The Nigerian banking industry witnessed a 14% rise in Non-Performing Loans (NPLs) in the first half of 2020 ending a 2-year trend of continued decline in NPLs, since Q3 2018.
According to the latest banking sector report released by the National Bureau of Statistics (NBS), non-performing loans in Nigerian banks increased to N1.212 trillion at the end of June 2020, from N1.059 trillion recorded in December 2019, indicating that NPLs across Nigerian banks rose by N152.4 billion or 14.38% in six months.
Oil & Gas sector, Construction, others lead the pack
A cursory look at the report reveals that the number of loan defaulters may have started to rise across Nigerian banks.
- At the end of H1 2020, Oil and Gas sector contributed the largest share to NPLs in Nigerian banks, recording a significant 22.2% increase in NPLs from N219.91 billion recorded at the end of Q4 2019 to N268.79 billion in Q2 2020.
- Construction recorded a 93.4% increase, from N86.79 billion in Q2 2019 to N167.86 billion in Q2 2020.
- One of the biggest contributors to NPLs in Nigerian banks was Commerce and Trade as it recorded a significant 17.5% rise from N146 billion to N171.55 billion at the end of Q2 2020.
- Meanwhile, despite the rise in NPLs across critical sectors, some sectors including agriculture, transportation, power & energy, and education recorded a decline.
Why the rising trend?
The recent upward trend in Non-Performing Loans is mostly attributed to non-payment of loans by bank obligors due to the covid-19 induced lockdowns. Nigerian banks have also seen their asset quality decline due to the fall in oil prices.
Earlier in the year banks cut a deal with the CBN as they were granted regulatory forbearance in the restructuring of loans. Over 33% of industry loans are expected to be restructured as part of the deals signaling the spate of economic crunch that has hit the private sector.
A recent Meristem report seen by Nairametrics forecasts further deterioration of asset quality.
A further deterioration in asset quality is likely to occur, particularly for vulnerable sectors like Oil and Gas, Manufacturing and Agriculture. This may however be mitigated by the planned restructuring of33% of industry loans.” The report highlights.
Despite the headwinds expected, the CBN appears satisfied with the level of non-performing loan ratios as highlighted in its July monetary policy communique.
“The Committee noted the decrease in NPLs ratio to 6.4 percent at end-June 2020 from 9.4 percent in the corresponding period of 2019, on account of increased recoveries, write-offs and disposals. The Committee expressed confidence in the stability of the banking system and urged the Bank to monitor the compliance of DMBs to its prudential and regulatory measures to sustain the soundness and safety of the banking industry.” CBN
At N1.2 trillion Nigeria’s non-performing loans are still relatively low compared to previous years. However, there is concern that this may not be the true reflection of bad loans in the country considering the imminent recession and level economic crunch in the country.
Against the backdrop, pressure may start building on the banks, whose loan books have been hit by Nigeria’s shrinking economy, plunging currency, and foreign exchange shortages, following the slump in oil prices.
Projections by EFG Hermes, 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.
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Nigeria records $4.3 billion in Corporate Deals in 2020
Nigerian owned businesses and businesses operating in Nigeria recorded over 103 corporate deals valued at over $4.3 billion.
Nigerian owned businesses and businesses operating in Nigeria recorded over 106 corporate deals valued at over $4.3 billion (N1.63 trillion) in 2020.
This is according to data compiled by Nairalytics the research arm of Nairametrics between January and December 2020 all at different stages of completion.
Nigeria’s investment climate was precarious in 2020 as the global economy spluttered due to the Covid-19 pandemic. Nigeria’s GDP contracted by 3.62% (year-on-year) in real terms in the third quarter of 2020 after enduring a 6.1% contraction in the previous quarter, a development that was also attributed to the sustained shocks emanated from the continued spread of the virus as well as weak global oil prices.
Thus, foreign investor sentiments towards investing in Nigeria remained dampened due to the economic downturn stifling foreign portfolio inflows into the country. Data from the National Bureau of Statistics (NBS) shows that capital inflow into Nigeria was estimated at $8.61 billion between January and September 2020, compared to $20.19 billion recorded in the corresponding period, falling by 57% year on year.
