RenCap: economic stability returning to Nigeria
A financial management firm, Renaissance Capital, has said Nigeria’s economy is gradually returning to stability.
The firm, which met with corporates across the banks, consumer and building materials space during its Eighth Annual Pan-Africa 1:1 Investor conference in Lagos between May 10 and 11, said return of stability to the economy was the common theme.
In the summary of the report released at the weekend, it explained that banks have started seeing ‘green shoots’.
Renaissance Capital said banks believe the economy is past the worst of what one described as “the most severe downturn in 25 years”.
One of the big themes was the improvement in foreign exchange (FX) liquidity, which allowed for the unwinding of some outstanding obligations.
The report reads: “Trade facilities and velocity increased as a result, according to one bank. During the height of the FX shortages, trade cycles lengthened to 12 months, from a typical four-to-six months. The trade cycle is now contracting. Banks are cautiously optimistic about the Investors and Exporters (I&E) FX window. One bank thinks it is a tacit devaluation and precursor to a more liberal FX policy. Another sees the FX rate settling at N370-400/$1. Banks see little incentive to lend with Treasury yields in the 20s. Non-performing loans (NPLs) tend to lag the economy, according to one bank. It estimates that there is 18 months to go of high NPLs and downside surprises. Retail transactions that fell, when households cut spending, have yet to pick up.
“That said, banks believe things are getting better. In the short term, they see opportunities in manufacturing, agriculture and infrastructure. They are steering clear of the oil & gas, and haulage sectors. One bank thinks the nascent recovery is led by an improvement in the oil sector, and fears that if it is not sustained by structural reform, it will be fragile. The banks’ biggest concern is regulatory changes.”
The firm, however, said consumers will remain under stress for a while, adding that consumer companies think the fundamentals of the micro-economy – consumers and businesses – have not changed. It said the consumers are still very stressed, unemployment high and inflation elevated. It added that consumers have reduced the frequency of purchases, found substitutes and traded down.
According to the report: “One consumer company shared with us the example of a middle-income mother buying smaller sachets of a product, when she can afford a larger pack. Her argument was that in these challenging times, she can control consumption more easily in her household with sachets. Lower income mobile subscribers are reacting to high inflation by dropping from two subscriber identity module (SIM) cards to one, according to a telecoms company.
“Tight FX liquidity led to some companies delaying capex. Some consumer companies cannot pass on the cost of FX to the end consumer. Even those with a relatively larger share of locally sourced raw materials told us that its pricing is still impacted by FX. The companies see stability returning. That said, the consensus was that consumers are likely to remain under stress for a while,” the firm said in the report.