Banking and finance: Increased competition amidst monetary tightening, naira depreciation

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By Babajide Komolafe

Operators in the financial sector said that despite the perceived risk of political activities, tapering of quantitative easing and declining external reserves the sector in 2014  will experience increased competition in terms of new products,  infrastructure financing amidst  monetary tightening and significant possibility of naira depreciation.

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In an interview with Financial Vanguard, Mr. Opeyemi Agbaje, Managing Director Chief Executive, RTC Advisory Services Limited said that while there are positive development in 2013 that will influence the economy in 2104, there are however several levels of uncertainties in the economy.

Positives and Negatives of 2013

He said, “There are positives we are taking into 2014 from 2013. Those positives are: Power privatisation which was done in 2013 and will be consolidated in 2014; the agricultural reforms which appear to be having some impact, it’s still early, but that would also be consolidated in 2014.

There are also some significant negatives that we would also be taking into 2014. Most importantly is the management of the oil sector, vis-a-vis  the absence of PIB, divestment of multinationals, and the general state of uncertainty in the industry, oil theft, oil piracy, declining production.

Major risks

“Now if you go into 2014, I see several levels of uncertainty, and for me that is the defining concern for 2014. We have uncertainty in the foreign exchange market. One, because oil sector outlook is not clear.

Two, our domestic oil sector is not settled because of issues I mentioned earlier, and that is where we get 85 per cent of our foreign exchange earnings. So there is doubt over our foreign exchange, I see a very high probability of naira devaluation, and the pressure is already building.

“Nothing major may happen in the oil sector in 2014, because the outlook is not so positive, and you know the alternatives, shale oil, shale gas, fracking, and all of that.

In the financial sector, there is also some uncertainty around liquidity; the CBN’s CRR policy and expectation in some sectors that they are going to raise the CRR. With CBN’s determination to curtail inflation in the face of political spending in 2014, so there is going to be further squeeze in liquidity and pressures on inflation.

And then the most important uncertainty of all is political uncertainty. Because we would face severe political challenges in 2014, it is obvious, we are going to have a national confab, we are going to have an election.

Even though the election will take place in 2015, but all the work will happen in 2014 because INEC is saying they will do it in 2015. So 2014 will be a year of political campaign and there would be more focus on policy than on governance. So there are many levels of uncertainty that would define this year. But like I said there are some positives and there are some negatives.

Overall I think there are three major risks we should watch out for. One is the political risk, the second is the foreign exchange, the risk of Naira devaluation, and the third is around the oil sector. If anything goes wrong with global oil prices, we would be in serious trouble.

Global factors

“Now the global factors, the one that concerns us, one is the oil prices because there is uncertainty around that one too. The second one that concerns us is the global growth projections. The IMF has projected 3.6 per cent or so for 2014.

I think they will revise it downward. It is not aggressive but it is not too bad. The third one, the third global factor that will affect Nigeria is this tapering of quantitative easing in United States.

It is already affecting the global stocks market. We saw in December, the fear of tapering affecting stock markets in Europe and America. So when they actually start the tapering, it will have global consequences, for financial markets, stock markets and the economy itself. So that is another issue.

For us I don’t think it will be catastrophic. It will have some effects on out stock market and it could also have impact on the financial sector.

Increased competition in banking industry

On his part, Wale Abe, Executive Secretary, Financial Market Dealers Association of Nigeria (FMDA) noted that there would be increased competition in the banking industry as well as more tightening by the Central Bank of Nigeria (CBN.

He said, “The expectation, first of all is that the trend of investment should increase marginally. We expect to see expansion in the critical sectors of the economy like the agricultural sector in particular.

Then there are some concerns about the manufacturing sector, government is likely to pay attention to that sector as well by way of improving infrastructure because if infrastructure improves the manufacturing and industry will equally benefit from growth.

“Of course the service sector is expected to do well in particular. That takes us to banking. There would be lots of  competition   in terms of ICT and in terms of new products especially financing the infrastructural sector as a whole, both social and physical infrastructure.

However the expectation is that foreign investment, both direct as well as portfolio investment should equally increase because the expectation is that the Nigerian economy delivers good returns.

Electioneering is a threat to inflation

“However, the challenges will actually come from curtailing inflation, given the fact that this year is a year preceding election, which means that electioneering campaign will actually start in 2014. Given the fact that the ruling party is in a kind of crises and the opposition party, in terms of numeracy is increasing.

This might create some serious attrition between the ruling party and the opposition. It boils down to the fact that a lot of money will find its way into the economy, money that will not pass through the official banking industry, by way of corruption and others trying to get position to win election.

