* Target manufacturing, agriculture, infrastructure…
Nigerian banks are uptick that the economy is past the worst of what most described as “the most severe downturn in 25 years”, according to Renaissance Capital’s findings from its 8th annual Pan-Africa Investors conference, which held in Lagos recently.
According to the research firm, the return of stability in the economy was the common theme among corporates drawn from banking, consumer and building material space.
The banks specifically believe things are getting better. In the short term, they see opportunities in manufacturing, agriculture and infrastructure, while steering clear of the oil & 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
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A major driver of their optimism is the year-to-date (YtD) improvement in FX liquidity, which according to them, allowed for the unwinding of some outstanding obligations.
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.
Equally, trade facilities and velocity increased as a result, according to one bank.
Renaissance Capital in its findings noted that during the height of the FX shortages, trade cycles lengthened to 12 months, from a typical four-to-six month, adding that the trade cycle is now contracting and that banks are cautiously optimistic about the Investors and Exporters (I&E) FX window.
Non-performing loans (NPLs) tend to lag the economy, according to one bank. It estimates that there is 18-month period to go of high NPLs and downside surprises. Again, retail transactions that fell, when households cut spending, are yet to pick up.
In spite of the expressed optimism, consumer sector will remain under stress for a while
Consumer companies think the fundamentals of the micro-economy – consumers and businesses – have not changed. They think the consumer is still very stressed, unemployment high and inflation elevated. Consumers have reduced the frequency of purchases, found substitutes and traded down.
One consumer company shared the example of a middle-income mother buying smaller sachets of a product, when she can afford a larger pack.
The mother’s argument was that in these challenging times, she could control consumption more easily in her household with sachets. Lower income mobile subscribers are reacting to high inflation by dropping from two sim cards to one, according to a telcos company. Tight FX liquidity led to some companies delaying capex.
According to analysts, some consumer companies 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. The companies see stability returning.
The building materials sector is also seeing a rebound in 2018. The effect of an economic downturn tends to lag more in the building materials sector. However, according to some operators, the industry’s downturn has bottomed. The industry expects foreign financing sourced 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 (stressed) consumer. The industry sees some election-related softening in growth in 1Q19. However, it sees scope for it to strengthen in the remainder of 2.
Business a.m. staff
Frontpage October 16, 2019