NIGERIA MACRO-ECONOMIC AND BANKING

SECTOR THEMES FOR 2019

2018 OVERVIEW

‘Winter is Coming’ is not a weather forecast, it is the motto from 3.0% reported in 2018 predicated on softer-than-
of House Stark, one of the Great Houses of Westeros in HBO’s expected global trade, elevated financial market pressures
medieval fantasy TV series, Game of Thrones. This phrase, on some Emerging Markets and Developing Economies
which conveys a sense of inevitability and constant vigilance, (EMDEs) and heightened financial market pressures on
typically excites lovers of the TV series eliciting anticipation some economies. Following an estimated 4.2% growth for
and suspense. ‘Sanctions are Coming’, President Trump’s 2018, EMDEs’ expansion for 2019 is expected to remain
satirical warning in the wake of the breakdown of the unchanged at 4.2% on the back of weaker-than-expected
Iranian Nuclear deal failed to elicit much enthusiasm. 2018 acceleration in commodity exporting countries, lingering
was a busy year for the Trump Administration, as the global effect of financial crisis in the large economies (including
power wielded its big stick against various other countries Turkey, Argentina, South Africa etc.) and tighter external
including China. The Trump Administration slammed China financing conditions. Sub-Saharan Africa (SSA) region
with export tariffs running into billions of US dollars and is expected to have grown by 2.7% in 2018 and trend
China responded likewise. This impasse between the U.S.A upwards to 3.4% in 2019 driven primarily by improved
and China, which decelerated after they signed a 90-day investment in large economies including Nigeria, South
truce that ended an intense 12-months trade war, became a Africa and Angola, implementation of investment friendly
major source of global economic nightmare. policies and growth in non-resource intensive economies.

Speaking of nightmares, French President Emmanuel Macron Nigeria

seems to be living through one, with the Yellow Vest Back home, the atmosphere is charging up as the incumbent,
Protests which started as a demonstration against rising fuel President Muhammadu Buhari of the All Progressive Congress
prices (which were subsequently shelved) and redistribution (APC) squares against ex-Vice President Atiku Abubakar of
of wealth has ballooned into a full-scale movement that is the People’s Democratic Party (PDP), alongside presidential
now demanding his resignation. On the other side of the candidates from other political parties for electoral votes
English Channel, Theresa May staggers on, surviving a Vote at the February 2019 elections. The upcoming elections to
of No Confidence and 2 defeats in Parliament over her draft decide who steers Nigeria’s government for the next four (4)
Brexit deal. The Saudis were also put to question in the wake
Global Real GDP Growth %
of the death of Jamil Khashoggi, bringing to fore the age-
old question on the value of true press freedom.

In Asia, tension eased on the Korean Peninsula as leaders

of the North and South agreed steps towards achieving
peace and economic cooperation between the erstwhile
adversaries. On the Horn of Africa as well, a new era of
peace and prosperity seems afoot with Ethiopia and Eritrea
signing a peace deal to end 20 years of enmity and opening
their borders to trade.

On the global economy, the World Bank projected that the

global economy will expand by 2.9% in 2019, down 0.1%

Source: World Bank

*e- expected **f- forcasted

1 Nigeria: Macro-economic and Banking sector Themes for 2019

years promises to be an interesting contest, with all eyes on 2017 driven by a 2.3% growth in non-oil sector activities,
the Independent National Electoral Commission (INEC) to including Information and Communications, Agriculture,
conduct free, fair, credible and peaceful elections. Services and Trade sectors. The oil sector expanded 19.6%
quater-on-quater but contracted 2.9% on a year-on-year
The economy was however weighed by ongoing domestic basis primarily driven by lower oil production levels.
concerns including the resurgence of Boko Haram attacks in
the North East and the escalation of clashes between cattle Economic growth was also dampened by heightened
herders and farmers which negatively impacted agricultural capital outflows on the back of rising yields in developed
output in the worst hit areas. Consequently, GDP from countries such as the US & UK and uncertain domestic
the Agricultural sector grew by 1.91% in Q3 2018, down political environment. This resulted in the Nigerian Stock
1.16% from 3.07% in the same period in 2017. Exchange (NSE) All Share Index (ASI), which was the 3rd best
On the whole, the economy expanded 1.81% in Q3 performing stock market in 2017, contracting by 17.81%
2018 relative to 1.17% reported in the same period in as investors exited the market and repatriated capital.

