Following a bearish run in 2019, with a negative return of 14.6%, the local bourse began the year on a positive note and has sustained the upbeat performance for the sixth trading session of the year.
In 2019, despite attractive valuations and subdued political risk following the conduct of the general elections, investors appetite for Nigerian equities remained largely underwhelming. With a more stable political climate, investors appear to be reassessing their risk appetite.
The NSE has gained 9.5% year-to-date, making it the world’s best performing bourse, albeit fueled largely by local investors participation. Hence, we ask; How sustainable is the rally? An analysis of the buying trend shows a lot of buying interest in banking stocks and high dividend yield stocks.
Notably, we have seen banking stocks like UBA, Zenith, FBN, Ecobank, showing significant gains while stocks like Flour mills, Nascon and Dangote Cement have also seen strong buying interest based on expectation of consistent and high dividend yield. That said, we expect some profit-taking in today’s session given nine straight days of gains, nonetheless, we still expect decent activity level in the market.
Following two consecutive years of negative close, we think the market may stage a comeback in 2020, albeit the bullish performance will be capped by modest economic expansion. While we do not believe we are going to see foreign investors returning to the market in droves, we believe activity level will be better than we saw in 2019.
Our view is hinged on the unconventional monetary tools adopted by the CBN which we believe will buoy system liquidity and spur local investors demand for risky assets.
The decision of the apex bank to stop individuals and Pension Fund Administrators from investing in OMO bills has led to a significant moderation in yields on treasury bills and bonds, pushing real yields into negative territory. As more liquidity is expected to hit the system from maturing OMO bills, we anticipate there will be a surge in volume of the funds chasing existing investment vehicles. Accordingly, we believe some of the liquidity will flow into the local bourse.
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Member of the Nigerian Stock Exchange,
First City Plaza, 44 Marina,
PO Box 9117,
Local content – A driving force for African oil and gas sector sustainability
There is a wave of change coming and COVID-19 is the first of the determinants that oil and gas investment will gradually be reducing.
With 2020 being a year of uncertainties in the oil and gas sector and some of the decisions, activities and market trends that took place last year, I reflect on what some of the activities pre-COVID-19 and now means for the African energy sector.
Following the reform of the African Petroleum Producers’ Organisation (APPO) Fund, I was opportune to witness the equally newly reformed Africa Energy Investment Corporation (AEICORP). The AEICORP is to provide “a Solid Capital Base and Liquidity Profile, a Preferred Creditor Status, Developmental Impact, Strong Financial Performance Returns to Investor,” for investors to participate in a low-risk pan-African growth.
With one of the objectives of APPO seeking to ensure member countries cooperate, I believe for African countries to reap the maximum benefits from oil and gas, investment in energy technology through institutions like AfDB and AEICORP will help to achieve this aim. The thought of African investments in the hydrocarbons sector takes my mind to a familiar place – de-carbonization of fossil fuels, as opposed to abandonment.
De-carbonising fossil fuels through technology developed by Africans might take a while to embrace but it is worth the long-term investment. At the moment (or for the next 20 years), Africa is not ready for zero-carbon emission energy sources. Almost all of the oil-producing countries on the African continent depend on revenues from oil and gas to fund their budgets and keep their economy moving. It cannot be denied that the energy security of Africa is highly dependent on decarbonisation.
This is because most of the African countries export their crude to countries abroad and the countries abroad are moving towards adopting the terms of the Paris climate accord which aims to see low carbon emission.
New discoveries of oil and gas are still being made daily with a large part of prospective areas still underexplored. All the countries on the continent cannot boast of 24 hours steady supply of electricity. The West is embracing decarbonisation because they have gotten to a stage where all of the basic social amenities are working, Africa isn’t there yet.
