Activities that will shape banking, finance in 2018

Slowly, but surely, the year 2018 is here. Across various quarters, there have been political, religious and economic predictions.

In the banking and finance sector, investors, policymakers and the general public are expectant of critical issues that will determine the inflow and outflow of funds across the markets.

But, most significant is that 2018 is the second year after the Federal Government’s Economic Recovery and Growth Plan (ERGP) was drafted. The year will, therefore, go a long way in determining the extent to which the objectives of ERGP will be achieved for the period 2017–2020.

In order to stabilise the macroeconomic environment, the government aims to align monetary, trade and fiscal policies. So, the New Year will be split into two halves. The first half will be characterised by economic and policy actions. The second will be politics. On this premise, Nigerian Tribune delves into what Nigerians are likely to experience in the financial services sector.

 

Inflation

Although the Governor of the Central Bank of Nigeria (CBN), Mr Godwin Emefiele holds the view that Inflationary pressure will continue to ease and may return to a very low double-digit or high single-digit levels this year, some expert opinion holds a contrary view. Their belief is that due to political campaigning that will take effect fully in 2018, there will be an increase in the level of money supply, at a growth rate of five to 10 percent. Broad money supply contracted by 11.06 percent in 2017 due to tight liquidity conditions. Also, the likely review of the minimum wage (currently at N18,000) and other social intervention programs by the government will exacerbate inflationary pressures in 2018. This condition will prompt the Central Bank of Nigeria (CBN) to engage in a more frequent Open Market Operation (OMO) in order to control liquidity.

 

Exchange Rate

The exchange rate will witness some pressure due to the anticipated increase in liquidity. However, the Central Bank of Nigeria (CBN), as already demonstrated, will attempt to support the currency at the expense of the rising external reserves level. Hence, their expectations that exchange rate stability will continue as CBN entrench and sustain the transparency in the Foreign Exchange ( FX) market. Just as FX reserves accretion continues, and market confidence and improved sentiments remain, stakeholders expect that the exchange rate will not only be stable but would also begin to appreciate against major currencies.

Professor Hassan Oaikhenan of the Department of Economics and Statistics, University of Benin, supports the idea of a rallying local currency. He said the foreign exchange environment would likely witness some favourable effects in 2018. He made the projection in an interview with the News Agency of Nigeria (NAN) in Awka, saying that there would be a massive inflow of foreign exchange into the country as politicians would need them to fund their electioneering campaigns ahead of 2019 general polls.

In fact, the apex bank is also hopeful that barring any unforeseen shocks, Foreign exchange (FX) reserves will continue to grow. “It is my belief that if we remain resolute with our efforts, policies and actions we can attain an FX reserve position of about $40 billion by end 2018,” says Emefiele.

 

Growth

Though leading indicators such as the Production Manufacturing Index, External reserves, nominal currency and price stability have improved, labour force participation remains weak and this leads to a surge in the misery index. Experts’ opinion is that the growth momentum is expected to be sustained in 2018, although at a slow pace: 2 – 2.2 percent. The drivers of growth will remain unchanged, increased agriculture and oil production. In addition, increased infrastructural development and its impact on productivity will boost aggregate demand.

Group Managing Director, Access Bank Plc, Herbert Wigwe, says “looking at 2018, there will be a lot more focus on retail, supporting sectors of the economy that will lead to import substitution. There will also be increasing activities in the key sectors of the Nigerian economy like the Agric and power sectors, just as the private sector had a major role to play in driving diversification of the Nigerian economy.

Also, the assurances from Emefiele pointed to an economy that will continue on a recovery path.

“In my personal understanding of current developments and my assessments of the traverse of future outcomes, I expect that Economic Recovery will consolidate.

“As the sentiments improve in the macro-economy and supported by proactive monetary, trade, industrial and fiscal policies, I expect a continued uptick in GDP growth with a positive spillover to the improved unemployment rate. As policies to strengthen the agricultural and industrial sectors become more emergent, growth in these sectors will rise, further bolstering overall economy.”