Real GDP (%)

Source: National Bureau of Statistics

NSE All Share Index Points

Source: Nigerian Stock Exchange

2 Nigeria: Macro-economic and Banking sector Themes for 2019

OUTLOOK FOR 2019

As the political environment braces up for the 2019 general growth in 2019, which include predictions of 2.0% and
elections with campaigning and electioneering activities 2.2% by the IMF and World Bank respectively, we believe
gaining momentum, concerns abound on the state of the growth will be slower, nearing 1.75% in 2019. We expect
economy and what needs be done to stimulate the growth that electioneering will dominate fiscal activities in the first
most desired by the populace. Given the latest performance half of the year, with significant policy activities resuming in
of the macroeconomic indicators, it is safe to assume that the second half. Therefore, the true measure of economic
irrespective of who emerges as President, the task ahead growth will be dependent on the intensity of economic
remains employment creation, security, economic growth, activities in the second half of the year. This would be
amongst others. predicated on a peaceful post-election environment,
improved performance in the non-oil sectors and positive
Contrary to projections about the expected rate of economic oil sector contribution.

2019 Proposed Budget

Budget Assumption

3 Nigeria: Macro-economic and Banking sector Themes for 2019

Other prospects of macro-economic importance for 2019 It is likely that the National Assembly will pass a budget
include: that incorporates the new minimum wage structure and
adjust for lower oil price & production level estimates. It will
Business and Regulatory Environment however be interesting to see how these will be balanced
We believe the business environment in 2019 will remaining with recent calls to reign in fiscal borrowing.
challenging – following on from 2018. As highlighted
earlier, we expect a slowdown in economic activities in H1
2019 due to election related uncertainties to also weigh Unemployment Rate %

on the industry with banks exercising significant restraint

and due diligence on all cash transactions. We expect the
regulatory environment to be firm, but supportive and
more conciliatory in 2019 – in view of the need to manage
investor perceptions to supposedly harsh regulatory
decisions and foster confidence in the economy.

Fiscal Environment and the 2019

Proposed Budget
With a targeted revenue of N6.97tn, the proposed budget Source: National Bureau of Statistics

for 2019, aptly dubbed ‘Budget of Continuity’, projects to

spend N8.83tn during the year, resulting in a budget deficit
of N1.85tn. Specifically, the budget proposes to generate Oil Price & Production
N3.73tn in Oil Revenue, N1.39tn from non-oil sources and With crude oil prices declining in the wake of concerns
the balance N1.23tr from Other Revenue sources. Of the around excess crude oil supply and a slowdown in global
N8.83tn planned expenditure, N4.04tn was earmarked for economic growth, the Organization of Petroleum Exporting
Recurrent Expenditure, N2.03tn for Capital Expenditure Countries (OPEC) and its allies agreed to cut global oil
and N2.14tn for Debt Servicing. production by 1.2 mbpd in the first half of the year
effective January 2019 in a bid to support crude oil prices
Given the recent fall in crude oil prices, and the noted in the near term. The new OPEC deal will see Nigeria cut its
challenges around the effectiveness of the government production by 3.15% to a cap of 1.685 mbpd (excluding
revenue machinery, we are concerned about the downside Condensates), which puts total allowable production at
risks to a higher deficit. With the recent commitment to between 1.885 mbpd and 2.035 mbpd after adjusting for
Nigerian Labour Congress (NLC) to implement the new estimated condensate production of between 200 kbpd
minimum wage structure in 2019, there is a higher chance and 350 kbpd. Overall we see a risk to the budget, which
that government expenditure could rise above the projected was projected on assumptions of US$60 pb oil price and
level, thus widening the deficit. 2.3 mpbd (including condensates) production level.

The real GDP growth estimate of 3.01% appears aggressive To forestall future vandalization of oil installations, we
considering the marginal growth recorded in 2018. Given expect the NNPC to replicate its recent surveillance contract
that the official unemployment figures released by the NBS with Ocean Marine Solutions (OMS) for the protection of
for Q3 2018 puts unemployment rate at 23.1% (Q3 2017; the Trans Forcados Pipeline (TFP) to other installations.
18.8%) which represents about 21 million unemployed The contract requires the security provider, OMS, to be
Nigerians and that the job creation statistics of the country responsible for repairs in the event of any damage to
does not suggest the likelihood of accelerated job creation assigned installations. We believe this will go a long way
within the next 12 months, achieving a GDP growth of in motivating effective surveillance and curbing pipeline
3.01% in 2019 may be an uphill task for the government. vandalism in the Niger Delta.

