The Nigerian economy is being tested on many sides, at the moment, everyone is equally looking forward to how things will turn in the second quarter of the year. Our reporter, Olutayo Irantiola, examined the economy at the state of the week; herein are his findings.
The trip to China
About one week ago, President Muhammadu Buhari was in the People’s Republic of China where he discussed and signed on for a continued bilateral relationship between China and Nigeria.
Kola Oladejo, an economist and banker explained the implications of President Muhammadu Buhari’s travel to China where he signed a $6 billion deal to fund joint infrastructure projects.
The CBN also signed a currency swap deal with the Industrial and Commercial Bank of China Ltd (ICBC), the world’s biggest lender. Nigeria’s trade volume has continued to increase from $11.76b in 2014 to $14.9b in 2015, representing about 22% of our total trade volume, so China is extremely important to us as a nation.
According to him, the swap is simply an agreement to exchange one currency with another currency at a specific and agreed rate of exchange. CBN gives ICBC naira and takes yuan from them. CBN can then in turn make the yuan available to Nigerian banks. This means that Nigerian businesses can inform their Chinese partners to give price quotes in yuan and then approach Nigerian banks to raise their LC in yuan. This removes the barrier of dealing with three currencies namely dollars, naira and yuan.
The implications of this are that the demand for dollars will potentially reduce as the portion of our trade volume that was driven by China will now be traded in yuan. The “dollar business men” can face their dollars while those that do businesses with China will use yuan.
However, he mentioned that the trade imbalance issues between Nigeria and China are obviously skewed in favor of China and it is therefore important that we increase the volume and value of our exports to China so as to reduce the possible trade imbalance.
Consumer spending still on the Rise
McKinsey and Company has projected that consumer spending in Nigeria and other major economies on the African continent will increase from $1.8 trillion (N358.2 trillion) in 2013 to $2.4 trillion (N477.6 trillion) in 2020.
McKinsey is a global management consulting firm that serves leading businesses, governments, non- governmental organizations, and not-for-profits.
In a McKinsey study titled, Africa: A Continent of Opportunity for Pharma and Patients the number of households with annual incomes above $5,000 (N995, 000) will increase from 134 million to 166 million by 2020.
While stressing that urbanization will be the driver of growth, McKinsey said there would be 1.5 million households in Lagos with incomes between $20,000 (N3.98 million) and $70,000 (N13.93 million) by 2030.
“The bottom line here is that the perception of Africa as a locale of raw resources only is rapidly changing. Global firms are taking part in what the Wall Street Journal terms a ‘new gold rush’ to cash in on the African consumer. It includes the US-based big-box-store Wal-Mart’s $2.5-billion dollar purchase of a 51 percent stake in South African retailer Massmart as a prime example,” the report states.
Encouragingly for local manufacturing, Nigeria and six other African economies, generics have gained market share since 2004 over branded products and over-the-counter medicines.
The banking sector
Bad loans, naira volatility and other economic headwinds have made Ecobank International Incorporated, Union Bank Plc, First City Monument Bank Limited, Wema Bank Plc and Fidelity Bank Plc to post a combined 80 percent decline in their annual profits.
The annual financial statements of the banks have revealed the 2015 financial results of the five banks released in March this year showed that the profit before tax tumbled by 69 percent to N77.65bn from N131.19bn in 2014.
Similarly, the combined profit after tax of the five banks fell from N107.279bn in 2014 to N59.73bn in 2015, indicating a decline of 79.59 percent.
The N53.54bn fall in profit was attributed by many of the banks’ chief executive officers to high impairment charges on bad loans, foreign exchange volatility and other challenges facing the economy following the significant drop in the nation’s oil revenue due to the sharp fall in oil prices.
The economic crisis facing the country has affected the banking industry significantly. Out of the 15 banks quoted on the Nigerian Stock Exchange, 10 have released their 2015 annual financial statements as of the March 31, 2016 regulatory deadline set by the Central Bank of Nigeria for the submission of the statements.
Of the 10 banks that released their results, five posted sharp decline in profits, a major departure from the consistent rise in profits posted by almost all the banks in the country after the 2010 banking crisis.