 

Monetary policy

In 2018, monetary policy will be slanting towards a midpoint to accommodate growth. Thus analysts at Proshare Confidential believe that there will be a 100 basis point shave to the monetary policy rate accompanied by a cut in the quantity base.  The root penetration of a rate cut will be shallow without reducing the cash reserve ratio. Other supporting views are that Monetary policy stance could change when the underlying fundamentals become supportive. If the pace of disinflation becomes adequate and inflation is seen at predicted levels, the MPC may begin to see the strong justification for an easing of monetary policy, which may further accelerate the recovery process.

But Emefiele made it clear that “We must not be quick to discard the restrictive measures which aided our recovery simply because the metrics have improved.” This is a clear indication that the Monetary Policy Committee will continue to maintain its current restrictive measures.

At the CBN, the governor further pointed out, “we will continue to fine-tune our policies and strategies based on our understanding of evolving developments and supported by in-house technical analysis and simulations. We will remain proactive in ensuring that the welfare of Nigerians is optimised at any point in time.”

 

Fitch & profitability of Nigerian banks

Fitch, one of the big three rating agencies in the world, says the big banks in the country like Guaranty Trust Bank, Access Bank, United Bank for Africa, Zenith and First Bank might be able to withstand pressure and make the profit in 2018, but Tier 2 banks might not be so lucky.

Reduced Treasury bill issuance, Fitch said, will affect the profitability of banks, especially Tier 2 Nigerian banks, which it says will struggle to remain profitable in 2018.

Nigerian banks were highly reliant on the interest income from treasury bills in 2017 as it made up 30 percent of their income.

However, some second-tier banks with a nine-month (9M17) operating Return on Assets of four percent to six percent may struggle to remain profitable this year, it said.

It noted that the slowdown in T-bill issuance marks a change of strategy as the government looks to increase its financing from external sources and longer-dated domestic issuances.

 

Investment options

The outlook for 2018 suggests that there will continue to be opportunities to make even more money for both the unemployed and those in employment. Analysts at Nairametrics online suggests, “Buying and selling of shares,” as a good investment option.

The Nigerian Stock Exchange returned 42 percent in 2017 and was one of the best performing stock markets in the world. Stocks have been rallying mainly because foreign investors have resumed investing in Nigeria. This trend is likely to continue in 2018.

However, risks can be reduced by careful stock picking and tracking of every bit of information about the stock to buy to be able to know when to sell or even buy more.

Crypto-currencies are considered to be the future currency of choice for the digital world. Apart from speculators looking to cash in on the rise in values, others see this as the future of money or means facilitating transactions. Thus, they believe that the value will only continue to appreciate. Crypto-currencies posted the best “returns by an asset class” in the world in 2017. Its flagship currency, Bitcoins, returned about 1000per cent in 2017 as demand surged all over the world. Check this website for crypto currency exchange website.

In terms of risk, they are highly volatile and often incur huge price swings on a daily basis. There are also many of them out there, some of which are likely scams or may never appreciate in value. However, its returns could be between 50 and 300 percent per annum.

Treasury Bills, a government short-dated fixed income security that is offered for 91 days, 182 days and 364 days tenors. 2017 interest rates were as high as 20 percent for one-year treasury bills. It dropped to about 15 percent by the end of 2017. It is likely returns could be between 10 and 15 percent per annum in 2018.

Treasury bills have zero risks as the government is not expected to default.

FGN Bonds-a government fixed income security that is offered for two years, five years, 10 years and 15 years tenors. FGN Bonds yields were high in 2017 as the government increased their level of borrowings to fund the budget. These have zero risks as the government is not expected to default and its likely returns will be between 13 and 18 percent per annum in 2018.

Furthermore, experts recommend

Mutual Funds which is likely to give between nine and 14 percent per annum in 2018.

