Nigerian banks are going out on a limb to predict that Africa’s largest economy which is embroiled in a recession has turned the corner.
“Banks believe the economy is past the worst of what one described as “the most severe downturn in 25 years,” says a report by investment banking firm, Renaissance Capital, shared with BusinessDay.
Banks shared their views with Yvonne Mhango, Chief Economist, Sub-Saharan Africa at the 8th Pan-Africa conference organised by Renaissance Capital.
The banks cited the big driver of the resurgent economic growth to be the significant improvement in foreign exchange (FX) liquidity, “which allowed for the unwinding of some outstanding obligations.”
Banks also note that trade facilities and velocity has increased as a result of the sharp increase in foreign exchange liquidity.
“During the height of the FX shortages, trade cycles lengthened to 12 months, from a typical four-to-six months. The trade cycle is now contracting” bankers said.
Banks have also expressed cautious optimism about the recently introduced Investors and Exporters (I&E) FX window.
“One bank thinks it is a tacit devaluation and precursor to a more liberal FX policy. Another sees the FX rate settling at NGN370-400/$1. Banks see little incentive to lend with Treasury yields in the 20s. Non-performing loans (NPLs) tend to lag the economy, according to one bank. It estimates that there are 18 months to go of high NPLs and downside surprises.”
The banks admitted that retail transactions that fell when households cut spending due to the recession, have yet to pick up but believe things are getting better.
In the short term, the banks say they “see opportunities in manufacturing, agriculture and infrastructure but are steering clear of the oil and gas, and haulage sectors. One bank thinks the nascent recovery is led by an improvement in the oil sector, and fears that if it is not sustained by structural reform, it will be fragile. The banks’ biggest concern is regulatory changes.”
Players in the building materials sector have similarly expressed optimism that the slack demand in the sector has bottomed.
“The industry expects foreign financing raised by the government, and improvement in the oil sector, to improve FX liquidity. Building material companies are predicting a rebound in growth in 2018.”
“However, those whose sales are dominated by individual homebuilders expect the recovery to be protracted, as their performance is linked to the consumer. The industry sees some election-related softening in growth in the first quarter of 2019 but sees scope for it to strengthen in the remainder of 2019.”
While banks and players in the building sector expressed optimism about the economy, consumer companies that spoke with the investment-banking firm, said that the fundamentals of the micro economy for consumers and businesses have not changed.
“They think the consumer is still much stressed, unemployment high and inflation elevated. Consumers have reduced the frequency of purchases, found substitutes and traded down. One consumer company shared with us, the example of a middle-income mother buying smaller sachets of a product, when she can afford a larger pack. Her argument was that in these challenging times, she can control consumption more easily in her household with sachets.”
The reports also notes, “Lower income mobile subscribers are reacting to high inflation by dropping from two sim cards to one,” according to a telecommunications firm.
Besides, the tight FX liquidity means some consumer companies have delayed capital expenditure, while some have also said that they cannot pass on the cost of FX to the end consumer.
“Even those with a relatively larger share of locally sourced raw materials told us that its pricing is still impacted by FX, even though the companies see stability returning to prices.”
Renaissance Capital notes declining consumer confidence may possibly have bottomed out in the last quarter of 2016 but consumers are likely to remain under stress for a while.
Moody’s said recently that Nigerian consumers’ purchasing power is likely to remain under pressure over the next 18 months, even as domestic and foreign investments are expected to rebound once the economy has fully stabilised.
“We expect a growing middle class in sub-Saharan Africa’s largest economy, on a purchasing power parity basis, combined with an increasingly urbanised captive market to support the rising consumption of goods and services,” Moody’s said.
By Our Reporter
