On Sunday, former Vice President of the country, Atiku Abubakar, won the presidential primaries of the Peoples Democratic Party (PDP) with 1532 votes, beating 11 other contestants. He will thus be the main challenger to incumbent President Muhammadu Buhari in the 2019 elections.
Now, more than ever before, the economy will take the front burner. Inflation is rising, yet growth remains sluggish. Disposal income of the majority of Nigerians is on the decline while wage remains stagnant and unemployment hit record levels.
More than ever before, the 2019 election will be about the economy much as the 2015 election was about insecurity. President Buhari has been on the helm for about 3 years plus and his views and policies on the economy are very well-known. For Atiku, the main contender to the post, his views will be in the spotlight in the months leading to the National Election.
We have heard Atiku speak on several occasions about the economy and in this article, we dive into some of his notable quotes for an insight into how his campaign might shape his economic policies.
Job Creation is a priority
Job creation, according to the former Vice President, will be his priority.
My agenda is centered on jobs. That is what I have been doing for the past 40 years. I am first and foremost an entrepreneur. A job creator. My group of companies has a workforce of about 50,000.
While he may be a successful entrepreneur, Atiku has not given a clear plan on how intends to create jobs, nor how many jobs he intends to create. Creating circa 50,000 jobs is not the same as employing millions of Nigerians, poorly educated in terms of formal and technical education.
President Buhari, on the other hand, has been dismal when it comes to job creation. Though unemployment figures are yet to be published this year, however, the last unemployment rate published in the third quarter of 2017 revealed an unemployment rate of 18.8% one of the highest in recent times.
In an interview with Reuters, he also advocated for an expansion of the privatization programme to the oil and solid minerals industries.
“I am also going to expand it to include the oil and gas sector which have not been touched at all and other major sectors of the economy like mining, solid minerals,”
In the same interview, he also hinted at what could be a possible downsizing of the civil service or pruning of its running costs.
“I am a strong believer in very, very small government and also the private sector.”
A smaller government may be difficult to achieve in the near term, as the current administration is in the middle of negotiations for an increased minimum wage, which would naturally kick off with the civil service. While the Obasanjo Presidency, made much more progress with privatization than the current government, Atiku who supervised the process was accused of crony capitalism.
It is hard to find any major policy statement from the current government on small government, however recent antecedents suggest the Buhari administration is socialist in its approach to the economy and as such might not be favourably disposed to smaller government.
A business-friendly environment
In a speech delivered at Chatham House, Atiku pledged to create a business-friendly environment, and handover utilized federal assets to the state.
The federal government will create a business-friendly macroeconomic environment, through the pursuit of appropriate monetary and exchange rate policies, to leverage private sector investments, especially in agriculture to promote economic diversification.
In a 2015 policy document titled Building a Nigeria for All, Atiku stated that by 2020 (where he to have been elected President, then)
The Presidency will work with the NASS to introduce unified, simple, transparent, and predictable flat tax rates with clear allocation
formulas for local, state, and federal governments
The Buhari administration made ease of doing business one of its key policy initiatives when it came into power in 2015. Whilst some of its efforts have been laudable, it has faced several bureaucratic bottlenecks impeding its ability to make the business environment less harsh. The more recent regulatory onslaught against mega-multinationals like MTN has also not helped its quest to make the business environment friendlier.
Diversification of the economy
In the same speech, he also advocated for the diversification of the economy away from crude oil revenue.
Indeed, achieving diversification is central to our economic development strategy. Let us begin to visualize Nigeria without oil or one not predominantly dependent on hydro-carbon.
While every administration has trumpeted diversification of the economy, the Nigerian economy is diversified but largely reliant on crude oil for government revenue and a source of foreign exchange.
The Buhari administration’s diversification model has focussed largely on Agriculture. However, not many gains have been made even though this policy might require time to materialize. In terms of other areas such as services and mining, the government has made little to zero gains.
In the same speech, he disclosed he would push for better management of foreign exchange reserves.
It is also imperative that our foreign reserves and revenue buffers are boosted to insulate the economy against adverse shocks and to strengthen countercyclical fiscal capacity.
We will streamline the operations of the Sovereign Wealth Fund, the Excess Crude Account and the Stabilization Account which is currently embedded in the Revenue Allocation Formula for more effective stabilization outcomes.
Unless these stabilization vehicles are reshaped Nigeria will continue to be subject to the vagaries of the world oil market.
A floating Naira
Atiku has also advocated for floating the Naira, as it would encourage foreign investors
“I will allow the naira to float because I believe that is one of the ways foreign direct investment can be encouraged to come in,”.
Atiku’s analysis is flawed here. Nigeria has more or less operated a managed or dirty float in the last ten years.
What has differed in each regime was the availability of foreign exchange reserves when there were oil shocks as well as the degree exchange rate controls are applied in such situations. FDI inflows are largely dependent on a stable policy environment.