That might be the biggest challenge that we might likely face. Then if that happens, the expectation is that the interest rate will likely increase because the central bank will have to tighten more, in anticipation of fiscal injection into the economy. So those are the kind of things we might likely see.

But by and large, the ability of the politicians, especially the leadership of the political class to manage whatever crises that might emerge from the political environment, will actually go a long way in determining the direction in which the Nigerian economy will go. All of these will actually increase the risk factor.

Risk factor will actually increase in Nigeria for 2014. And that will propel those who are willing to take risk to invest more to get better returns. So if are able to manage things better, then off course the Nigerian economy might be better off at the end of the day.

Also is the development in the power sector, if things go the way it is planned, if we are able to generate more, and then transmit and distribute. Then obviously, we might see a dramatic jump in terms of productivity in Nigeria. Otherwise if the political crises will not allow us to do that, then we can see the trend going backward instead of upward.

New guidelines will boost finance companies

President Finance Houses Association of Nigeria, FHAN,……..Durojaiye   on his part noted the challenge of declining  crude oil prices and likely impact on foreign reserves and exchange rate. He however expressed optimism that the recently released draft guidelines for finance companies will boost activities in the sub-sector in 2014.

He said, “For our sector, the central bank has just produced a draft guideline that will regulate the finance companies, and we are all hopeful that this will boost the sector.

The increase in capital base from N20 million to N100 million, and finance houses functions have been well spelt out and expanded. So there will be scope for more business for finance companies. And finance companies have also been listed as one of the financial institutions that SMEs can access developmental fund from.

So you can bring you financials and we will package it for you to be able to access developmental funds.

Challenge to the Economy

“Then for the economy in general, the challenges we foresee has to do with revenue generation and the expenditure profile. In terms of revenue generation, you will discover that over the last two years we have been losing between 300,000 and 400,000 barrels of crude oil per day to oil theft and breakage of pipeline.

So how will the government able to curb all these, knowing that we have a deficit of almost N1 trillion. Also is the fact that this is an election year, the expenditure pattern is likely going to be above the budget.

The deficit will go beyond the budgeted N1 trillion. And oil prices, you will find out that, because of shale oil in United States, and discovery of oil in other places, and peace in the Middle East, and Iran threatening that it would go beyond its OPEC quota; this might flood the market with oil and this might force down the price.

If you look at our budget price which is above $70 per barrel, if oil price falls to $90 per barrel, we would have serious problem with the budget.

These are the things I am looking at, and I am saying the only hope that things will not get worse in terms of foreign exchange generation and the rate of the naira. If the oil price goes down, and we are not able to curb oil theft, the naira will be under pressure.

“We hope that CBN will be able to manage it very well. The CBN governor said that we are prepared. The Minister of finance says they have a plan to make sure there is no shortfall that will be able to affect the budget this year.

They said they will be able to control expenditure and also look for alternative sources. You know, they hired Mckinsley to help the FIRS to increase the generation of non-oil taxes. We are hoping that all these will assuage the challenges we are looking at in the year.

Management of foreign reserves and foreign exchange must improve

Okechukwu Unegbu, Managing Director//CEO, Maxifund Securities Limited called for improvement in the management of the nation’s foreign reserves and foreign exchange, saying that some restrictions introduced by the CBN in 2013 were  not good. He also frowned at the prevalence of corruption in the country, saying that this is not good for the economy.

He said, “First and foremost we should be able to do more in terms of management of our foreign exchange and foreign reserves. They have not been good. As at last week or two weeks ago, we are talking about N175 or N170 to the dollar.

That is disastrous. At the time the central bank said that receiving money from our people in diaspora, if it comes, you go to the banks, they pay you in naira. It was a bad policy. They should have allowed it the way it was, more money would have flowed in.  Now because no money is coming in, there is scarcity.

“In the government sector, the greatest challenge we have is corruption. Everywhere is corrupt. You go to any ministry, for you to even write your name, you have to pay the clerk, to write your name to see the minister.

And apparently, the people are observing these things. And that means there is weakness in leadership, and as long as that exist, we are going to continue to have decayed economy. We are not ranking well in competitiveness ranking; we are not ranking well in transparency. So with all this, we have a big problem, corruption.

And then in the capital market, the capital market was gradually recovering and suddenly, just like the increase in fuel prices in the New Year, which we protested, the regulators of the capital market have increased the capital bases of stock broking house and all that, by over 700 per cent.

It does not make sense to me. You should have allowed the capital market get back itself properly before you do that. There is no objective factor or criteria for the increase. I am not saying it should not be done but there has to be some consistency in the way it is done.”

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