From Wuhan, one of China’s most populous cities, the 2019 novel Coronavirus (2019-nCoV) has now spread to 74 more countries, apart from China with over 92,000 confirmed cases, 3,130 deaths and 48,451 recovered cases (as at 03 March 2020). Expectedly, the Coronavirus outbreak seems to be on everyone’s mind, alarming public health authorities, spooking the global equity markets and sinking stock markets into the red.
China’s importance in a globalized economy has dramatically increased since the 2002-2003 Severe Acute Respiratory Syndrome (SARS) outbreak, the most obvious precedent for today’s crisis that originated in the Guangdong province of China and spread to more than two dozen countries. Then, China comprised less than 4% global GDP; today, China is the world’s second-largest economy, currently accounting for 16% of the world’s GDP and contributing 24% of the global imports.
Therefore, putting brakes on Chinese factories’ output and disrupting global supply chains running through China will unavoidably have a ripple effect on international businesses, world economy and global growth. There are also concerns over consequences of the United States, the world’s largest economy, being forced to implement a lockdown similar to the one imposed by Chinese authorities.
As the novel COVID-19 strain of the coronavirus moves far beyond China’s borders, it is difficult to fully evaluate the scope and severity of the risks on investments. As the Coronavirus spreads, so do fears of a financial collapse. That fear is causing a lot of selling and a lot of losing. Notably, world stock markets have tumbled since the first death was announced on January 11.
While the only confirmed case of coronavirus in Nigeria remains the index case of the Italian citizen confirmed on the 27th February, the country can’t stay unscathed with the happenings in China—a chief trade partner to Nigeria. The Nigerian Stock Exchange (NSE) lost a whopping N308 billion (USD845 million) less than 24 hours after reporting the index case.
Investors lost N209 billion (USD573 million) on Monday 2nd March as the stock market dipped further. The price of oil, Nigeria’s major source of public revenue, has already taken hit as a result of the ongoing outbreak; there could be nothing worse for an already struggling economy, than having her source of revenue negatively impacted.
Markets do not like uncertainty, thus investors are understandably nervous with the spread of the coronavirus disease. We do not know, with certainty, how far the virus has spread and how long it might last; how much fear inhibits travel, consumer spending, manufacturing, and trade; and the capability of public health institutions to stop the spread of the virus. These uncertainties have led to increased volatility in the stock market as investors scramble to adjust their portfolios to factor in the virus’ potential for damage to the global economy and assess its further impact on asset prices.
One major question every investor should strive to answer is: Is my investment short or long term? Another is: Is there evidence linking global epidemics with long-term investment fundamentals?
No cause for alarm
Past experiences show that, in general, epidemic outbreaks tend to have temporary impacts on markets and economies. In fact, markets have short memories regarding epidemics. Markets may initially react to the uncertainty, but global equities tend to rebound after temporary decline. Besides, this isn’t the first new virus we’ve seen, and this won’t be the last. SARS, Zika, Influenza H1N1 and others have all come and gone.
This is not the time for a knee-jerk reaction as global efforts continue to combat the coronavirus epidemic. Temporary phenomenons and markets go through cycles like this. Viruses will get contained and investors will return to corporate and economic fundamentals. One of the most important things an investor can do in the face of market uncertainty is to make sure that investment portfolios are at the right risk levels. Market volatility helps build wealth over a period of time. For investments whose timelines are on the shorter side, such investments are already at a low level of risk. This insulates you from market volatility—whether it’s related to disease outbreaks or otherwise.
The lauded investor Warren Buffett advised investors not to allow coronavirus to infect their investment strategy. “It is scary stuff. I don’t think it should affect what you do with stocks,” he told CNBC’s Becky Quick in an interview that aired February 24 on “Squawk Box.”
No need for any fear-based changes. Investors are encouraged to continue disciplined investing through systematic investment plans (SIPs) and stick to their asset allocations. Panicking to sell out as markets slide would only lead to further losses. Staying the course can help handle the downturn, and potentially stay the course.
In tuning out the noise and sticking to the long-term plan, you should identify opportunities to immunize your portfolio against coronavirus and other possible similar outbreaks. Diversification premium is an investment cure for coronavirus. Having a mix of assets across sectors and geographies is the best way to ensure that one spell of volatility does not take your portfolio down.
Despite the perceived and actual threats from the coronavirus, high-quality bonds, gold and safe-haven currencies like the U.S. dollar have rallied while more production-intensive commodities like oil have suffered, as have the stocks of companies domiciled in or exposed to the affected areas. Funds focused on sheltering capital, strategic bond funds, and multi-asset funds with a cautious approach are good additions if you are looking to add diversification to an equity portfolio. The current situation should also be seen as an opportunity to invest for long-term in quality companies.
Investors are admonished to be on alert for fraudsters attempting to play into our natural emotions of fear and greed during this period of uncertainty. There have been spikes in investment opportunities with unbelievable return-on-investment and get-rich-quick schemes. At the risk of sounding like a broken record on this topic, there are no sure things or get-rich-quick strategies when it comes to investing.
While it’s unclear how many people will ultimately be affected by COVID-19, or how many weeks or months it will take to run its course, if it holds true to similar epidemics, however, it will run its course. Investors are enjoined to stay alive even as they seek to safeguard their investments from the outbreak. Standard recommendations to prevent infection spreading include regular hand washing, covering mouths and noses when coughing and sneezing, thoroughly cooking meat and eggs, etc. Also, avoid close contact with anyone showing symptoms of respiratory illness such as coughing and sneezing.
Written by Oluwaseun Oguntuase
Repositioning the Nigerian Power Sector
The Nigerian power sector continues to grapple with the age-long problems that have plagued the sector even before the privatisation exercise.
A Punch newspaper report says Nigeria lost an estimated N20.5bn in 22 days (January 1 and 22, 2021) due to continued rejection of electric power by the electricity distribution companies (Discos) who in turn argue that it makes no business sense to wheel power to locations where consumers show an unwillingness to pay for the electricity they receive.
Some stakeholders have defended the discos’ actions by arguing that some of the power generated are allocated to areas with little or no revenue prospects, particularly areas where power theft is more common.
This leaves the discos with no option but to reject some of the load to avoid running into further liquidity issues. The news report further stated that a total of 1,941 megawatt-hour of electricity was restricted during the review period due to insufficient gas supply, as well as lack of distribution and transmission infrastructure.
The Nigerian power sector continues to grapple with the age-long problems that have plagued the sector even before the privatisation exercise in 2013. Insufficient gas supply, weak transmission infrastrusture, absence of cost-reflective tariffs and poor metering system have remained largely unresolved. On the demand side, the final consumers have continued illegal actions of meter bypass and in many cases have accumulated unpaid bills.
Granted, among the uncaptured consumers, there are those without access to the national power grid, particularly in rural areas, however, the wide disparity between registered consumers and estimated number of households today suggests that power theft in Nigeria is not on a small scale, and this could be contributing meaningfully to the liquidity issues gripping the power sector value chain.
Tackling the liquidity constraints of the power sector remains at the forefront. Among suggestions to achieve this is structuring the activities in power sector as financial products for capital market transactions in a bid to facilitate the required liquidity, deepen private participation in the sector and enhance transparency in the entire value chain of electricity generation.
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.