foreign portfolio investors to unwind their positions.

But these are still early days, and we await the CBN’s upcoming auctions to learn more of its rate policy.

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Business

Ondo govt bans operations of Okada riders

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The Ondo State government has placed total restriction on the activities of commercial motorcycles, popularly known as “Okada”, in Ofosu and Ajebamidele axis of the Benin-Ore highway in Odigbo Local Government area of the state.

The state government, in a statement issued on Thursday by the Commissioner for Information, Donald Ojogo, stated that the ban became imperative on the stretch of the road which borders Edo State and Ogun State, due to what it described as the nefarious activities of the Okada riders.

In the statement, Ojogo maintained that their activities will henceforth be restricted within Ore town, pointing out how increasing crime rate in the affected areas are mostly perpetrated under the guise of those riding okada.

The statement read, “Government has observed with serious concern, the activities of some unscrupulous elements who have hidden under the guise of engaging in motorcycle business, popularly also known as Okada, to perpetrate crime on the Ofosu-Ajebamidele route along the Ore Expressway.

“Disturbed by the activities of these criminal elements which include armed robbery, kidnapping, their mode of operations as well as the heightening cases of loss of lives, the Ondo State Government has placed a total ban on commercial motorcycles (Okada) along the entire stretch of the route in question. This action is with immediate effect and shall suffice until further notice.

“By this development, all activities of commercial motorcyclists are henceforth, restricted to internal confines of Ore town and other communities in the area. Security agencies, especially the Nigeria Police, are consequently directed to apprehend forthwith, anyone who flouts this restriction order.

“Government appeals to the general public to co-operate with security agencies in the enforcement of this action in order to stem the growing rate of criminal activities along the area.”

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Business

Miyetti Allah announces closure of livestock markets in Enugu

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The Northern Leaders, Livestock and Perishable Goods Market, and Miyetti Allah Cattle Breeders’ Association of Nigeria, Enugu State chapter, has announced a two-day closure of livestock and perishable goods markets in the State.

To this effect, they will not be open for business on Wednesday and Thursday next week.

DAILY POST reports that within the period, the groups are to carryout sensitization visits to all the places of business and settlement of their members as part of their collaborative effort with the State Government and security agencies towards peace and security in the State.

This was announced at a press briefing jointly addressed by their leaders in Enugu, on Saturday.

The leaders, Gidado Siddki and Sarki A.Y. Sambo, who were flanked by others, said they were appreciative of the peaceful co-existence between their members and the people of Enugu State, and as such would not allow anyone to jeopardize it.

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Court Jails Bank MD 2 Years For Embezzling N195 Million

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Adetunji Abudu, a former managing director of New Prudential Mortgage Bank Limited, has been convicted and sentenced to two years imprisonment for N195m fraud.

Justice I.N. Buba of the Federal High Court in Ikoyi, Lagos State gave the ruling following his arraignment and prosecution by the Economic and Financial Crimes Commission (EFCC).

According to a statement by the anti-graft agency, Abudu was arraigned on a four-count charge bordering on money laundering and embezzlement, in 2016.

The agency said his offence is contrary to the Banks and Other Financial Institutions Act (BOFIA) 2004, Section 18(8) and punishable under Section 18 (11) of the BOFIA LFN 2004.

Abudu was alleged to have obtained a N35 million loan and another N110 million loan without authorisation when he was the bank’s managing director.

The former New Prudent Bank boss also approved the setting off of a N50 million loan granted to Total Access Concept Limited by Addoser Micro-finance Bank, which was also not authorised in accordance with the bank’s policy and in contravention of BOFIA 2004.

The defendant pleaded not guilty to the charges.

In the course of the trial, A.B.C. Oziokor, the lead prosecution counsel, called seven prosecution witnesses and tendered several documents that were admitted in evidence by the court.

On his part, Abudu called five witnesses.

Delivering his judgment on Justice Buba found the defendant guilty on counts one, two, three and four, as charged.

The judge said, “The court has considered the fact that the convict is a first-time offender, a family man, and a breadwinner. The court will be lenient, given that the convict is a first offender. But this will also send the right signal that it is this type of attitude that has led our financial institutions into trouble.

“This is a matter the convict should not have allowed going through the rigors of a criminal trial, having been given the opportunity to refund the money. But he still remained obstinate.”

The judge, therefore, sentenced the convict to two years on counts one, two, three and four, without an option of fine, with effect from the day of the judgment.

The sentences are to run concurrently.

The convict was ordered to make restitution to the complainant, in accordance with Section 321(a) of the Administration of Criminal Justice Act, ACJA, “if the properties released cannot meet up the amount of exposure to the complainant”.

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