Africa looks to be one of those who will suffer climate change the most. We cannot follow the same paradigm as the advanced countries and we will take a longer time to achieve what they will achieve. The COVID-19 pandemic is a trigger for many African countries to begin to gradually embrace diversification and invest in other sectors of their economy. If African countries do not fully depend on the revenues from oil and gas, we can begin to talk carbon decarbonisation. For now, it is a gradual process and we still have a long way to go.
The West will not come and save us. The West will save the West and Africa should save Africa. In November 2019, the European Investment Bank (EIB) announced that it will no longer grant loans for crude oil, natural gas and coals project from January 1st 2022, with a few exceptions for gas projects. Also, in October 2020, the United Nations asked world’s publicly funded development banks to bring their lending policies in line with the Paris Agreement, and a few weeks later, many of the institutions including the African Development Bank Group (AfDB) said they will reduce investment in fossil fuels related project.
This is to show that it would soon be every investor for themselves. And if China follows suit, the African market will break.
When all of these lenders stop funding fossil fuel projects in the country, most African countries will have little or no advantage when it comes to negotiations. Chinese authorities have been big players in the development of oil and gas resources in Africa and one of the biggest lenders to African countries. If by 2025 that all of the world’s publicly funded development banks would have joined the EIB in halting the disbursement of funds for fossil fuel projects, an indication that they are only willing to do embark on projects that are in line with their net- zero commitments, China will be the only option left.
Many African countries have already signed agreements that will see them forfeit important state-owned assets if they fail to meet up on their repayment plan for loans obtained from China. Let us not forget that China is also a signatory to the Paris climate accord. So if in the future, China decided to also stop funding fossil fuel projects, most of our countries in Africa who do not start planning for the unexpected now will be left with a wrecked economy and with no option than to forfeit out of the little they have to pay their debts.
French Group, Total, ‘totally’ dominates the oil and gas sector in some African countries. What happens to us when Total pulls out its resources and stops funding fossil fuel projects, because being a French company, it is one of the companies expected to fully commit to the terms of the Paris Agreement?
Is the Africa Continental Free Trade Agreement (AfCFTA) the saviour?
Yes, we do have a genuine opportunity through the AfCFTA. The AfCFTA was formed in 2018 to eliminate tariffs on intra-African trade, to make it easier for African businesses to trade within the continent and cater to and benefit from the African market. It creates a single market for goods, services, facilitated by movement of persons to deepen the economic integration of the African continent, under the Pan African Vision of an integrated, prosperous and peaceful Africa. The benefits are:
To improve the intra-African trade landscape and export structure;
- To create a sound global economic impact;
- To develop better policy frameworks;
- To foster specialisation and boosting industrialisation;
- To strengthen regional and inter-state cooperation;
- To increase employment and investment opportunities, as well as technological development;
- To provide the opportunity to harness Africa’s population dividend.
In a few years, the AEICORP and AfCFTA may, alongside a few lending bodies and China, be the only creditors willing to invest in the African energy scene. The continent needs to embrace its own Funds and platform and invest in technology in the African energy scene, in preparation for the future of the oil and gas industry.
One of the solutions to energy security is for African countries to make a case for themselves. Why is the West ignoring the gas sector, which is cheaper and safer and the least-polluting fossil fuel to a more expensive and less reliable source like renewable energy? If African forces start to condemn the decision of these lenders to stop financing fossil fuel projects, under a uniform voice and umbrella body like APPO, negotiations will take place and better resolutions that will favour all parties can be reached.
Countries with huge natural gas reserves such as Nigeria, South Africa, Tanzania, Algeria, Ghana, Equatorial Guinea, Ghana, Senegal, Cameroon etc. should follow in the footsteps of Mozambique and attract investors to invest in that sector. Equatorial Guinea also has projects lined up for its ‘Year of Investment’. Egypt has also been investing heavily in the gas sector and alongside Mozambique, it would become one of the biggest players on the continent, in a few years.
African countries can also take advantage of the fact that an African, H.E Mohammed Barkindo is the Secretary-General of the Organisation of Petroleum Exporting Countries (OPEC) to lead negotiations in ensuring that fossil fuel projects are still catered for by lenders.
