In a note released by his firm last Friday, the Chief Executive Officer, Financial Derivatives Company (FDC) Limited, Mr. Bismarck Rewane, stated that the dip in the Central Bank of Nigeria (CBN)’s June manufacturing and non-manufacturing Purchasing Managers’ Index (PMI) suggests the country could be set to report that economic growth again slowed in the second quarter of this year.
The latest PMI report released by the apex bank last Tuesday indicates that the manufacturing PMI eased to 57.4 index points in June from 57.8 index points in May. The report also showed that the Non-Manufacturing PMI declined in the month of June to 58.6 from 58.9 in May.
NBS Q1 GDP 2019 report
Data released by the National Bureau of Statistics (NBS) in May showed that the nation’s economy expanded more slowly in the first quarter of 2019 than it did in the fourth quarter of last year. The NBS, in its Gross Domestic Product (GDP) Report for first quarter of 2019, said the GDP grew by 2.01 per cent in the first quarter, compared to 2.38 per cent in the fourth quarter of 2018.
The Bureau stated: “It is worth noting that general elections were held across the country during the first quarter of 2019 and this may have reflected in the strongest first-quarter performance observed since 2015.”
IMF revises growth forecast
Indeed, since the country exited recession in the second quarter of 2017, it has struggled with sluggish growth. For instance, the economy grew by only 1.9 per cent in 2018. Also, the International Monetary Fund (IMF) had last January – a few weeks to the elections- revised down its GDP projection for Nigeria this year to 2.0 per cent from its earlier forecast of 2.3 per cent. It also projected a 2.2 per cent economic growth for Nigeria next year, lowering the initial estimate from 2.5 per cent for 2020. Although the IMF subsequently revised Nigeria’s growth for this year upwards to 2.1 per cent, in April this year, its counterpart Bretton Woods’ institution, the World Bank, early last month revised down its own GDP forecast for the country to 2.1 per cent in 2019 from its earlier projection of 2.2 per cent.
Attention turns to growth
Thus, with the elections concluded and following Muhammadu Buhari’s second inauguration as Nigeria’s president on May 29, stakeholder groups and financial experts wasted no time in letting him know that his primary task was to immediately take steps to accelerate economic growth. For instance, at a roundtable session dubbed, “Going for Growth,” held in Lagos about a fortnight ago, President of the Dangote Group, Alhaji Aliko Dangote, called for an urgent solution to the problem of poor power supply in the country, stressing that Nigeria cannot achieve sustainable economic growth without adequate power supply.
He said: “How do you have economic growth without power? So, no power, no growth; without power, there can’t be growth. Egypt increased its electricity by 10 gigawatts, which is equivalent to 10,000 megawatts in 18 months.”
Dangote said that all stakeholders must come together and support government in finding a solution to power challenges in the country. Apart from power, Mr. Dangote suggested that government focuses more on three areas, which include finance, manufacturing and agriculture. According to him, the Asian Tigers concentrated on developing these three sectors to take them to their current level of socio-economic development. He also urged the CBN and commercial banks in the country to work towards reducing lending rates as well as developing consumer credit products in order to encourage low income earners to access credit facilities.
However, speaking at the event, CBN Governor, Mr. Godwin Emefiele, stated that while the apex bank was desirous of achieving a low interest rate regime to stimulate economic growth, this, was, however, not feasible now given the high inflationary environment in the country.
He said: “In fact, for us at CBN, achieving a low interest rate regime will give us a great sense of accomplishment. Indeed, given our determination to stimulate economic growth, it is obvious that we would want to pursue a policy of moderating interest rates. Yet, in an environment where inflation recently was as high as 18.72 per cent, it would be counter-productive to reduce interest rates because any attempt to ease interest rates under a high inflationary environment will no doubt retard growth.”
He also pointed out that apart from the high inflationary environment Nigeria’s high interest regime, “reflects not only the cost of capital, but also the cost of doing business in the country.” According to him, a typical bank branch in the country provides its own security that sometimes includes permanent police presence, its own electricity supply with several generators, diesel tanks and inverters as well as its own broad band Internet services. The CBN boss explained: “For banks whose main source of income is from interest earnings, these deficiencies become costs, which it (banks) must necessarily pass on to borrowers.”
CBN gov’s 2nd term agenda
In fact, in the wake of his reappointment for another term of five years, Emefiele, last Monday, held a press conference where he disclosed that one of the key objectives the CBN would pursue during his second term in office would be work with the fiscal authorities to achieve double digit growth for the country in the next five years.
In fact, in order to boost economic growth, the CBN’s Monetary Policy Committee (MPC) had at its meeting in March, cut the benchmark interest rate- the Monetary Policy Rate (MPR) by 50 basis points from 14.00 to 13.50 per cent. CBN had left the rate unchanged at 14 per cent since July 2016. However, since that reduction in MPR, the inflation rate has risen from 11. 25 per cent in March, to 11.37 per cent and 11.4 per cent, in April and May respectively, thereby compelling the MPC to leave rates unchanged at its last meeting.