In addition, data obtained from the Nigerian Stock Exchange (NSE) reveals that about N226.13 billion was recorded from Foreign Portfolio Investors between January and November 2020 as domestic investors drove market turnover for the most part of the year.
Despite the economic downturn, the economy witnessed several corporate deals consummated or under different stages of completion for the period ended December 2020.
Corporate Deals Soar
Corporates ranging from Startups to more matured businesses announced the closure or intent to secure funding through debt or equity-related deals amidst covid-19 and the lockdown. From Silicon Valley to South Africa the deals flowed in from all over the world boosting the capital structure of most Nigerian firms.
- A total of 106 deals were captured in 2020 valued at $4.3 billion or N1.6 trillion occurred during the year with transactions ranging from raising equity, debt issuances, outright acquisitions, and divestments.
- While the tech community dominated most of the equity-related deals, more established companies focussed on public offerings and debt securities such as commercial papers to raise money.
- It is no surprise that the largest deal captured in 2020 was the International Breweries rights issue valued at about N165 billion or $457 million.
- Dangote Cement was next to a bond issuance of about N150 billion, one of the largest private-sector debt-related deals for the year. BUA Cement followed suit with its own debt issuance of about N100 billion.
- In terms of commercial papers, MTN raised N100 billion, the largest commercial paper issuance raised during the year.
- In the tech community, the $200 million acquisition of Paystack by Stripe was by far the largest deal directly affecting a Nigerian based tech-related company.
- Bolt, the cab-hailing tech firm operating across Nigeria and some African countries also got a significant funding boost raising about $100 million.
Why this matters
While the Nigerian economy suffered one of the biggest drops in portfolio investments in 2020 there was a flurry of mega deals that boosted the capital structure of most firms operating in the country.
- Nairametrics research believes a large chunk of this funding will be spent in Nigeria as the country picks up from the economic ruin that was 2020.
- The funds will flow into marketing budgets, capital expenditures, hiring of talents and executives, software acquisitions, etc.
- Nairametrics also expect a significant rise in corporate deals on the Nigerian Stock Exchange as more companies take advantage of low-interest rates to either raise cheaper debts or replace expensive debts with equity.
- Nigeria has a thriving Deals market that provides a significant source of revenue to law firms, financial advisory firms, auditors, fund sourcing firms, and investors.
- Nigerian regulators also earn significantly from fees and taxes collected as the deals are consummated.
A comprehensive report on all 106 deals will be published by Nairametircs next Monday. Kindly send in your email address here to get a copy.
Nigeria spends N29 trillion on recurrent (non-debt) expenditure in last 10 years
Nigeria spent N29.3 trillion on recurrent expenditure, 10x more than capital expenditure.
The Federal Government of Nigeria has spent N29.3 trillion in the last 10 years on (non-debt) recurrent expenditure. The government has earned N33.2 trillion as revenue in this period.
This is according to data compiled from the budget implementation report of the federal government compiled and published by the Budget Office of Nigeria.
High on non-debt recurrent expenditure
Nigeria’s recurrent expenditure includes spending on personnel expenses, pensions, and gratuities, service-wide votes, and overheads. It has consumed about 50.6% of total budget expenditure and 88.5% of revenue in the last decade.
- Nigeria is amid an economic crisis brought upon by the fall in oil prices and more recently the covid-19 pandemic.
- The federal government currently relies on about 33% of its actualized revenue since 2015 when oil prices started their sustained fall. It was about 55% between 2013 and 2015.
- With oil revenues falling, the impact of a continuous increase in recurrent expenditure has widened Nigeria’s fiscal deficits closing at N6.1 trillion in 2020, the highest since we started tracking records in 2009.
- Economic analysts have for years pointed to Nigeria’s high spending on recurrent expenditure compared to capital expenditure as a phenomenon that is inimical to economic growth.
Nigeria has recorded a budget deficit every year since 2009 averaging about N1.1 trillion in the 5 years before the Buhari Administration came into power in 2015. However, since 2015, budget deficits have averaged N3.3 trillion.
The government budget deficits have meant increased borrowing, exacerbating the situation. Last year, Nigeria borrowed N2.8 trillion from the central bank via the Ways and Means provisions. To service this borrowing about N3.2 trillion was spent in 2020, once again the highest on record.
