Nigeria: Shape of banking, economy in 2016, early 2017

The year 2016 was a tough year for, not only the banking sector but the Nigerian economy as a whole. CHIMA NWOKOJI, in this report, examines how this year, when Nigeria officially entered recession, has set the tone for 2017.

lthough several schools of thought have tried to convince everyone that cares to listen that what Nigeria experienced in 2016 was a blessing in disguise, not a few will agree that it was not an easy year for  individuals, corporates, regulators and operators in all sectors of the economy.

Incidentally, Nigeria’s Central Bank Governor, Mr. Godwin Emefiele helped to clarify the situation. He gave a clear picture of the shape of Africa’s acclaimed biggest economy. According to him, the situation in the country is better described as ‘Stagflation,’ a more serious economic problem. “In reality, Nigeria’s economy is currently facing a classic case of “stagflation”. This situation largely occurs when a country’s Gross Domestic Product (GDP) is falling or stagnant, while unemployment and inflation are rising, all simultaneously,” he said at  the 2016 annual bankers’ dinner held in Lagos.

2016 in retrospect

Every day in 2016, Nigerians struggled with the cost of basic amenities as prices soar and the value of the naira depreciated against the US dollar. The rapid decline in growth led to the worst recession Nigeria has experienced since the Ibrahim Babangida regime, when the economy declined by 0.51 percent and 0.82 percent in two consecutive quarters of 1987.

Moody’s, an international rating agency in the third quarter of the year, observed that Nigerian government’s lack of money to carry out daily commitments are increasing amid growth and inflation challenges. The Central Bank of Nigeria in the same period also reported that activities in the manufacturing sector in the Nigerian economy shed weight by 2 per cent compared with the volume of July.

Inflation/bond sales

It was in 2016 that Nigeria battled its highest rate of inflation in 11 years. Inflation which started the year out at 9.6 per cent has consistently risen on a monthly basis, standing at 18.48 per cent in November according to figures given by the National Bureau of Statistics. It had crossed from single digit and doubled over the last 11 months affecting government’s capacity to raise funds from the debt market.

This had led to a gradual waning of investors’ interest in government bond auctions as they asked for higher yields. While all the bond auctions were reopenings of existing bonds, N977.7 billion had been raised through bond sales as against N1.135 trillion which was expected from bond sales. The debt office had its expectations met from January when the naira was pegged till August; two months after the flexible exchange rate began. However by September, investor’s interest waned especially in November when the country was able to raise 41 per cent of what it expected from bond sales.

Exchange rate/Forex reserves

The 16 month peg of the naira at N197 at the official end of the foreign exchange market had ended in June as the value of the local currency dropped to N340 before settling around N305 at the interbank market. The local currency was quoted at N490 to the dollar on Thursday from N495 against the dollar last week on the parallel market. In the official interbank window, the naira was quoted at N310.25 to the dollar on Thursday, but it was expected to close at around N305.5, the same level it has traded at since August.

This had impacted prices negatively as the import dependent country’s reserves dipped to a low of $23 billion dollars which covers only about three months’ worth of imports as at October. The reserves have since begun a slow recovery after the CBN reduced its intervention at the interbank foreign exchange market standing at $25.187 billion as at December 19, 2016. This is however still below the $26 billion which the reserves were at the beginning of the year.

Pressure on CBN

The weakening value of the naira and the attendant hardship it dealt the citizenry had also put a toll on the apex regulator, the CBN as some individuals had called for the removal of its governor. The apex bank had in an effort to attract scarce foreign exchange into the country, increased benchmark interest rate. This led to outcry over the rising cost of funds by operators in the real sector as  Monetary Policy Rate (MPR) was hiked to an all-time high of 14 per cent , further jerking up the rates at which banks lend to the public to around 30 per cent.

The apex bank was therefore faced with tough decisions around inflation rate , exchange rate and interest rate with their inherent trade-off. Available records show that from January 05 to November 03, 2016, the CBN had mopped-up N5.784trillion from the system spending N611.15billion on interest expense (cost) for liquidity management.  As such, many accuse the bank of targeting inflation at the expense of growth and employment.

GDP /Unemployment

While annual GDP rate declined to -2.24 per cent in September from 2.06 per cent, quarter on quarter, the economy improved from 0.82 per cent in the second quarter to 8.99 per cent in the third quarter of the year according to data released by the NBS.