4 Nigeria: Macro-economic and Banking sector Themes for 2019

Nigeria’s Oil Production Output (mbpd) Nigeria’s Total Public Debt Stock (in N’billions)

Source: Debt Management Office

Source: OPEC of which measure you hold, the ability to accelerate revenue
generation is an important barometer for debt servicing.

We are concerned that any planned deficit financing in

2019 will only balloon the debt profile, contributing to a
Debt Profile further crowding out of the private sector, with attendant
Recent releases from the Debt Management Office (DMO) impact on economic growth.
puts total public debt stock as at Sep, 30 2018 at N22.43
tn (US$73.2bn), consisting of N15.8tn Domestic Debt Exchange Rate, External Reserves and
(Federal and State governments) and N6.6tn External Debt Capital Inflow
(Federal and state governments). The data brings to the In 2018, we had projected the possible convergence of
fore ongoing discussions about the sustainability of the some of the exchange rate benchmarks in existence at the
government’s debt profile in the face of declining revenues. time. In line with our expectations, the underlying rates
The potential capacity to repay as highlighted by the debt- for the NiFEX and NAFEX benchmarks did converge and
to-GDP ratio of 19% has been questioned in many quarters remained within a marginal spread of each other. Thus,
as less important than debt-to-revenue of 65% which only the official CBN rate - which is used for FX transactions
measures ability to the repay. Thus, while government debt by the NNPC and the oil companies - remains below market
is currently about 19% of national GDP, the cost of servicing at N305 - N307/US$1. Consequently, what used to be a
the debt is projected to be 24% of the 2019 budget and multiple exchange rate regime is now more or less a two-
30.7% of the planned revenue. rate regime. The CBN was able to sustain the currency
in 2018 through its market intervention activities with
With the IMF and the lower legislative house expressing available data suggesting that about US$48bn has been
concerns about the level of debt and the challenge of provided to the market through the CBN interventions.
significantly increasing its revenue streams, it becomes
imperative for some moderation to be introduced to the On the corollary, external reserves grew 13.3% in 2018,
rate of debt accumulation. It is our opinion that irrespective from US$38.1billion in Dec. 2017 to US$43.1billion in Dec.

5 Nigeria: Macro-economic and Banking sector Themes for 2019

FX Rates (US$/N) Capital Importation (US$’million)

2018, though it rose as high as US$47.6billion in June

2018. Accretion to reserves was supported by proceeds
from the Eurobond issuances in 2018, strong crude oil
receipts occasioned by the higher oil prices recorded in
Source: National Bureau of Statistics
most of 2018 and positive capital flows recorded in the
first half of 2018. According to the NBS, capital flows
contracted 31.1% y/y and 48.5% q/q in Q3 2018, with
outflows by portfolio investments, which accounted for
60% of capital flows, shrinking 38% y/y and 58% q/q. The Monetary Policy – Interest Rate and
reversal of capital flows was triggered by the effect of the Inflation
U.S. FED monetary policy normalization actions and the As a predominantly import dependent economy, any
strengthening of the U.S. markets. decline in the relative value of our currency will have a direct
impact on the price level of goods and services. It therefore
Reserves (US$’ billions) became imperative for the Monetary Policy Committee,
and the Central Bank, to take necessary steps to maintain
the value of the currency by sustaining a tight monetary
policy environment. While this has been largely achieved,
the impact of flooding on communities and farm lands, and
escalation of farmers-herders crisis had a negative impact
on foods production and therefore food inflation.