President Buhari is vehemently against floating the naira leading to a creation of multiple exchange rate improvision by the CBN. This has stabilized the exchange rate in the past 18 months but critics believe this is unsustainable particularly if we experience another oil price shock.
To get an insight into how Atiku thinks, here is a summary of his manifesto when he contested in the primaries under APC in 2015.
Within the first 100 days, the Federal Government will:
The Presidency through the FMF and FMTI instruct MDAs (and prepare relevant legislation) to make sure that:
i. Consult the private sector on economic policy and business regulation
ii. private sector insights and inputs inform economic policy and business regulations consultation processes are open and transparent
iii. the business costs of new rules and regulations are commensurate with the expected social etc. benefits
Within one year, The Presidency through the FMF prompt legislators and MDAs to improve the business environment by:
i. tasking independent auditors with the compilations of business friendly scorecards of legislators and Dgs
ii. Introducing business impact assessments iii.pledging to veto all (business related) legislation and regulation that does not pass a rigorous business impact assessment
Within two years, ·
The Presidency through the Federal Ministry of Finance (FMF) will help businesses focus on doing business by:
i. working with state governments to inventorise and harmonize business taxes, levies, and fees cutting the number of federal levies, and fees
ii. Streamlining Federal, States and Local Government (3G) taxes, levies, and fees iii.simplifying tax filings iv.creating a transparent corporate tax register v. phasing out special purpose funds that tap private donations to provide public services
Within four years, · The Presidency, through the Federal Ministry of Trade and Investment (FMTI) will encourage international trade by:
i. creating more robust product standards and certification procedures
ii. Boosting non-oil exports
iii.streamlining customs procedures (by creating an SME-compatible single window)
iv.f a s t – t r a c k i n g p o r t a n d a i r p o r t construction/expansion projects
v. facilitating the construction of dry ports with appropriate hub and spoke transport links etc. vi.creating an (agile, accessible, and transparent) SME-focused Export Support and Insurance Agency
By the year 2020, · The Presidency will work with the NASS to introduce unified, simple, transparent, and predictable flat tax rates with clear allocation formulas for local, state, and federal governments
Why Insurance firms are selling off their PFAs
It has not been uncommon over the years to have insurance companies with pension subsidiaries.
The idea of mitigating risks and curtailing losses at the bare minimum begins from the insurance industry and only crosses into the pension space with the need for retirement planning. For this reason, it has not been uncommon over the years to have insurance companies with pension subsidiaries. However, controlling the wealth of people is no easy feat – and crossover companies are beginning to think it might not be worth it competing with the big guns; that is, the pension fund administrators (PFAs) that already cater to the majority of Nigerians.
A few months ago, AXA Mansard Insurance Plc announced that its shareholders have approved the company’s plan to sell its pension management subsidiary, AXA Mansard Pensions Ltd, as well as a few undisclosed real estate investments. It did not provide any reason for the divestment. More recently, AIICO Insurance Plc also let go of majority ownership in its pension arm, AIICO Pension Managers Ltd. FCMB Pensions Ltd announced its plans to acquire 70% stakes in the pension company, while also acquiring an additional 26% stake held by other shareholders, ultimately bringing the proposed acquisition to a 96% stake in AIICO Pension. The reason for the sell-off by AIICO does not also appear to be attributed to poor performance as the group’s profit in 2019 had soared by 88% driven by growth across all lines of business within the group.
So why are they selling them off?
Pension Fund Administration is, no doubt, a competitive landscape. Asides the wealth of the over N10 trillion industry, there is also the overarching advantage that pension contributors do not change PFAs regularly. Therefore, making it hard to compete against the big names and industry leaders that have been in the game for decades – the kinds of Stanbic IBTC, ARM, Premium Pension, Sigma, and FCMB. Of course, the fact that PFAs also make their money through fees means the bigger the size, the more money you make. With pressure to capitalize mounting, insurance firms will most likely spin off as they just don’t have the right focus, skills, and talents to compete.
The recent occurrence of PENCOM giving contributors the opportunity to switch from one PFA to another might have seemed like the perfect opportunity for the smaller pension companies to increase their market shares by offering better returns. More so, with the introduction of more aggrieved portfolios in the multi-fund structure comprising of RSA funds 1, 2, & 3, PFAs can invest in riskier securities and enhance their returns. However, the reality of things is that the smaller PFAs don’t have what it takes to effectively market to that effect. With the gains being made from the sector not particularly extraordinary, it is easier for them to employ their available resources into expanding their core business. There is also the fact that their focus now rests on meeting the new capital requirements laced by NAICOM. Like Monopoly, the next smart move is to sell underperforming assets just to keep their head above water.
