The Central Bank of Nigeria (CBN) could devalue the Naira between 5-10% in 2020, according to analysts at EFG Hermes. Nigeria’s exchange rate between the naira and the United States dollar has remained flat at about N360-N363 at the Investor and Exporter window following staunch defense by the apex bank.
While querying whether the CBN was cooking a mini devaluation, analysts at EFG Hermes posited that the apex bank could devalue the naira between 5-10% in 2020. This was contained in a research report seen by Nairametrics.
The research report focused on some of CBN’s recent policies, especially its decision to stop OMO sales to local investors as well as its imposition of loan to deposit ratio of 65% on Nigerian Banks. The report suggests these policies are piling pressure on Nigeria’s external reserves, which dropped to a 2 year low of $38 billion at the end of 2019.
[READ MORE: CBN may announce new recapitalisation plan soon)
“When connecting the dots and considering this seeming shift in the CBN’s policy priorities, one can only start to ask whether the CBN is indeed willing to rock the Naira’s boat slightly in order to keep it sailing; i.e. push for some currency weakness to get growth going; we reckon a 5-10% move in 2H20 in case it happens,” it stated.
The report, however, doubts if the CBN will devalue the naira without being pressured to do so. “While this line of analysis clearly points to Naira weakness sooner rather than later if these policies are sustained, one wonders whether the CBN is really willing to push for a self-driven devaluation that it can avoid, for now, considering the Bank has defended the currency for years and still has enough reserves to shore it up.
“A self-driven devaluation would be clearly a precedent in Frontier markets, as usually central banks are forced to devalue rather than seek it.”
But what if it devalues? The report opines that if it does, this will bode well for the economy providing room for it to grow. The report, however, does not specify how.
[READ MORE: CBN may announce new recapitalisation plan soon)
This scenario could create some short-term uncertainty but is a positive one in the
medium and long terms as it finally provides room for the economy to grow (although we argue that a devaluation alone is not sufficient to turnaround Nigeria’s economy fortune).”
It indicates further that the CBN might follow the familiar route of not devaluing but could decide to do and u-turn by reversing its existing monetary policies.
“The second scenario would be what we know best about the CBN: it acts at the 11th hour and pulls back the liquidity breaks by re-tightening monetary policy to maintain FX stability.”
Note: An earlier version of this article wrongly spelled the analysts as “EGM Hermes” instead of “EFG Hermes”. This has now been corrected.
Why there is a massive sell-off of US stocks
The United States 10-year Treasury yields rose to a new one-year high of 1.5% on Thursday sending the equities market on a bearish run. The US Dow Jones Industrial Average was down 1.5% as of 7.30 pm on Thursday falling by a whopping 500 points. The S&P 500 and NASDAQ were both down 2% and 2.75% respectively ad the sell-offs intensified.
Global bond prices also fell lower on Thursday and investors around the world sold off massively as they feared higher inflation could erode bond yields.
What is going on?
Investors are worried that massive injection of stimulus in the US and in most European countries could trigger higher inflation which will erode profits on bond yields assuming their fears materializes.
US inflation rate for the month of January 2021 was 1.4% the same as the month of December 2020. US inflation was as high as 2.3% a year ago yet investors remain worried. In response to this fear, bond yields have hit multiple one-year highs. This fear is has now spread to the US equities market.
US President Joe Biden is seeking a $1.9 trillion stimulus package which many had hoped will please the market. However, it appears investors are rather afraid that it could trigger a “reflation” eroding whatever positive jolt it could have had on the wider economy.
What this means for your stocks
A rise in interest rates is triggering a massive sell-off in US stocks ad investors fear a return to higher inflation could signal the market could be entering a bearish era. Stocks have hit multi-year highs since January as investors poured in billions of dollars into stocks. If this sell-off persists then investors in US stocks could see the value of their portfolio plummet.
Tech Stocks are particularly affected by the sell-offs with investors dumping heavyweights like Netflix, Tesla, Amazon, Microsoft, Facebook, Google all falling. Meme stocks, an acronym for stocks popular with Reddit and Twitter retail investors have also suffered losses.
Nairametrics SSN subscribers are advised to track their portfolios accordingly.
Buharinomics: In Stagflation we trust
We explain why President Buhari is synonymous with stagflation and what he can do to get us out of it.
Economists define stagflation as a period of slow economic growth, high unemployment rate and higher inflation. It is one of the worst kinds of economic state of affairs that often leads to poverty, insecurity and social-economic crisis. It is a sticky economic conundrum that is incredibly difficult to escape from.
The latest data from the National Bureau of Statistics reveal Nigeria barely slipped out of a recession in the 4th quarter of 2020 with a 0.11% GDP Growth rate. Despite being a welcome news, it is the slowest GDP Growth rate on record at least since 2011.
Earlier on, in the same week, the Statistics Bureau also released inflation data for the month of January revealing an inflation rate of 16.47%, the highest since April 2017, and affirming Nigeria’s galloping inflation status.
Nigeria is in a protracted state of stagflation and has been in the state since the Buhari administration came into power in 2015. Nigeria’s Gross Domestic product per quarter has averaged 0.18% in the last 6 years since this administration got elected into power. The Buhari government has also presided over a consumer price index change of 108.6%, meaning that prices of nearly every measurable item have doubled in the last 6 years.