Countries on the continent should also trade between themselves in the areas of energy. It is remarkable what the East African countries are doing together to ensure electricity supply in each other’s countries. Last year, Nigeria also announced it will be importing Niger’s surplus oil. African countries need to get from Africa what is present in Africa. This is the way by which we can help the cause of the AfCFTA, APPO, and each other to reach our full energy potentials and have adequate energy security.
There is a wave of change coming in the world and COVID-19 is the first of the determinants that oil and gas investment will gradually be reducing. African countries cannot afford to buy this change yet. We cannot afford to compare ourselves to the West as we lack what they have, and yes, we have some of the fossil fuels that they still want before their full switch to renewables. We have to take advantage of that gap and reach an agreement that favours all.
It will be great to see the terms of the Paris Climate Accord come to pass in the future. But for now, Africa needs the financing and investment in technology will help to still keep to the terms of the Accord while investing in the huge oil and gas potential here.
About the author
David R. Edet is an oil and gas expert, serving in the capacity of Business Analyst at Afric Energy Ltd, an Oil and Gas Company operating from Nigeria. Mr. Edet is a leading voice to youth involvement in African energy matters and campaigns for more involvement of local contact in the African hydrocarbons sector.
What banks can do to improve Real Sector Lending in 2021
To navigate the nation’s economy from oil, banks will have to pay more attention to real sector lending in 2021.
The beginning of the financial year for Nigerian Banks has become a comparison of which bank closed with the largest balance sheet for the previous year; a simulation of which one of the tier-1 banks would outdo the others in the $1billion dollars profit pursuit, and which bank would pay the most dividends to its shareholders.
Every so often, financial analysts employ the use of important indices to decipher areas where these financial institutions need to shore up their numbers and employ their resources to align with the fiscal and monetary policies of the government. These Analysts are usually ignored. Consequently, is the poor policy implementation of the CBN and an ever-widening chasm between the fortunes of Nigerian banks and the economy in which they operate.
A major area where most analysts have faulted Nigerian banks in recent times is in lending – lending to the real sector of the economy.
The expectation and the reality
On July 3rd 2019, in a letter to all banks, the CBN through its Director of Banking Supervision announced “REGULATORY MEASURES TO IMPROVE LENDING TO THE REAL SECTOR OF THE NIGERIAN ECONOMY”. A laudable directive that was to see banks maintain a Loan to Deposit Ratio (LDR) of 60%, wherein SMEs, retail, mortgage and consumer lending would be assigned a 150% weight in the computation of this LDR, and stiff sanctions of additional CRR of 50% of the lending shortfall will be levied against unyielding banks.
This regulation fuelled the expectation of substantial gains in the real sector given the relative availability of funds. Banks jostled and made a show of dishing out these loans, but as records of CRR debits for LDR failure began to hit the news, it became apparent that most banks were still stuck in their reality of doing business in Nigeria.
The reality being that Nigerian Banks have managed to stay amongst the most profitable banks in Sub-Saharan Africa while largely ignoring the real sector. A review of the earnings of 10 top Nigerian Banks between 2009 and 2019 showed that a sizable portion of their profit growth came from non-client driven activities, even as income from core banking activities of these banks shrank from accounting for 85% of their profits in 2009 to 65% of their increasing profit in 2019.
Perhaps this goes a long way to explain the 2020 H1 profits posted by these banks amid a pandemic and looming recession.
A case of once-beaten?
In fairness, Nigerian banks already got their fingers burnt in the real sector oven once before, and the existence of AMCON is a constant reminder of this fact. The Banks’ attempts to adhere to the new regulation most likely contributed to a rise in the industry’s NPL in H1 2020 notwithstanding CBN’s best intentions with the loan restructuring freedom banks were given to protect themselves from the crippling effect of the pandemic. There doesn’t seem to be a way out for Nigerian banks.