Olasiji Omotayo, Head of Risk in a leading pension fund administrator, explained that “Most insurance businesses selling their pension subsidiaries may be doing so to raise funds. Recapitalization is a major challenge now for the insurance sector and the Nigerian Capital Market may not welcome any public offer at the moment. Consequently, selling their pension business may be their lifeline at the moment. Also, some may be selling for strategic reasons as it’s a business of scale. You have a lot of fixed costs due to regulatory requirements and you need a good size to be profitable. If you can’t scale up, you can also sell if you get a good offer.”
What the future holds
With the smaller PFAs spinning off, the Pension industry is about to witness the birth of an oligopoly like the Tier 1 players in the Banking sector. Interestingly, the same will also happen with Insurance. The only real issue is that we will now have limited choices. In truth, we don’t necessarily need many of them as long all firms remain competitive. But there is the risk that the companies just get comfortable with their population growth-induced expansion while simply focusing on low-yielding investments. The existence of the pandemic as well as the really low rates in the fixed-income market is, however, expected to propel companies to seek out creative ways to at least keep up with the constantly rising rate of inflation.
Nigerian Banks expected to write off 12% of its loans in 2020
The Nigerian banking system has been through two major asset quality crisis.
The Nigerian Banking Sector has witnessed a number of asset management challenges owing largely to macroeconomic shocks and, sometimes, its operational inefficiencies in how loans are disbursed. Rising default rates over time have led to periodic spikes in the non-performing loans (NPLs) of these institutions and it is in an attempt to curtail these challenges that changes have been made in the acceptable Loan to Deposit (LDR) ratios, amongst others, by the apex regulatory body, CBN.
Projections by EFG Hermes in a recent research report reveal that as a result of the current economic challenges as well as what it calls “CBN’s erratic and unorthodox policies over the past five years,” banks are expected to write off around 12.3% of their loan books in constant currency terms between 2020 and 2022, the highest of all the previous NPL crisis faced by financial institutions within the nation.
Note that Access Bank, FBN Holdings, Guaranty Trust Bank, Stanbic IBTC, United Bank for Africa and Zenith Bank were used to form the universe of Nigerian banks by EFG Hermes.
Over the past twelve years, the Nigerian banking system has been through two major asset quality crisis. The first is the 2009 to 2012 margin loan crisis and the other is the 2014 to 2018 oil price crash crisis.
The 2008-2012 margin loan crisis was born out of the lending institutions giving out cheap and readily-available credit for investments, focusing on probable compensation incentives over prudent credit underwriting strategies and stern risk management systems. The result had been a spike in NPL ratio from 6.3% in 2008 to 27.6% in 2009. The same crash in NPL ratio was witnessed in 2014 as well as a result of the oil price crash of the period which had crashed the Naira and sent investors packing. The oil price crash had resulted in the NPL ratio spiking from 2.3% in 2014 to 14.0% in 2016.
Using its universe of banks, the NPL ratio spiked from an average of 6.1% in 2008 to 10.8% in 2009 and from 2.6% in 2014 to 9.1% in 2016. During both cycles, EFG Hermes estimated that the banks wrote-off between 10-12% of their loan book in constant currency terms.
The current situation
Given the potential macro-economic shock with real GDP expected to contract by 4%, the Naira-Dollar exchange rate expected to devalue to a range of 420-450, oil export revenue expected to drop by as much as 50% in 2020 and the weak balance sheet positions of the regulator and AMCON, the risk of another significant NPL cycle is high. In order to effectively assess the impact of these on financial institutions, EFG Hermes modelled three different asset-quality scenarios for the banks all of which have their different implications for banks’ capital adequacy, growth rates and profitability. These cases are the base case, lower case, and upper case.
Base Case: The company’s base case scenario, which they assigned a 55% probability, the average NPL ratio and cost of risk was projected to increase from an average of 6.4% and 1.0% in 2019 to 7.6% and 5.3% in 2020 and 6.4% and 4.7% in 20201, before declining to 4.9% and 1.0% in 2024, respectively. Based on its assumptions, they expect banks to write-off around 12.3% of their loan books in constant currency terms between 2020 and 2022, a rate that is marginally higher than the average of 11.3% written-off during the previous two NPL cycles. Under this scenario, estimated ROE is expected to plunge from an average of 21.8% in 2019 to 7.9% in 2020 and 7.7% in 2021 before recovering to 18.1% in 2024.
Lower or Pessimistic Case: In its pessimistic scenario which has a 40% chance of occurrence, the company projects that the average NPL ratio will rise from 6.4% in 2019 to 11.8% in 2020 and 10.0% in 2021 before moderating to 4.9% by 2024. It also estimates that the average cost of risk for its banks will peak at 10% in 2020 and 2021, fall to 5.0% in 2022, before moderating from 2023 onwards. Under this scenario, banks are expected to write off around as much as 26.6% of their loan books in constant currency terms over the next three years. Average ROE of the banks here is expected to drop to -8.8% in 2020, -21.4% in 2021 and -2.9% in 2022, before increasing to 19.7% in 2024.
