The success or failure of banks will depend on the status of the naira, power sector funding and oil & gas projects as well as biometrics. Lenders will have to brace for oil price slide and the monetary policy of the Central Bank of Nigeria (CBN), which has impacted on lending cost to key sectors of the economy, writes COLLINS NWEZE.
The naira has been on the ropes for months – no thanks to crude oil prices, which in the last six months have dropped by over 50 per cent.
It did not come to many as surprise, when the Central Bank of Nigeria (CBN) recently devalued the naira and tightened monetary policy.
To confirm low oil price will take a longer time to disappear; the Organisation of Petroleum Exporting Countries (OPEC) has opted not to cut output.
These policy shifts are putting the naira at risk, raising probability of further monetary policy tightening this year.
The currency was devalued by 8.38 per cent, raising the official exchange rate of the naira from N155 to N168 to the dollar — a N13 loss. For the CBN, these are parts of measures to strengthen the nation’s economy. The apex bank also raised the Monetary Policy Rate (MPR) from 12 to 13 per cent, and the Cash Reserve Ratio (CRR) on private sector deposits from 15 per cent to 20 per cent.
The MPR is the rate at which banks borrow from the apex bank to bridge their immediate cash shortfalls, while the CRR is a monetary policy tool used to either call up excess liquidity or release the funds needed to grow the economy.
With these developments, the Sub-Saharan Africa Economist at RenCap, Yvonne Mhango, said this year may turn out to be a tougher year for the consumer. According to her, two of the four variables that explain consumer confidence in its regression model have been adversely impacted by currency devaluation and interest rate hike.
Mhango said interest rates have been hiked and contradictory fiscal policy implies the prospects of wage increases for civil servants, in the short term, have dimmed.
“Of the four variables we use to explain the consumer confidence index in our regression model (including oil output and real Gross Domestic Product growth), we find the index to be most sensitive to interest rate movements. Further upside risk to interest rates and the potential removal of the fuel subsidy imply that 2015 has the potential of being a tougher year for the consumer than 2012,” she said.
The naira to lose more value
The naira rate at the parallel market (black market) is expected to cross the N200 border to a dollar as demand for the greenback persists, Managing Director, Financial Derivatives Company (FDC) Limited, Bismarck Rewane, has said.
Speaking at the FDC monthly economic report for December, he said that N200 to the dollar rate is only a 15 per cent adjustment as against 45 per cent devaluation in 2009.
Gloomy pictures ahead
The dollar, Rewane noted, is expected to further strengthen in the near future, buoyed by increased demand for the currency upon expectation of higher interest rates in the US.
“The dollar will also become more attractive as major central banks including the European Central Bank, the Bank of Japan and the People’s Bank of China is expected to pursue expansionary monetary policies in order to boost their economies. An appreciation of the dollar implies a further decline in commodity prices based on their inverse relationship,” Rewane said.
Continuing, he said: “We also expect that commodity prices would continue to be affected by weak global demand, especially in China, which is one of the largest consumers of grains, energy and metals.
“Oil prices, in particular, will continue to record the highest loss as OPEC fails to cut its production levels and US shale production further increases oil supply to the markets.
“We expect to see economic growth and development slowing over the next year as the much needed revenue support is weakened. Though the devaluation of the currency will bring some respite to the naira and reduce external reserves depletion in the short term, the pressure on the currency might resurface if the decline in oil prices is sustained for a long period.
“To help mitigate the impact of lower commodity prices on export revenues, the government must seriously take the call to reduce revenue leakages in the economy and at the same time boost production of non-oil export commodities.”
Although, projecting the value of naira is currently clouded by several domestic and exogenous factors, Rewane said the fair value of the currency is expected to be between N180 and N195 to a dollar at the interbank market.
He said the naira adjustment by the Central Bank of Nigeria (CBN) is timely and the depreciation of the currency has reduced over time because the official rate is closer to equilibrium.
