Some Cracks Emerging In The Group of Eight

Culled—Proshare

September 21, 2017/FBNCapital Research

Our chart captures exchange-rate movements over the past two years, marked initially by the fx scarcity triggered by the oil price slide in mid-2014. The differential between the rates (official and bureaux de change) initially narrowed with the liberalization of June 2016 that was not to be, but widened again until the CBN’s adoption of what we might loosely term multiple currency practices (MCP) in March. The potential game-changer has been the investors’ and exporters’ fx window (NAFEX). The local media no longer routinely quotes parallel rates from a well-known website.

The communique in July noted that the FGN deficit in H1 2017 had reached a provisional N2.51trn and so more than the projection for the full year. Since the committee correctly expects the FGN to be fiscally responsible, we struggle to see how some of its members could call for full implementation of the expansionary Economic Recovery and Growth Plan.

One member cited studies confirming that Nigeria and some other countries in sub-Saharan Africa had the potential to improve their tax revenue/GDP ratios by between 3% and 6%. We note that an increase of 6% in Nigeria’s case would still leave it well behind Ghana, Kenya and South Africa.

Another referred to the “quantitative easing stance” adopted by the CBN (ie its financing of the FGN deficit). He said that since December the CBN’s claims on the FGN had risen twentyfold (to N814bn) while those of the commercial banks had grown by just 0.4% to N4.6trn.

Members had much to say on the pressures in the banking sector. Several commented on the growth in NPLs, with one noting that they are factored into banks’ pricing models and therefore limit the banks’ capacity to support economic recovery.

Another member railed against the excessive concentration in their assets, which he illustrated with some choice figures. Big players borrowing more than N1bn accounted for more than 81% of aggregate loan portfolios, and small enterprises borrowing N1m or less for just 1.3%. Firms best placed to ratchet up output and create jobs receive very low allocations of credit, and at high cost

For the “off-message” argument in the statements, we choose the theory of one member that Kenya presents the model for ensuring that interest rates and spreads do not destroy the productive base of an economy. In this case the legislature, encouraged by the president, passed a law capping spreads in the face of opposition from the Central Bank of Kenya, not to mention the banks themselves and the offshore portfolio investors. The cost base of the Nigerian banks and their NPLs could not support such legislation.

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