Upper or optimistic case: In a situation where the pandemic ebbs away and macro-economic activity rebounds quickly, the optimistic or upper case will hold. This, however, has just a 5% chance of occurrence. In this scenario, the company assumes that the average NPL ratio of the banks would increase from 6.4% in 2019 to 6.8% in 2020 and moderate to 4.8% by 2024. Average cost of risk will also spike to 4.2% in 2020 before easing to 2.4% in 2021 and average 0.9% thereafter through the rest of our forecast period. Finally, average ROE will drop to 11.6% in 2020 before recovering to 14.4% in 2021 and 19.0% in 2024.
With the highest probabilities ascribed to both the base case and the pessimistic scenario, the company has gone ahead to downgrade the rating of the entire sector to ‘Neutral’ with a probability-weighted average ROE (market cap-weighted) of 13.7% 2020 and 2024. The implication of the reduced earnings and the new losses from written-off loans could impact the short to medium term growth or value of banking stocks. However, in the long term, the sector will revert to the norm as they always do.
Even with a 939% jump in H1 Profit, Neimeth still needs to build consistency
Neimeth has been one of the better performers in the stock market in the last one year.
Neimeth’s profit after tax for H1 2020 might have jumped by 939% from H1 2019, but there’s still so much the company needs to do to remain in the game.
For the first time in years, Pharmaceutical companies across the globe are in the spotlight for a good reason. As the COVID-19 pandemic rages on, the world waits patiently for this industry to produce a vaccine that can once again lead us back to the lives we all missed. Nigeria is also not an exception, it seems. One of Nigeria’s oldest pharmaceutical companies, Neimeth, has been one of the better performers in the stock market in the last one year. However, there is still so much the company needs to do to earn profits consistently.
Neimeth’s recently released H1 2020 results show a jump of 19.4% in revenue from ₦976 million earned in H1 2019 to ₦1.165 billion in H1 2020. While this is impressive, its comparative Q2 results (Jan-March ‘ 20) show a drop in revenue of 25.4% from ₦748.8 million earned in Q2 2019, to the ₦568.7 million revenue in Q2 2020. In similar vein, while its profit-after-tax soared by 939% from ₦5.447 million in H1 2019 to ₦56.596 million in H1 2020, its quarter-by-quarter results show a drop of 118%. While there is a truth that some months are better performers than others, Neimeth’s extreme profit jump in the half-year results juxtaposed with the more-than-100% drop in the first quarter of this year, reveal wide-gap volatility in its earning potential. Its revenue breakdown attributes the quarter-by-quarter drop in revenue to a comparative drop in its ‘Animal Health’ product line by a whopping 897.42%. The ‘Pharmaceuticals’ line also only experienced a marginal jump of 2.57%.
Full report here.
Current & Post-Covid-19 Opportunities
A 2017 PWC report had revealed that by 2020 the pharmaceutical market is expected to “more than double to $1.3 trillion. Mckinsey had also predicted that come 2026, Nigeria’s pharma market could reach $4 billion. The positive outlook of the industry is even more so, following the disclosure by the CBN to support critical sectors of the economy with ₦1.1 trillion intervention fund.
The CBN governor, Godwin Emefiele, had stated that about ₦1trillion of the fund would be used to support the local manufacturing sector while also boosting import substitution while the balance of ₦100 billion would be used to support the health authorities towards ensuring that laboratories, researchers and innovators are provided with the resources required to patent and produce vaccines and test kits in Nigeria.
While manufacturing a vaccine for the Covid-19 pandemic might be nothing short of wishful, the pandemic presents a global challenge that businesses in the healthcare industry could leverage. Through strategic R&D, it could uncover a range of solutions, particularly those that involve the infusion of locally-sourced raw materials.
In order for the company to attain sustainable growth, it needs to come up with structures and systems that are dependable, while also tightening loose ends. One of such loose ends is its exposure to credit risk. It’s Q2 2020 reports reveal value for lost trade receivables of N693.6 million carried forward from 2019. To this end, it notes that while its operations expose it to a number of financial risks, it has put in place a risk management programme to protect the company against the potential adverse effects of these financial risks.
At the company’s last annual general meeting (AGM), the managing director, Matthew Azoji, had also spoken on the company’s efforts to gain a larger market share through its initiation of bold and gradual expansion strategies.
The total revenue growth and profitability of the half-year period undoubtedly signals a potential in the company. However, we might have to wait for the company’s strategies to crystalize and attain a level of consistency for an extended period before reassessing the long-term lucrativeness of its stock or otherwise. That said, it certainly should be on your watchlist.