Unemployment rate however continued to rise during the year. From 10.4 per cent in January, unemployment rate rose to 13.9 per cent as at the end of the last quarter. In terms of doing business, the country fared better than it did in 2015 as its ranking on the ease of doing business in 2016 was 169 compared to 170 which it ranked in 2015.

Banking sector

The banking sector was not left out of the economic hardship in the country. Many of the lenders had in an effort to cut costs sacked some of their staff. Some others had converted their staff to casual workers after intervention of the legislative and executive arms of the government as well as public outcry over the high job losses forced them to halt their retrenchment processes.

While some banks  fared better than others, the average performance of the Nigerian banking industry had not been so good as international rating organizations had down rated some of them. This was due to the rising level of Non-performing Loans in the industry. According to the CBN, average NPL level in the industry rose from 5 per cent in December 2015 to 11 per cent by June 2016. Moodys Investor Service says it expects NPLs to increase to around 12 per cent.

Even a Lagos-based securities firm, Afrinvest West Africa Limited believes the resilience of the Nigerian banking sector was put to the test as elevated risk concerns triggered a spike in NPL ratio and slowed the pace of credit expansion dramatically.

Fitch, an international ratings agency, had acknowledged that banks in the country had experienced a sharp rise in non-performing loans (NPLs), adding that other key concerns in the banking industry include forex scarcity, weakening capital adequacy ratios, and the sovereign’s ability to support banks.

Health of banks

Although, the outlook for the sector is characterized by reduced profitability, retrenchment, depressed trading income, declining Capital Adequacy Ratio (CAR) among others, the CBN as well as the Nigeria Deposit Insurance Corporation (NDIC) continued to insist that the Nigerian banking industry is strong.

According to the Director, Banking Supervision, CBN, Tokunbo Martins, while the banking sector is feeling the economic headwinds, “like every other jurisdiction. It is not strange. Non-performing loans (NPLs) at 11 per cent is not what we need to focus on. What we need to focus on is if the banks have the capacity to absorb losses that may arise from those NPLs and the answer is yes. They have very strong capital buffers.”

Another thing according to her is that Nigerian banks have very huge capacity to generate income to also absorb those losses, if they do arise. And that the non-performing loans can re-perform because the underlying assets are still there and they are good.

As a result of the mixed views, other industry watchers and indeed foreign investors are not convinced that the banking industry is as strong as the CBN and NDIC would want the banking public to believe.

Pointers to early 2017

Experts had predicted that 2017 will be tougher than 2016. They said  the economy will not recover until 2018 and  even 2019. Inflation will continue to be high (hovering around 20%) and that Naira to dollar will remain in the N450s. With money scarce, many more businesses they say will fold up, leading to job losses and more poverty. With inflation and high exchange rate the banks will not be able to give loans and when they do the interest rate will be too high to afford. With high inflation those with paid salaries are now actually earning less, that is if they will be lucky to keep their jobs. They went ahead to predict that Nigeria’s economic recession may be long and deep because business confidence is low and investors are holding back. But in the face of these ‘prophesies of doom, there is still hope that things will get better. Hence, there are certain events to look out for beginning from January 2, 2017.

Development Bank of Nigeria

Nigeria’s minister of finance, Mrs. Kemi Adeosun, wants the proposed Development Bank of Nigeria (DBN) to commence operation in January 2017. This is one of the events to look out for as Nigerians step into 2017. The minister dropped this hint in Abuja while providing details of the outcome of the 2016 annual meetings of the International Monetary Fund (IMF)/World Bank that was held in Washington DC, the U.S. capital.

Adeosun said Nigeria’s delegation to the meeting was able to secure the commitment of the World Bank to expedite action on the transfer of  the sum of $1.3billion being seed money  it promised the Nigerian government for urgent takeoff of the bank. “Between last Saturday and Sunday, we were on a panel, interviewing managing director and chief operating officer for the DBN as it must take off by January 2017,” she assured.

CBN, Banks’ new fund for agriculture and SMEs

The Central Bank of Nigeria has said it will, together with the Deposit Money Banks(DMBs), set up a new fund to boost agriculture and the Small and Medium-sized Enterprises in the country, targeting at least N30bn for the first year.

The Governor, CBN, Mr. Godwin Emefiele, disclosed this  at a press briefing after the eighth Bankers’ Committee annual retreat in Lagos. He said the Agriculture/SME Fund would be unveiled on January 1, 2017, but the money would not be available until around March or April after the DMBs’ audited accounts would have been presented to the public.