Rewane said: “A further depreciation of three to five per cent is also expected at the official market. This is due to anticipated impact of the global oil market spiral on external and fiscal buffers which limits the CBN’s ability to support naira.
“In addition, if the US changes its monetary policy stance, there might be a reversal of capital flows and an erosion of some of the external reserves.”
He reiterated Goldman Sachs’ forecast of last July that the naira will trade at N165 to dollar in three months, N175 to dollar in six months and N195 to dollar in 12 months.
Speaking further, he said: “As 2014 drew to a close, oil prices still plunged even after losing over 50 per cent (now $56pb). The naira is on the ropes trading at N193 to a dollar and interest rates are strangulating at 22 per cent per annum. These are some of the issues that have made the second half of 2014 a rough and tumble period as well as one of the most interesting years in this decade for Nigeria.
“Against this background that shows that cyclical economic downturns and recovery are inescapable, our findings reveal that the Nigerian macroeconomic environment will continue to be vulnerable to exogenous shocks in 2015.
“This is mainly because oil prices and international capital flows will continue to be dominant features in the Nigerian macro-economic equation.”
Also speaking, the Managing Director of Afrinvest West Africa Plc, Ike Chioke, said a strong positive correlation exists between the exchange rate and crude oil price in the country.
He said: “Nigeria’s crude oil – Bonny Light, which traded at $110.2 per barrel in January last year, reaching $114.6 per barrel by June, is now trading at about $56 per barrel.
“With the discovery of the Shale oil, crude oil prices are projected to moderate in coming years. In addition, the threat by the United States (US) to reduce oil imports constitutes a downside risk on crude receipts of OPEC members. Consequently, the CBN must establish a “real” and “sustainable” value for the naira as the opportunity cost of “substantial” support for the naira increases,” he explained in a report – Naira Trending Towards 2015.
Chioke said dependence on crude oil (currently 70 per cent of total foreign exchange earnings) makes economic growth susceptible to oil price shocks.
According to him, a decline in crude oil price would lead to a corresponding decline in oil receipts; “which will forestall the accumulation of external reserves, creating a negative signaling effect that leads to capital flight, thus depreciating the naira.”
“The current over-reliance on oil receipts – oil receipts account for about 96.8 per cent of the country’s total exports – by the government poses a huge threat to the stability of the economy,” he noted.
Oil & Gas loans face
increased risks
Banks are also expected to have some challenges managing their loans to the oil and gas sector, as price drops further.
Some bank chiefs see the drop in oil price as political. The Chief Executive Officer, Sterling Bank Plc, Yemi Adeola, described the continuous fall in prices of crude oil as purely political. He said the fundamentals of the oil industry, do not justify the fall in prices.
The bank chief alleged: “What has happened is purely political. The fundamentals in the oil industry does not justify the sharp fall in prices. It will get to a point, after all the political issues are resolved, the price will bottom-out, and will start bouncing bank. This is not the first time that oil prices will go down. In 2008/2009, it tested $47 per barrel not for too long, and it bounced back. This one will drag for a while, maybe six months or so, but it will bounce back.”
Adeola said he does not want to discuss the politics of the US and the Gulf countries but the truth is that in advanced countries, banks do not panic when crude oil prices go down, because that asset is there and it is permanent.
His words: “For as long as you have proven reserves, what you need to do is to restructure the tenor of your loans. So, if a facility is for five years and oil price goes down, I will not get my money in five years, but I will get it in 10 years by simply restructuring the loans.
“In Sterling Bank, we looked at oil accounts in our books and there is nothing to worry about. We stress tested them, and found that our customers can still do well even if oil price drops to $50 per barrel.”
The intricacies of oil loans have prompted the CBN to act fast. The apex bank has warned banks of the dire consequences of the falling oil price on loan advances to the oil and gas as well as the public sector in the New Year.