In spite of ongoing activities to manage price stability,

we expect inflation to rise during the year. The the recent
convergence in exchange rates, the rise in food prices, new
minimum wage and increased government and election
related spending are expected to weigh on the general
In 2019, we expect that the CBN will sustain its price levels over the near term. We expect headline inflation
interventions in the FX market in a bid to ensure that rates to come in at an average of 13.5% in 2019.
remain relatively stable into the elections and sustain its
price stability objectives. While the OPEC production cap Going into 2019, we expect monetary policy to remain
rules and lower oil price levels pose a downside risk to contractionary, given the overarching concerns of
reserve accretion, we are optimistic of an improvement in maintaining exchange rate stability. We expect that the
capital flows on the back of a non-violent elections, stable current monetary policy variables will be maintained in
exchange rate and attractive fixed income yields. 2019, while Open Market Operations (OMO) by the CBN
will be sustained. Presently, the CBN mops up all excess

6 Nigeria: Macro-economic and Banking sector Themes for 2019

liquidity from the banking system using issuances of short- top army commanders of arming Nigerian soldiers with
term securities to banks. It is our expectations that this obsolete weapons while enriching themselves with the
situation will not change, rather might escalate if money funds meant for acquiring sophisticated weapons to fight
supply within the banking system expands over the year. insurgency. These allegations are weighty and echoes the
We expect that short-term interest rates will rise to reflect need to reform the security infrastructure of the country.
the increased tightness in market liquidity, with implications These reforms must be holistic and strategically flawless
for lending activities in the year and a slight rise in fixed as the desired economic growth may not be attained if
income yields during the year to encourage the return of the security fabric of the country is perceived as largely
foreign portfolio investors and capital formation. inefficient.

The 5-year term of the current CBN Governor, Godwin

Headline Inflation (y-o-y)

Source: National Bureau of Statistics

Emefiele ends in June 2019. Given that he’s eligible to

serve a second term, we expect that his re-appointment
or successor will be announced before the end of March
2019. A change in leadership at the Apex bank may
have implications for the monetary policy direction of the
country.

Security
The frequency and stealth nature of the resurgent Boko
Haram attacks may appear to have overshadowed the
successes recorded by the army against the sect in the last
three or so years. In a related development, the herders –
farmers crisis has also caused immeasurable destruction of
lives and properties in the last 12 months.

Of grave concern however, is the allegation of collusion with

the militia levelled against the Nigerian Army in the killings
in Taraba & Benue states, and the accusations against

7 Nigeria: Macro-economic and Banking sector Themes for 2019

THE NIGERIAN BANKING INDUSTRY

Overview of 2018 prices will create downside risks to further accretion to the

The industry had its fair share of events in 2018 – from reserves, and capacity to continue to support to currency.

the implementation of IFRS 9 standards, the establishment It is not unlikely therefore that we will witness a divergence

of a bridge bank, Polaris Bank to assume the assets and in the rates offered at the CBN interventions and rates

liabilities of the defunct Skye Bank, the resolution of the available on the Investors & Exporters (I&E) Window. We

9Mobile facility to the proposed merger between Access expect the CBN to continue to monitor activities within

and Diamond banks. During the year, Banks had to the market that could adversely affect foreign exchange

contend with tight system liquidity, declining loan book stability.

and a rise in NPLs. Unlike 2017, banks’ stocks closed

the year in negative territory as the NSE Banking Index Asset Quality
declined by 16.1%. A close scan of the industry reveals that there’s a positive
relationship between performing loan book and elevated

Outlook for 2019 global oil prices, and the reason is not far-fetched as over

Short term interest rates will remain elevated, and 30% of the total industry exposure are to the oil and gas

market liquidity tight due to the expected contractionary sector. With oil prices relatively elevated, the industry had

monetary policy. All existing policy measures deployed to contend with the combined effect of IFRS 9 resulting

towards achieving the monetary objectives of the CBN in increased loan loss charges against shareholders’ fund

should remain in force – at least up through to half year which decreased capital, declining loan book due to the

2019. In light of the an expected increase in federal relatively low demand for credit and reduced capacity of

government borrowings, the high interest rate regime banks to lend. We expect banks to intensify efforts to

could exacerbate any crowding out effect which may grow their loan books albeit to quality risk rating names,

negatively impact bank lending rates and cost of funds, and also expect NPLs to decline from presents level.

with attendant implications for growth and profitability.