The bankers ‘committee defined goals for 2017 to include: supporting government’s efforts to develop adequate infrastructure to engender viable and productive SMEs, and increasing access and cost of funding, particularly to the agriculture and manufacturing SMEs.

‘Made in Nigeria Challenge’

Another activity that will shape the economy by early 2017 is expected to come from the Senate President, Dr Abubakar Bukola Saraki.  In his continued quest to provide a platform for the promotion of Made in Nigeria products in order to boost Small and Medium Scale Enterprises in the country, Saraki promised that he will to launch ‘Made in Nigeria Challenge’ in January 2017.

Saraki, in a statement signed by Bamikole Omisore, his special assistant on New Media, stated that the ‘Made in Nigeria Challenge’ initiative will afford entrepreneurs in the country opportunity to connect manufacturers that produce alternatives to imported products.

“On 2nd of January 2017, my office will launch #MadeInNigeria challenge to connect investors to manufacturers that produce alternatives to imported products. Since inception of the 8th Senate, we have championed and encouraged the patronage of #MadeInNigeria goods so as to jumpstart the economy and we have also amended the Public Procurement Act to support this agenda.

“In 2017, we intend to take #MadeInNigeria further by using legislation to discourage importation of goods that can be produced locally, take the advocacy directly to Nigerians, work with government agencies to create enabling environment and encourage Nigerians who have eyes for local production  #MadeinNigeria manufacturers can post 45 seconds to 3 minutes video of a product we are importing but that they can produce using at least 80 per cent local content,” the statement read.

Petrol pump price

The retail price for petrol may rise by at least 13.7 percent to N165 per litre by January 2017 from the current price of N145 just as global price of crude oil rises. Industry experts said the current petrol price template is predicated on an exchange rate of N285/$ and crude oil price of $45 per barrel, and these have now been overtaken by an exchange rate of N305/$ and oil price of about $55 per barrel.

Although the pricing template had been rendered void since June 2016, following the devaluation of the naira and the uptick in gas prices, petrol marketers sold old stock, hence were able to maintain the N145 set in May. But as soon as the marketers run out of stock and start importing new cargoes, a new pricing template must evolve and it could see Nigerians pay as high as N165 per litre in January, according to Dolapo Oni, head of energy research at Ecobank.

“As we see higher crude oil prices, let us also expect higher fuel prices. I expect an increase to at least N165 per litre in January,” Oni said in response to questions.

Export/ import

There are strong indications that Nigeria’s trade deficit will continue to narrow on currency controls and weaker FX rate. Hence the beginning of  2017, it will continue to look as if Nigeria is now exporting more items and no longer importing everything as before.

The National Bureau of Statistics (NBS) released Q3: 2016 Foreign Trade Statistics on 1st December, 2016. The report showed  quarter on quarter (Q-o-Q) improvement in trade deficit which narrowed to the lowest in 2016 as impact of weaker exchange rate in the period inflated exports data (reported in Naira) while currency controls pared growth in imports.

Trade deficit improved 78.5 per cent Q-o-Q to N104.1billion from N484.2billion in Q2:2016 while Merchandise trade (sum of exports and imports) rose 16.3per cent Q-o-Q and 17.9per cent year on year (Y-o-Y) to N4.7trillion. The Naira reporting currency however made the trade numbers flattering due to large exchange rate movements within the period. In Dollar terms, trade deficit compiled from CBN data narrowed 57.0 per cent to US$620.0million while merchandise trade fell 18.4per cent Q-o-Q to US$16.3billion.

Financial result of banks/MMM

The focus of every bank in the New Year will be how to clean their balance sheets in order to present good financial result to shareholders. Hence, trading softly in terms of loan advancement and aggressiveness in recovery and deposit mobilization will be the guiding principles in the industry. In terms of deposit mobilization, marketers will capitalize on the partial crash of the Ponzi scheme MMM to reclaim savings deposit depleted by the scheme. But if the scheme fulfills its promise of a comeback, it will be another year of fierce competition for bankers. Recall that MMM gives 30 per cent interest of monies provided, while banks give less than 3 per cent.

Again, the banking industry is built on people. It is driven by services and technology. People and organizations are becoming increasingly sophisticated. Their needs are more diverse and so are the services and the technologies to meet those needs. Indeed, technology is dramatically changing the face and environment of banking. Transactions of high volume and value are consummated with the click of a button. As banks invest more and more in technology, job turnover will increase.

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