In a memo to banks, the CBN, through its Director, Banking Supervision, Mrs. Tokunbo Martins, said the falling oil prices and the potential for a further decline had been a major concern. Many states have been unable to pay salaries as banks shut the tap amid dwindling and delayed allocations.
Mrs. Martins said that considering the quantum of exposure to the oil and gas sector, combined with risk management deficiencies as revealed by the recent Risk Based Supervision, there is the need to proactively guard against a crystalisation of these risks.
The memo entitled: Oil and Gas Industry Credit Risk Mitigation reads: “The CBN therefore considers it essential to ensure that banks have sufficient capital buffers to mitigate these escalating risk taking activities. Where exposure to the oil and gas sector (as defined by the International Standard Industrial Classification of Economic Sectors as issued by the CBN) is in excess of 20 per cent of total credit facilities of a bank, the risk weight of the entire portfolio in the sector will attract weight of 125 per cent for the purpose of capital adequacy computation.”
Oil prices have declined from $107.89 per barrel in June last year to $85.06 per barrel in October, and trading at $57.33 per barrel. The possibility of further decline, Mrs. Martins said, should not be underestimated.
The CBN director said that a proposed single-factor sensitivity stress test showed that at $70 per barrel, 25 per cent of oil sector loans would become non-performing while 15 per cent of the loans will be nonperforming in the public sector.
Budget versus subsidy
Mhango said the Federal Government could save $2.5 billion or four per cent of this year’s budget by removing oil subsidy. She explained that given the downside risk to revenue and the near-depletion of the Excess Crude Account (ECA), the government may have little option but to remove fuel subsidy.
She said previously, the probability of the oil price falling below $80/barrel was low but “today, we are adapting to the fact that this may be the new normal, following OPEC’s (which represents 40 per cent of the world’s production) decision to maintain current production levels in response to lower oil prices. Lower oil prices may result in a further slowdown in foreign exchange inflows, challenging the Central Bank of Nigeria (CBN’s) ability to defend the naira.
“This means savings of $2.5 billion, or four per cent of 2014 budget consolidated government budget. We think the current low public debt levels of 11 to 12 per cent of Gross Domestic Product (GDP) and revenue growth challenges imply government’s borrowing may increase in 2015, leading to an increase in yields, after being depressed in 2014.”
Power sector funding
For the CBN Governor, Godwin Emefiele, the observed challenges in funding power projects are interconnected with the unexpectedly large revenue shortfalls in the industry, which needed to be fixed.
That made the CBN boss to institute the Nigerian Electricity Market Stabilisation Facility (NEMSF), where N213 billion has been mapped out to settle legacy gas debts and shortfalls in revenue for operators to boost power supply.
The CBN, he said, is collaborating with the Ministry of Petroleum Resources, Ministry of Power and Nigerian Electricity Regulatory Commission (NERC) to achieve the objective.
Such feat, he said, would boost liquidity conditions in the Nigerian Electricity Supply Industry (NESI) and address hiccups that has characterised the posts-privatisastion of the power sector.
The NEMSF in perspective
According to the CBN, the NEMSF will this year, be administered through deposit money banks and disbursed at the rate of 10 per cent per annum while the tenor shall not be more than 10 years.
Also, a Special Purpose Vehicle (SPV) that complies with section 31 of CBN Act 2007 will serve as an intermediary between the banks and the electricity market players while the Nigeria Electricity Regulatory Commission (NERC) shall reset the Multi Year Tariff Order (MYTO) to ensure that it provides for the loan repayment including the costs of setting up and operating the NEMSF.
The other power sector value chain players must also agree to specific service related commitments, which include committing gas suppliers to supply at higher volumes; generating companies (GENCOs) and Distribution Companies (DISCOs) must commit to utilising the funds for equipment/infrastructure acquisition, refurbishment and/or upgrade.
The rule also include that all parties licensed by the NERC to operate in the electricity market should sign performance bond agreements with the relevant authorities including the Bureau of Public Enterprise (BPE).