The reports on the NSE website showed that Ecobank posted a PBT of N40bn in the 2015 financial year; Union Bank, N18.1bn; FCMB, N2.5bn; Fidelity Bank, N14bn; and Wema Bank, N3.046bn.
However, the five other banks that released their 2015 annual reports in March this year outperformed the market, posting increases in both their profit before tax and profit after tax.
This is despite the huge provisions for bad loans that most of them made in the 2015 financial year.
These are Guaranty Trust Bank Plc, United Bank for Africa Plc, Access Bank Plc, Sterling Bank Plc, and Zenith Bank Plc.
Sterling Bank’s PBT rose from N10.7bn in the previous year to N11bn in 2015, while its PAT rose from N9bn to N10.3bn; UBA’s PBT rose from N42.4bn to N50.8bn, while its PAT rose from N40bn to N47.6bn; and Zenith Bank’s PBT rose from N107bn to N115bn, while the PAT increased from N92.5bn to N98bn.
GTBank’s PBT rose from N120.7bn to N116.4bn, while its PAT moved up from N94.4bn to N99.4bn; and Access Bank’s PBT rose from N46.1bn to N65.2bn, while its PAT increased from N39.9bn to N58.9bn.
The five remaining banks out of the 15 listed on the NSE, which have yet to file their 2015 financial reports are; First Bank of Nigeria Limited, Skye Bank Plc, Diamond Bank Plc, Stanbic IBTC Holdings Plc and Unity Bank Plc.
They have filed notices of delay in filing their 2015 annual reports, stating various reasons. They are expected to release the results before May ending.
Already, Skye Bank Plc and First Bank of Nigeria Limited have issued profit warnings ahead of the release of their results. They said high impairment charges due to non-performing loans would lead to the major decline in their profits.
Diversification of investment
Investors have been urged to diversify their portfolio across asset classes that perform differently in various industries. As of now, the preferred investment options for investors are to allocate more resources to both sectors as they offer positive returns despite the economic challenges.
The industrial and agricultural sectors could be beneficiaries of the present administration’s policy thrust. Over the last quarter, the inflation rate had risen (Feb’16: 11.4 per cent vs Jan’16: 9.6 per cent), increased unemployment rate (Q4’15: 10.4 per cent vs Q3’15: 9.9 per cent) and reduced economic growth (2015 real GDP growth of 2.79 per cent, the lowest rate recorded in the rebased series).
At the second Monetary Policy Committee (MPC) meeting of 2016, it was noted that the CBN was struggling with “Stagflation”, which is an economic situation characterized by slow economic growth rate, high inflation and high unemployment. At the end of the meeting, the committee decided to tighten monetary policy.
“The MPC raised the Monetary Policy Rate (MPR) by 100bps to 12 per cent; raised the Cash Reserve Requirement (CRR) of banks from 20 per cent to 22.5 per cent; retained Liquidity Ratio at 30 per cent; and adjusted the asymmetric corridor from MPR+2 per cent and -7 per cent to MPR+2 per cent and -5 per cent (i.e. CBN will lend to banks at 14% and accept deposits at 7%)”.
Mobile payment recorded its highest monthly transaction of N6.5 billion in March, indicating increased adoption of mobile devices for payments. This was disclosed by the Nigeria Interbank Settlement System (NIBSS) in the electronic payment report posted on its website. The report revealed that the value of transactions through mobile payment grew faster than other channels between January and March this year.
In terms of value, mobile payment grew by 51 percent from N4.3 billion in January to N6.5 billion in March. On a yearly basis, mobile payment recorded the second highest growth, after the NIBSS Instant Payment (NIP). From March 2015 to March 2016, value of mobile payment rose 75.6 percent from N3.7 billion to N6.5 billion. In terms of volume, mobile payment grew by 55 percent to 190,277 in March from 121,940 in January. Compared to the volume in March 2015, mobile payment grew by 146 percent from 77,185 March 2015, to 190,277 in March 2016.
(Sources: Chat with Kola Oladejo, This Day Live, The Punch Newspaper, and Vanguard)