Navigating the waters of necessity
With all the modernization around the banking process, banking at its root has remained unchanged over the centuries. It still entails receiving from areas of surplus to fix deficits. The real sector of the Nigerian economy has been in severe deficit as the nation directed its attention, and finances, to the oil sector which has been the sustenance of a potentially diverse economy like ours for far too long.
If Nigerian banks are to navigate the nation’s economy from oil before the rest of the world completes the move, then they will have to pay more attention to real sector lending in 2021. This can be done through the following:
- Understanding the necessity
Real Sector lending should no longer be viewed by banks through the lens of meeting regulatory requirements only, their importance to the Banks’ balance sheet should be understood. In the near future, it is unlikely that banks will be unable to earn as much from derivatives as uncertainty caused by the pandemic continues to cause spectacular swings in some markets coupled with a wider acceptance of crypto over fiat which may shrink some markets.
Also, further ignoring the real sector market by commercial banks inadvertently means that Fintechs and their MFBs continue to ramp up the profits in these markets, and may someday be big enough to compete favorably with the commercial banks. Mergers and acquisitions will hasten this process.
- Having an action plan
As an action plan, real sector lending (not just the creation of risk assets) should be incorporated into the KPIs of relevant members of staff. Also, the banks should actively pursue sectors of the economy where they have comparative advantage by virtue of their expertise, customer base, technological advantage and/or branch network.
- Using segmentation
Too much emphasis has been placed on “value chain” making banks feel the need to play in all aspects of a business. They practically provide funds for all aspects of the same business- from manufacturing to distributorship. Whilst an argument could be made on the need for synergy and the relative ease of monitoring value chain businesses, this type of concentration of funds puts banks at higher risk of loss when a part of the value chain defaults. However, focusing on a segment of a business could have its own benefits in limiting exposure.
- Revisiting VC, PPP and Loan syndication
Perhaps the next big business will not be a conventional textile mill nor will it be distributorship of FMCGs. Nigerian banks need to have a foothold in the businesses of the future by adopting VC models of investments and fundraising for these business ideas. Public-private partnership and Loan syndication should not also be limited to development of social amenities but to funding businesses in the real sector.
The real sector lending drive of the CBN has shown promise since inception, increasing the level of industry gross credit by N829b in its first few months between May and Sept 2019. The introduction of the GSI by the CBN from August 2020 is also a step in the right direction to protect banks from an increased default rate of personal loans.
Nonetheless, these policies will not upturn the Nigerian economy if Nigerian banks continue to treat real sector lending as an occupational hazard rather than the occupation itself.
A critical analysis of the N1.163 trillion Lagos State 2021 budget
To fund the 2021 budget, Lagos State says more companies will remit taxes in 2021.
Lagos State thrives as the economic backbone of Nigeria and with its GDP rivaling African nations, it is no surprise that what happens in Lagos, affects Nigeria in its entirety.
Following the impact of the COVID-19 pandemic, Lagos State had quite naturally reduced its expectations for the year 2020. From a proposed budget of N1.169 trillion, the State reviewed it downwards by 21% to N920.5 billion – out of which it was still able to attain an overall performance of 86%.
Total revenue alone was 93% of projections and this is despite the pandemic, the additional costs of the #EndSARS protests, as well as the other disruptions that followed. As the Lagos State Commissioner for Economic Planning & Budget, Sam Egube puts it, ‘excuses build bridges to nowhere.’
That said, a 2021 budget of N1.163 trillion is nothing short of audacious, particularly considering the revisions made to last year’s projections. Signed into law by the Governor on 31st December 2020, it was prepared to first prioritize the completion of all on-going projects in the State and then to meet a series of objectives from employment creation, increased investment in human capital development, i.e. education and healthcare, deployment of functional technology in public services, amongst others.
While the budget succinctly themed, “Rekindled Hope” and the many proclamations of the T.H.E.M.E.S agenda are remarkable, revealing a desire to reach for more, there is ardent need to interrogate the sources that make up the budget, what they are projected to be used for, and the possible limitations between the lines.
