Lack of infrastructural could pose a huge obstacle to effective intra-continental trade
With economic activities gradually picking up in the country, Guaranty Trust Bank (GTB) has projected a 1.8 percent economic expansion for Nigeria with the recovery of oil price and the discovery of effective Covid-19 vaccines.
The bank projected this in a report titled ‘Nigeria macro-economic and banking sector themes for 2021’ where it projects trends that will shape the economy.
According to the bank, the Fiscal Policy and the 2021 FG Budget, total Debt Profile, interest Rate, and Inflation, exchange Rate Policy, External Reserves and Capital Flows, Oil Prices, Production, and Security are key trends that will shape the economy.
In the report, GTB noted that the federal government’s plans to rebase the country’s GDP through the commencement of the National Business Sample Survey (NBSS) will drive the Inclusion of some economic activities in the computation framework and backcasting to recompute GDP estimates for prior years.
On business and regulatory environment, the bank said the business environment came under significant pressure due to negative GDP growth and the crash in oil prices but it anticipates a slight improvement in the operating environment arising from a possible increase in FX liquidity, better understanding of and management of the spread of the virus and increased government spending.
“We expect the monetary thrust to be relatively accommodative with the primary focus of monetary authorities maintained on spurring growth, achieving exchange rate stability and improving FX availability.”
The bank further applauded the government’s decision to exclude low-income earners from personal income tax payments stating that it will enhance the disposable income of that segment of the populace adding that the reduction of import duties on select categories of vehicles should also help to reduce the prices of the referenced vehicles.
“In view of the economic and health impact of the pandemic, the revenue projections (especially the non-oil revenue) of the 2021 budget appear ambitious. That said, we applaud the government’s decision to deregulate the price of PMS and are optimistic that the resulting cost savings would be used for other developmental projects.”
MONETARY POLICY AND INTEREST RATE
On the monetary policy and interest rate, GTB expects the CBN to sustain its policy stance going into 2021 driven largely by the need to improve credit flow to spur economic growth. In a move to attract portfolio flows and reduce the consistent exit of investors, the CBN increased yields of fixed income securities.
“The additional borrowings by the government, as well as relatively lower OMO maturities into the system, may result in a further increase in interest rates but not expected to be significantly higher than present levels. We note the impact of the second wave of the pandemic but also do not foresee widespread lockdowns as was with the first wave as effective vaccines are being rolled out and medical practitioners have a better understanding of the virus.”
OUTLOOK FOR THE NIGERIAN BANKING INDUSTRY
On the outlook for the Nigerian banking industry, GTB noted that a huge positive for the industry was the massive customer migration to digital platforms as a result of movement restrictions imposed by the government which drove better-than-expected fees from digital channels. In addition, the revaluation gains on the back of significant naira devaluation are expected to drive further improvement in non-interest revenue for Banks.
On the cost side, the work-from-home (WFH) policy afforded most firms the rare opportunity of reevaluating their cost profile and make amends where necessary. We expect OPEX to remain contained in 2021, with travel expenses and other operational costs expected to remain lower relative to 2019 levels.
As a result of the tightening of liquidity conditions expected in the market from Q2 2021, we anticipate a rise in volatilities within the money market and fixed income space. We also anticipate a renewed scramble for deposits by banks and other financial institutions to meet demands on them for funds. Money market rates, should on average, rise steadily across the period with a resultant pull on deposit and lending rates. In view of the above, the CBN might have to consider the possibility of releasing some of the CRR sterilized by it.
With the devaluation of the naira, we suspect that the true capital positions of these banks will be further challenged, erasing existing capital buffers. Consequently, we expect banks with shortfalls in their capital positions to retain more of their earnings to shore up their capital and keep themselves within touching distance of the minimum regulatory capital requirement. It is also not unlikely that the apex bank will offer some form of regulatory forbearance to banks that fall short of the minimum regulatory capital.
The new Banking and Other Financial Institutions Act (BOFIA) 2020 could change the competitive environment of the industry going into 2021. Notably, the act broadens CBN’s regulatory oversight function to include fintech as it prohibits the operations of unlicensed financial institutions. This will very likely result in capped fees for Fintechs and increased operational and regulatory costs. We project that this might increase their cost and stifle their drive in the long to medium term and facilitate a leveling of the playing field for traditional banks and their non-bank competitors.
The new act further stipulates that loans in excess of N3million without collateral will now require regulatory approval. This will change the dynamics for most SMEs that depend on revenue-based financing, and retail customers that require salary-based consumer loans offered by banks as an additional hurdle has been added to the loan procurement process. Whilst the act seeks to strengthen the financial services sectors and enhance healthy competition amongst players, there are concerns that the powers given to the CBN in the new act could make financial services providers move slowly and adapt with lesser agility.
Furthermore, the release of operating guidelines and licensing of payment service banks (PSB) in 2020 is expected to intensify competition in the sector as it gives Telcos an entry into the banking industry. The competitive landscape in 2021 will be shaped by the apex bank’s level of adherence to the new act, the resilience of non-bank competitors, and the reaction of traditional banks to the changing landscape.
AfCFTA has the potential to accelerate economic growth in the continent in the coming years, as most economies in the region look to recover from the raging economic recession. The lack of infrastructural assets such as good roads and rail lines connecting the different countries within the region could however pose a huge obstacle to effective intra-continental trade.
With 54 out of the 55 countries on board the agreement, Nigeria’s ratification of the agreement in November 2020 signified the country’s commitment to intra-Africa trade and necessitated the re-opening of the country’s land borders. It is difficult to identify the sectors that would benefit from the agreement in the short-term following concerns of dumping and smuggling of the goods into the country due to the country’s porous borders, posing a huge threat to local manufacturers. Inefficient customs procedures, insecurity, and lack of stable power and road networks have also been identified as the country-specific shortcomings in the face of the agreement.
We expect a tightening of the gap between the parallel market rate and the official rate due to a marginal adjustment of the currency in 2021. Our expectation of the appreciation of parallel market rates is predicated on increased supply to that market, however, It should be noted that a devaluation in the official market usually triggers an immediate devaluation in the parallel market even if short-lived. Notably, a further devaluation to levels closer to the general consensus of the true value of the naira is expected to trigger increased foreign portfolio flows into the country.
These factors coupled with the disruption of the 2020 planting season amidst government-approved movement restrictions as well as a high 2020 base will keep average inflation for 2021 elevated at 16% levels. We note that while the re-opening of the land borders should ease the pressure on food prices, the government needs to do a lot more on the fiscal side to crash food prices. Annual Food inflation, which accounts for almost 60% of the inflation basket, rose to its highest since November 2017 accelerating to 19.6% in December 2020 from 18.3% reported in November 2020.