Recurrent expenditure vs Capital expenditure
A cursory review of the data shows that at N29.3 trillion, recurrent non-debt expenditure is about 3x more than the N10 trillion spent on capital expenditure in the last 10 years.
- The Buhari Government has often compared itself with prior PDP led governments claiming it has spent more on capital expenditure. In 2020, the government spent N1.7 trillion on capital expenditure, the highest on record.
- They have also spent between N1.4 trillion and N1.7 trillion between 2017 and 2020.
Whilst, their numbers have been impressive, spending on Capex as a percentage of total government expenditure is far lower than any other year in the last 10 years.
Here are some stark numbers
- Nigeria spends on average 21% of the total budget on capital expenditure. The highest percentage was 29.8% in 2017.
- It was 20.9% in 2020.
- In contrast, recurrent expenditure as a percentage of total expenditure is as high as 115% on average in the last 10 years. It was 86% in 2020.
- While capital expenditure has risen to N1.7 trillion in 2020 compared to just N958 billion in 2017, it is far lower in dollar terms at $4.6 billion compared to $5.8 billion respectively.
In the recently approved budget for 2021, Nigeria plans to spend N13.5 trillion in budgetary expenditure out of which N4.3 trillion is for capital expenditure and another N5.64 trillion on recurrent(non-debt) expenditure.
If this plan pans out the government would have succeeded in increasing its capital expenditure as a percentage of total expenditure to 32% in line with 30% included in the ERGP.
If history is to be relied upon as a basis for projecting, the government is more assured of hitting its recurrent non-debt expenditure spend than capital expenditure.
Nigeria’s Capital Expenditure challenges
According to a world bank report, capital expenditure involves spending on transport, information technology, power and utilities, defense, etc.
- A recent Moody’s report indicates Nigeria needs to spend about $3.3 trillion in capital expenditure over the next 30 years or $1.1 trillion a decade to close its infrastructure deficit.
- This amounts to $100 billion (N40 trillion) per annum or 28% of Nigeria’s GDP of N144 trillion, a tall task considering where the country is at the moment.
- Nigeria is far from this goal and may not meet this target if it continues to spend more on recurrent expenditure compared to capital expenditure.
Also, the government will also need to explore new revenue sources other than oil to boost its revenues while relying less on budget deficits.
- Doing this will require massive tax reforms that target the informal sector, block leakages and reduce wasteful incentives.
- Unfortunately, the covid-19 pandemic has pushed back any immediate plans to aggressively tax revenue.
- For example, in its 2021 budget, the government is projecting a tax revenue of N1.4 trillion down from N1.6 trillion a year earlier.
The Private Sector way
Another possible area of increasing achieving Nigeria’s infrastructure goals is via the private sector. But to do this, Nigeria will need to improve its capital formation policies that enable the private sector to invest in public infrastructure while delivering a legal path to recovering its investments and profits.
- There is also the public-private partnership initiative pursued by the federal government towards funding infrastructure development in the country.
- Just recently, the president approved the setting up of a $39.4 billion Infrastructure Company, wholly focused on critical infrastructural investments in Nigeria.
According to the president, “this Infrastructure company will raise funding from Central bank of Nigeria, Nigeria Sovereign Investment Authority, Pension funds, and local and foreign private sector development financiers.”
Upshots: Nigeria plans to spend N5.6 trillion on recurrent non-debt expenditure in 2021. The increase is coming from the following;
- Personal cost for MDA’s rising from N2.8 billion (as per 2020 budget) to N3 billion in 2021 budget.
- Personal cost for government-owned enterprises (GOEs) will more than triple from N218 billion to N701 billion.
- Overheads also increased considerably during the year.
- In addition, debt servicing for 2021 is budgeted at N3.1 trillion up from N2.6 trillion in 2020.
Analysts predict higher inflation rate for Nigeria in 2021
Nigeria’s inflation climbed to its highest in 3 years and analysts have predicted higher inflationary pressure in 2021.
The National Bureau of Statistics released Nigeria’s inflation figures for the month of December 2020, which puts headline inflation rate at 15.75%, a big leap from the 14.89% recorded in the previous month.
It is evident that Nigerians have continued to grapple with the effect of the Covid-19 induced lockdown, sustained border closure (until December 2020), insecurity, amongst others, that has plummeted the economy into recession.