Funding the budget and the debt quagmire
The total budget of N1.163 trillion is expected to be funded from a total revenue estimate of N971.028 billion, made up of Total Internally Generated Revenue (TIGR) of N723.817 billion, capital receipts at N71.811 billion, and federal transfers at N175.400 billion.
While the figures for Federal transfers and receipts are said to have been conservative, the breakdown assumes that a key part of the budget is expected to come from the State’s Internally Generated Revenue (IGR).
During the official budget speech, the Commissioner of the Lagos State Ministry of Economic Planning and Budget had explained that Lagos State Internal Revenue Service (LIRS) performance is expected to increase by 30% in 2021. On one hand, systems such as simpler collection systems are being tightened to boost revenue; on the other, more companies will remit taxes with many tax holidays from 2020 taken care of in the past year.
They also expect to harness the huge revenue-generating opportunities in the State particularly in the real estate and transportation sectors while also leveraging data to uncover available opportunities. Following the 21% revision of the past year, particularly with many of the same challenges still at the fore, the assumptions for the projected revenue can really only be proven by their delivery.
The deficit of N192.494 billion is projected to be funded by a combination of both internal and external loans. Now, while borrowings of N192.5 billion compared to projected IGR of N723.8 billion is relatively fair as the State is projecting to internally generate almost 4 times of its proposed borrowings, the underlying debt challenge of the nation should naturally still cause a few raised eyebrows for the additional debt – even though it is projected to be used in its totality to fund capital projects. The ongoing instability in the FX market, as well as the increasing debt burden this will pose, are some of the main points of consideration with the budget deficit financing.
Speaking at the “Facts-Behind-The-Figures Media Roundtable,” Commissioner for the Lagos State Ministry of Economic Planning and Budget, Sam Egbe explained that most of the loans taken will be in Naira in order to protect the State from FX risks as much as possible. The Commissioner of Finance, Dr. Rabiu Olowo, had also explained that the loans to be taken are well within fiscal sustainability levels.
He explained that “We cannot depend on our own internally generated revenue or the federal transfer that we get from the federal government if we want the kind of development that Lagos needs at this time. For this, there are two main benchmarks that we follow. We have the federal debt management office benchmark of 30% debt to revenue, and of course the World Bank benchmark which is 40%. We closed the year 2020 at 19.8% and for the year 2021. While we project about 22% debt to revenue ratio, we are still within both benchmarks.”
The deficit financing of N192.5 billion is proposed to be raised through local capital market bonds of N100 billion, external loans of about N55 billion, and internal loans of about 37.5 billion.
Priority sectorial allocation
The total expenditure for the year 2021 is broken down into capital and recurrent expenditure at N702.9335 billion and N460.587 billion respectively, a ratio of 60:40. While there could be arguments as to the sustainability of the allocations given the infrastructural gap in the State, there are a few extra-budgetary strategies for funding projects that the government put in place to bridge the gaps.
Some of them include Private Sector Infrastructural partnerships, bespoke financing terms, and structured (also PPP) critical infrastructure as used for the blue and red rail as well as the metro broadband fibre ring. The argument is that the State can deliver more than can be captured in the budget.
The allocation breakdown for the total N1.163 billion based on the Classification of Functions of Government (COFOG) also reveals an upward increase in Economic affairs (consisting of Agriculture, Commerce, Tourism, Art & Culture, Energy and Mineral Resources, Transportation, Infrastructure and Waterfront) from 26.55% of the budget in 2020 allocation to 29.35% at N341.4 billion in 2021.
This implies that opportunities could exist in these areas for Lagosians and international investors willing to produce the value the State requires to meet its objectives. While the sectorial allocation isn’t bereft of limitations as indeed it really cannot solve all the problems at the same time, major considerations should be around its successful implementation and the government’s continued transparency to Lagosians in economic happenings.