Biometric banking
Banking security will this year, continue to be a priority for many banks and regulators of the financial services sector. That prompted the CBN through the Banker’ Committee, deposit money banks and Nigeria Interbank-Settlement System (NIBSS) to inaugurate the centralised biometric identification system for the banking industry tagged: Bank Verification Number (BVN).
For the CBN, the exercise is a continuation of the $50 million biometrics project it instituted with the Bankers’ Committee, Dermalog and Charms Plc and is expected to assignunique number to every bank customer for enhanced security of transactions.
CBN order
The CBN mandated banks to enroll 30 per cent of their customers on the BVN by the end of last year, and 70 per cent by March this year.
CBN Director, Banking and Payments Unit, ‘Dipo Fatokun, said the apex bank will monitor lenders to ensure compliance.
He explained that where an existing customer wishes to register the BVN with his/her bank, capturing his signature and photo identification document may not be necessary, as the bank is expected to have those records during account opening.
Also, where an existing customer wants to do a change of name, after his/her enrolment, on BVN, due diligence should be done and appropriate legal documents obtained, before effecting the change.
Fatokun said the new directive is aimed at fast-tracking the enrolment, adding that banks are to give more attention to the enrolment of their customers. It is expected that the apex bank will, in the coming months, monitor banks’ compliance in line with set guidelines.
Benefits to customers
Biometric Project Manager at NIBSS, Oluseyi Adenmosun, said that BVN gives a unique identity that can be verified across the banking industry, making it easier for customers’ bank accounts to be protected from unauthorised access. It is expected to address issues of identity theft, and reduce exposure to fraud in the banking sector.
The manager added that the purpose of the project is to use biometric information as a means of first identifying and verifying all individuals that have account (s) in any Nigerian bank and consequently, as a means of authenticating customer’s identity at point of transactions.
Adenmosun said the BVN would also provide a uniform industrially accepted unique identity for customers and authenticate transactions without the use of cards using only biometric features and PIN.
Government reactions to
the headwinds
Finance Minister Dr. Ngozi Okonjo-Iweala, who is the Coordinating Minister for the Economy, has been busy explaining what government is doing to wriggle out of the naira crises among others. She talked about plugging revenue leakages, increasing the drive for revenue as well as developing the non-oil sectors.
The minister, who spoke at the International Institute for Finance (IIF) African Financial Summit 2014 held in Lagos, argued that with the right policies, Nigeria and other nations in the continent would be able to sustain growth despite the economic headwinds.
She admitted that unfolding events over the last six months have cast a shadow on global economic recovery in the aftermath of the 2008/2009 financial crises.
Her words: “Many countries on the continent depend on commodity exports as the main source of revenue. In Nigeria, our crude oil exports alone accounted for about 83 per cent of the value of our total exports in 2013, according to our National Bureau of Statistics (NBS).
“It is now imperative to drive up domestic resource mobilisation, especially taxes. In several African countries, including Nigeria, tax revenue to GDP is below 15 per cent – the conventional International Monetary Fund threshold for satisfactory tax performance. There are many leakages and gaps to be plugged, and more effective tax administration could contribute to improving revenues.”
Continuing, she added: “Aside drop in oil prices, the price of gold, which peaked at about $1383 per ounce in March, this (last) year, is now trading at around $1160 per ounce. Iron ore, which traded at around $130 per dry metric tonne at the beginning of the year, is now trading at around $76 per dry metric tonne, which is a loss of more than 40 per cent of its value this year.
“Also, the prices of some agricultural commodities are on a downward spiral, with the price of cocoa falling by about 10 per cent from $3,252 per tonne at the end of September, to about $2,900 per tonne now.
“We need to look into areas that for reasons that are not very clear, we have neglected and we need to change direction. We need to identify such sectors and create an enabling environment to attract private investments, while also channeling government’s spending into them.”