Nigeria’s inflation climbed to its highest in 3 years, which is a cause for worry as analysts predicts higher inflationary pressure for the year 2021.
Wale Okurinboye, CFA, Head Investment Research, Sigma Pensions
In a chat with Wale Okurinboye, he addressed the factors that would determine the direction of Nigeria’s inflation in 2021.
“I expect lingering impact of the main shocks to 2020 inflation i.e. fuel price increments (+25-30%), electricity price hikes (55-65%), currency weakness and food price pressure to drive headline inflation towards 16-18% levels in the first half of 2021.
“However, strong base effects from 2020 will help contain upside over H2 2021. In all, I expect inflation to remain elevated over the year reflecting the shocks to key input prices.”
While commenting on actions to mitigate the current trends, he added that in order to lower inflation, Nigeria needs to address cost issues: supply chain around food (tackle insecurity issues in key crop producing areas), ensure exchange rate stability and hope no major increase in international oil prices.
He however stated that, “given the impact of Covid-19 on Nigeria’s external and fiscal accounts, this might be too much to ask.”
Victor Aluyi, Head, Portfolio Management, Commercio Partners
“I believe we are going to see the headline figures continue to spike over the next couple of months, although not as much because the December spike was quite expected as we saw pent up spending, which basically characterises that period whilst putting pressure on food inflation.”
This added to the factors we have been experiencing before now, the currency weakness, supply chain disruption amongst others.
“We could also see that the border closure has also played a significant role in exerting that upward pressure on headline inflation. However, we are likely to see the pressure ease due to the presidential directive to open up land borders in December 2020.”
“Nigeria’s inflation is likely to top 16% and probably closer to 18% in 2021. Although, the recent inflationary pressure is due to structural issues but monetary policies can also play its part in trickling down the numbers.”
Wale Olusi, Head of Research, United Capital
According to Wale Olusi, there are a number of factors that will determine inflation rate in 2021, but posits that the inflation figure is likely to top 16% or go as high as 19% if nothing is done about it.
“We at United Capital expect the headline inflation rate to peak at around 16% before pulling back, if no further policy adjustment is made.”
He, however, suggests that inflation could ease due to the reopening of the land borders as food prices are already trickling down in some regions of the country. He also mentioned that other factors such as oil prices, monetary policy and structural issues could drive the headline inflation higher if adequate measures are not put in place.
On tightening monetary stance
Wale Okurinboye opines that he expects the Apex bank to raise the MPR at some point in the year, possibly by 100 – 200 basis points. He, however, projects that Nigeria will exit recession by the second quarter of the year assuming there is no re-introduction of lockdown measures.
Okurinboye explained that, “this is an epidemic induced recession not a structural one, so as business activities return to normal on the non-oil side and as OPEC lifts output curbs on oil production, I expect Nigeria to exit recession in Q2 2021.”
In the words of Victor Aluyi, “the response of the Monetary committee has been that of an output growth, which is why we see reduction in the benchmark rate. They are trying to starve off the complete impact of the Covid-19 challenge and also reflate the economy.
“Meanwhile, I don’t see any adjustment in the coming months in terms of tightening, but it remains to be seen what the impact of the loosened rate has been, whether it has spurred growth in helping the economy recover quicker.”
Wale Olusi expects the Monetary Policy Committee (MPC) of the Apex bank to tighten its monetary policy stance at some point in the second and third quarter of the year.
He also expects the economy to rebound by about 1.7% to 2% buoyed by increased economic activity and improvement in the global oil market.
What you should know
- Nigeria’s inflation rose to 15.75% in December 2020, which is the highest rate recorded since December 2017.
- Inflation has been on a persistent upward trend since September 2019, around the time the federal government ordered the closure of land borders.
- The 2021 budget projects that Nigeria’s inflation will close at 11.95% in 2021 and a projected GDP growth of 3%.
- Nigeria’s food inflation also rose to its highest in 3 years. The last time Nigeria recorded a rise in the food index as high as 19.56% was November 2017.
The Nigeria economy has been ravaged by the effects of the Covid-19 outbreak, global oil prices, and border closure, which exerted inflationary pressure, thereby eroding the purchasing power of consumers in the country.
Meanwhile, analysts have predicted more doom in the short term but expects a positive spin as we go to the second half of the year.