Flashback to the first installment of General Buhari and the story is all too familiar. Nigeria’s GDP Growth rate for 1983, 1984 was -10.92% and -1.12% respectively. Annual inflation rate in the same period was 17.2% and 23.8% respectively.
Buharinomics is synonymous with Stagflation.
How did we get here?
While it all started from the drop in oil prices in 2014, a cocktail of economic policies from the Buhari-led administration is largely blamed for Nigeria’s economic quagmire. Since it came into power, the government has adopted economic policies that are centered around defending the local currency, import substitution and social spending.
For all its good intentions, these policies are pregnant with side effects that potentially erase its positives, turning into cancer of cataclysmic proportions.
For example, while the policy of defending the exchange rate stabilized the naira between 2016 and 2019, it cost the CBN trillions in interest payments and high cost of borrowing.
The high cost of borrowing is associated with higher inflation and stunted economic growth as small businesses cannot secure the funding required to expand and even when they do it is expensive.
The policy of promoting locally made goods over their foreign alternatives has also led to multiple bans of access to forex to imports, higher customs duties and taxes on imports and a crushing border closure all of which have combined to send inflation off the roof.
Nigeria’s inflation rate conundrum can also be traced to supply-side challenges such as insecurity, logistic gridlocks, corruption and inefficiencies at the Nations ports and an overall bitter experience in the nation’s ease of doing business.
How to get out of Stagflation
There is no clear-cut set of rules that can end stagflation however a rethink of the government’s approach to policymaking and implementation could be a good first step to control it, especially if the target is one of the major causes of stagflation, supply-side inflation.
To address Nigeria’s challenges with Stagflation, the Buhari Government will have to swallow its pride and relinquish trust in moribund policies that have not worked. Wholesome of Nigeria’s economic challenges are out of its control (like fall in oil prices) a huge chunk of it is self-inflicted and as such within its control. For example, it must fix the spate of insecurity around the country by being more deliberate with dealing with bandits, militant herdsmen and terrorists.
It must declare a national emergency in the nation’s ports and reduce the lead time to clearing goods for import or export. It must address the logistics issues affecting the distribution of farm produce from a place of planting to the destination of consumption.
Monetary policy restrictions stifling trade must be loosened and replaced with a reward policy system that encourages exports as against imports without banning cheap substitutes that have no local production advantage. We need new regulations and laws that favour private sector investments, protect property and enable capital formation. A case in point is the perennial PIB Bill that gets debated year after year.
These are not novel ideas within economic circles and as such cannot be that difficult to conceive and concede to doing. The challenges have always been the will and courage to act in defiance of snags such as vested interests, political ideology, endemic bureaucracy, and corruption. This government has shown in the past that it can roll back on unpopular policies except that it does it too late with not enough time to create a positive impact.
Total Plc must quickly move past one of its toughest year yet
Total Plc’s revenue plummeted by 30% in 2020 compared to 2019.
The reliance on and importance of PMS – gas and diesel in Nigeria cannot be overplayed. The deplorable state of our electricity ensures at the very least that oil companies like Total plc stay in business. Afterall, what business or household can thrive without power?
2020 has been shocking. The sort of year wherein businesses suffer shortages in the shadow of plenty and the oil sector is no exception. The performance of oil particularly, in 2020 was dreadful, to say the least. Total plc as a case in point suffered severe cutbacks in revenue from all of its operating heads. The general consensus is that this poor return is clearly product of the instabilities experienced through the course of the year. Covid-19 did wreak havoc on lives and livelihood necessitating various restrictions within the country. The restrictions meant decreasing activities which as a consequence upset travels, the operations of businesses and individuals. For Total Plc it meant just one thing – DWINDLING TURNOVER.
Total plc has hitherto been a leader in its sector. They generate revenue from three major expenditure heads namely Network, General Trade and Aviation.
Sales from Network refers to the turnover total generates from sales to service stations. General Trade refers to revenue obtained from its sales to corporate customers excluding aviation. Aviation, as the name implies refers directly to revenue obtained from its business with customers in the aviation industry.
Revenue generated from these segments coupled with proper cost monitoring has hitherto placed Total Plc at the summit as industry leaders. However, this year tells a different tale.
Total Plc’s revenue plummeted by 30% in 2020 compared to 2019. The company made N292billion in 2019 and N204billion in 2020 FY. The respective operating segments each suffered some responsibility on this. Sales from Network (its most fruitful revenue source) made only N143billion in FY 2020 whereas it made 205billion in 2019, that’s 30% reduction. Aviation and General Trade weren’t spared. Aviation dropped 54% from N26billion to N12billion while General Trade was only able to generate N49billion against N61billion in 2019.
These poor records were always going to reflect in closing figures at FY and pile further misery on investors who have endured what seems a horrid year. Total Plc finished with a position 1.5% worse off than they did in 2019 at N2.2billion. But to their credit, the extent of reduction was pleasantly a far-cry from what the differences in revenue had suggested. This is due to proper handling of expenditure heads particular finance costs.
Total Plc recorded N2.9billion as finance expenditure in repaying interest on loans and overdraft, compared to the N7.9billion it made in interest payments for year 2019. This singular factor amongst some others made for a more presentable finish to this year’s campaign. The slow but steady restart of activities offers the inclination that improvements are at the very least an expectation this year. We will see from first quarter results.
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