Planned recapitalisation of banks
Another important announcement that Emefiele made at the press conference was that the CBN will pursue a programme of recapitalising the banking industry to ensure that the country’s lenders rank among the top 500 banks in the world. According to him, the recapitalisation of Nigerian banks was long overdue because the last time such an exercise was carried out was in 2004 when the capital base of lenders was raised from N2 billion to N25 billion. Emefiele said: “In the next five years, we intend to pursue a program of recapitalising the banking industry so as to position Nigerian banks among the top 500 in the world. Banks will therefore be required to maintain higher level of capital, as well as liquid assets in order to reduce the impact of an economic crisis on the financial system.”
He also noted that the last recapitalisation exercise: “resulted in positioning Nigerian banks not only in Africa but also being among the top banks in the world in terms of capitalisation and also helped to increase and strengthen the banks’ capacity to take on large ticket transactions and those are some of the things we badly need today.” Specifically, he said: “If you relate it, N25 billion in 2004 exchange rate, which was about N100/$, N25 billion is almost about $200 million today, if you relate N25 billion at 360, you can see that it is substantially lower than $75 million so what we are trying to say is that the capitalisation has weakened quite substantially, and there is a need for us to say that it is time to recapitalize Nigerian banks again.”
MFBs minimum capital requirements
Interestingly, CBN had, in the first quarter of this year, reviewed the minimum capital requirements for micro-finance banks (MFBs) in the country. The regulator, last October, raised the minimum capital base for the three categories of MFBs with December 31st 2020 as the deadline for compliance. The minimum capital base for national MFBs was raised to N5 billion from N2 billion, state MFBs was increased to N1 billion from N200 million while that of Unit MFBs was increased to N100 million from N20 million.
In a circular it issued in March, the banking watchdog announced a graduated extension of the deadline to April 2021, even as it categorised Unit MFBs into two namely Tier 1 Unit MFBs and Tier 2 Unit MFBs. According to the circular: “Unit microfinance banks shall comprise two tiers; Tier 1 Unit MfBs, which shall operate in the urban and high density banked areas of the society; and Tier 2 Unit MfBs, which shall operate only in the rural, unbanked or underbanked areas.”
Furthermore, while the minimum capital base for Tier 1 Unit MFBs was retained at N200 million, that of Tier 2 MFBs was adjusted downward to N50 million. CBN also stated: “To aid the process of recapitalisation, all MFBs shall be required to comply with the following: Tier 1 MFBs shall meet a N100 million capital threshold by April 2020 and N200 million by April 2021. Tier 2 Unit MFBs shall meet a N35 million capital threshold by April 2020 and N50 million by April 2021. A State MFB shall increase its capitalisation to N500 million by 2020 and N1 billion by April 2021 and National MFB shall hold capital of N3.5 billion by April 2020 and N5 billion by April 2021.”
Moody’s stable outlook for banking
However, while the DMBs may indeed need to strengthen their capital base, they still received a largely positive report from one of the world’s leading credit rating agencies, Moody’s Investors Service. In a recent report, the agency announced that it was keeping its outlook on the Nigerian banks stable to reflect the industry’s resilient capital buffers and stable deposit bases, with high risks likely to subside as the economy is expected to strengthen. “Nigerian banks’ asset risk and profitability will remain key rating challenges, but we expect these challenges to gradually decline in 2020 as the economy picks up,” said Peter Mushangwe, Analyst at Moody’s.
“Banks’ funding and liquidity profiles will remain stable thanks to solid deposit bases.” In the report, the rating agency predicted that non-performing loans (NPLs) will decline to between seven and eight per cent over the outlook period from 11.7 per cent at year-end 2018 – but still at a high level; and that system-wide tangible common equity will be stable at 16 per cent of risk-weighted assets at year-end 2018, thereby sufficient to bear losses.
The report also pointed out that “banks revenue will be restrained by subdued loan growth while cost pressures, due to IT investments and AMCON levy2 and higher staff costs will slow pre-provision profitability.”
Besides, it stated: “Moody’s expects Nigeria’s real GDP to expand 2.3 per cent in 2019 and 2.8 per cent in 2020, up from 1.9 per cent last year, but well below the level required to improve living standards. Lending growth will recover in the second half of the year following a contraction in 2018, but it will remain subdued and will not appreciably boost banking revenue.”
The consensus in financial circles was that while the outlook on the banking system may be stable, especially given that Access and Diamond banks successfully concluded their business combination in the first half of this year, the prospects of the economy would depend on if President Buhari appoints brilliant individuals into his cabinet who will ensure that the fiscal authorities and CBN work together to accelerate growth.