Capitalization
The impact assessment of IFRS 9 on the industry revealed
Average T.Bill yield (PMA) (%)
that the transition to the new standard resulted in lower
capital position in view of the shift from Incurred Loss to
Expected Credit Loss (ECL) model. In effect, most banks
saw between 150-500 basis points (bps) shaved off their
capital, resulting in significant decline in the regulatory
Capital Adequacy Ratio (CAR) of some banks below the
minimum of 15% (and 16% for D-SIBs) bringing to fore
the need for these banks to raise fresh capital. In a move
to cushion the effect of the ECL provisions on tier 1 capital,
The highly regulated foreign exchange environment is the CBN introduced a 4-year transitional arrangement
expected to remain unchanged. With foreign exchange which will require banks to hold static the Adjusted Day
reserves closing 2018 at US$43.1billion, an estimated 15 One impact of IFRS 9 impairment figures and spread it over
months of import, we see room for the CBN to maintain a a 4-year period. Consequently, capital position of banks
policy of defending the currency. While this, in our opinion, will improve relative to the figures that were published for
may provide some level of stability and positive view for the the 2018 reporting periods.
currency in the short term, a continued decline in crude oil We expect to see more steps by banks to cover any

8 Nigeria: Macro-economic and Banking sector Themes for 2019

shortfalls in their capital ratios including raising qualifying Bank and Diamond Bank came as a surprise to many after
debt capital to shore up their capital base. both banks debunked reports of the planned merger a
few weeks before the formal announcement was made.
Evolving Competitive Landscape The proposed merger, which still requires the approval of
Increasing Competition for Retail shareholders and regulators, is expected to make the new
The industry continues to face increasing competition entity the largest commercial bank as well as the biggest
from Financial Technology (FinTechs) and other non-bank retail franchise in the country. Barring any unforeseen
companies offering a wide range of financial services to issues, the proposed merger will increase the competitive
the retail and MSME segments leveraging technology. landscape in the industry. The post-integration challenges
FinTechs have been able to achieve a fair disruption of and downside risks cannot entirely be dismissed on the
the retail banking landscape through the deployment back of historical experience of one of the banks but we
of simplified banking services which has revolutionized expect that the process will be well-executed by the banks
the service offerings of commercial banks. It is however and properly monitored by the relevant regulators. The
believed that their capacity to effectively gain significant success of the merger could trigger other such mergers,
market share is limited without collaboration. The relative with the potential to strengthen the industry.
ease with which Fintechs approached and gained market
share in the retail lending space, a hitherto unserved Conclusion
market, has prompted commercial banks to give this In the wake of normalizing interest rates, uncertainty in
more focus. We expect to see an increase in competition the oil market, slowing global economy and capital flight
amongst banks to capture market share in the retail and from emerging markets, Nigeria’s economic performance
micro/small business space over the course of 2019. will be largely dependent on the interplay of these external
factors especially the global oil market in a year that will
A more compelling threat however relates to the recent be split into two halves. The first half will see politics
decision by the CBN to license Payment Service Banks (PSBs) and electioneering dominate much to the detriment of
to facilitate transactions in remittance services, micro- economic activities which may translate into muted capital
savings and withdrawal services in rural areas. The primary inflow, increased pressure on the naira, accelerated FX
idea is to drive financial inclusion by leveraging the capacity intervention and declining external reserves.
of other entities, like the telcos with existing infrastructure
in the areas not easily reached by bank networks. While the We expect some level of normalcy to return in the 2nd
PSBs are to be prohibited from providing lending services half of the year translating to strengthened investor
and participating in the FX market, they will be able to confidence, increased capital flows, softened pressure on
offer other services, thus competing with commercial the naira and decreasing yields on government securities
banks for the pool of earnings and also ensure that the as well as the likelihood of increased inflationary pressure.
battle for retail is won using digital and mobile strategy. That said, the continued normalization of interest rates
While this is net negative for the industry, we view this as by the U.S. FED, lower oil prices, weaker-than-expected
positive for customers as it has the capacity to improve oil output and a tense post-election environment pose
customer service, increase product and service offerings, downside risks to our expectations.
enhance financial inclusion and drive the adoption of a
digitization of banking services.

Consolidation in the Industry

Like George W. Bush’s decision to give Michelle Obama
what appeared to be a candy rather than the handshakes
he offered to other former U.S first ladies at his father’s
funeral service, the proposed merger between Access

9 Nigeria: Macro-economic and Banking sector Themes for 2019