In secret, corporates come clean about their outlook for the economy
The recently concluded Renaissance Capital Annual Pan-African Conference aptly titled Stability is Returning, provided us with a unique insight into Nigeria’s economic outlook for 2017. The conference had in attendance captains of industries across the country as well as select regulators in charge of the economy.
However, what interest us the most was what some of the corporates invited had to say about the economy without having to reveal their identities. They opined on the FX Windows, Treasury Bills, Lending, Bad loans, consumer demand and spending etc.
Here are the key details;
Banks begin to see green shoots
- Banks believe the economy is past the worst of what one described as “the most severe downturn in 25 years”. One of the big themes was the YtD improvement in FX liquidity, which allowed for the unwinding of some outstanding obligations.
- Trade facilities and velocity increased as a result, according to one bank. During the height of the FX shortages, trade cycles lengthened to 12 months, from a typical four-to-six months. The trade cycle is now contracting.
- Banks are cautiously optimistic about the Investors and Exporters (I&E) FX window. 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. Non-performing loans (NPLs) tend to lag the economy, according to one bank. It estimates that there is 18 months to go of high NPLs and downside surprises.
- Retail transactions that fell, when households cut spending, have yet to pick up. That said, banks believe things are getting better. In the short term, they see opportunities in manufacturing, agriculture and infrastructure.
- They are 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.
The new I&E FX window – this time is different.
- One bank thinks the introduction of the I&E FX window brings Nigeria a step closer to where FX policy needs to be. Another less optimistic bank described the new window as cosmetic.
- It thinks the upside of the I&E window is that it brings transactions that were happening below the table, above the table. (Which implies an improvement in liquidity at ‘official windows’.)
- However, the downside is that it excludes intermediaries (banks).
- The spreads at the window are also quite wide; sellers of FX want rates of NGN400- 415/$1, and buyers NGN330-360/$1.
- A continued improvement in liquidity is expected to help narrow them.
- About $500mn has been sold at the window since it became operational on 24 April.
- According to the feedback we got from the banks, the Central Bank of Nigeria (CBN) has not intervened much in the I&E FX window. This is promising, in our view. It makes participants hopeful that the central bank is inching towards a more liberal FX policy.
Consumer will remain under stress for a while
- Consumer companies think the fundamentals of the microeconomy – 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 with us the example of a middle-income mother buying smaller sachets of a product, when she can afford a larger pack. Her argument was that in these challenging times, she can 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. 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. That said, the consensus was that consumers are likely to remain under stress for a while
Building materials – 2018 rebound
- The effect of an economic downturn tends to lag in the building materials sector. The company that said it believes the industry’s downturn has bottomed.
- The industry expects foreign financing raised 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 home builders 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 2019.
IMF expects inflation to remain in mid-teens until 2020.
- The IMF estimates that the CBN has injected $4bn into the market YtD.
- The fund thinks it is positive that the central bank removed the 60:40 rule (that reserved 60% of FX for manufacturers), which now allows for other sectors to access FX.
- The IMF’s growth forecast of 0.9% (we forecast growth of 0.5%) in 2017 is due to agriculture and higher oil production.
- When these sectors are stripped out, the remaining sectors will show negative growth under the current policy environment, which we took to include FX restrictions.
- Oil production disappointed in March, when it dropped to 1.6mbd. That said, the Forcados pipeline may come back on stream this quarter (2Q17), which would boost oil production by 200-240k bd.
- We found the IMF’s most surprising forecast to be that of inflation, which it sees remaining in the midteens for the medium term. (We see inflation slowing to 11.1% at YE17.)
- One of the assumptions the fund makes in its inflation forecasts is that the central bank continues to monetise the budget deficit.