This is basically giving money to experienced fund managers to invest on one’s behalf in exchange for high returns.

Mutual funds and other types of funds such as Exchange-Traded Funds (ETFs), Real Estate Investment Trusts (REITs) are viable investment options for anyone who has the cash to invest but no time to manage and monitor their investments. Data from the Securities and Exchange Commission reveals that most mutual funds performed relatively well in 2017.

 

The challenge of Fintech

There will be a lot of focus on Financial Technology (Fintech) this year, and institutions that pretend not to care will be forced to do otherwise by competition.

Fintech start-ups are making the most of a more relaxed financial regulatory environment within the European Union (EU), which from 2018 will also see banks forced to share customer data, as long as customers give their permission. This will allow digital banking platforms to position themselves between banks and customers and offer a full money management service, bringing together products from a range of providers.

 

Regulatory enforcement

In the regulatory environment, industry watchers did not believe that 2018 will be any different from the previous year.

Jude Fejokwu, an Africa Dialectic Analyst says “Though personal accusations against some heads of regulatory institutions may not be entirely untrue, people will be continually taken out just when they dare to start to right the wrong in Nigeria’s financial services industry and expose the high and mighty.”

For instance, in the past, the analyst said, the Stanbic IBTC issue was transformed into an attack against the founder: Atedo Peterside. The Oando issue is now transformed into an attack against the person of Wale Tinubu and his relation Asiwaju Bola Tinubu as a consequence. The Access Bank issue will be transformed into a personal attack against Aigboje and Herbert instead of focusing on the wrongdoing as stated by the ICPC.

Money, according to him, is not made in Nigeria and in most countries globally by having values “the deeper down in the recesses of the earth you can bury values, the higher your wealth will rise exponentially.  Integrity and fiduciary responsibility speeches are for symposiums, conferences and seminars only. It is all about perception and not reality. Telling the truth does not put food on the table, and may likely remain so in 2018.”

 

 Old & mutilated naira notes

There are expectations that the impasse between the CBN, the banks and  House of Representatives concerning old and mutilated naira notes in circulation will be resolved in 2018. The banks’ issue torn, mutilated and unhygienic currency notes through Automated Teller Machines (ATM), and across the counter. CBN says commercial banks are supposed to sort dirty and mutilated notes and return them to the bank for new notes but they fail to do it because they are avoiding little costs involved sorting. So, when banks send dirty notes not sorted, CBN charges them sorting fee. However, the House of Representatives last year, directed the CBN to stop imposing charges on commercial banks before receiving mutilated and dirty notes from them.

 

Oil Production

Oil is significant as the main source of forex earnings for the Nigerian government. The country’s production levels have been capped at 1.8mbpd by the Organisation of Petroleum Exporting Countries (OPEC). This cap limits Nigeria’s production levels. Hence analysts project that oil output will remain within the range of 1.75mbpd to 1.8mbpd, barring any disruptions to pipelines.

 

Improved revenue for states

It is expected that revenue to states and local government will bolster in 2018, and these will filter through the banking system. States that are more tilted to the private-public partnership will improve their ease of doing business, review tax laws, ensure a more effective land administration, contain recurrent expenditure and leverage more on more elastic road network to thrive better.

 

Concluding Thoughts

Economic and policy decisions will be influenced by political motives. Nonetheless, the economic recovery recorded in 2017 will be sustained in 2018, however at a slow pace of 2.2per cent. This is based on the assumptions of a robust oil production level and oil prices at an average of $55pb. If there are any shocks to oil production and even price, all bets are off, according to experts.

To sustain this recovery, Emefiele believes that the need is greater now than ever for robust policy coordination between the key aspects of economic policymaking space. In Nigeria, this would include fiscal, monetary, exchange, and trade policies, which must be targeted at protecting farmers to boost agricultural outputs, support local companies and enhance manufacturing and industrial capacities, with a view to diversifying the economy away from oil and fossil fuels.