By Babajide Komolafe
The lifting of interbank guarantee would heighten competition for deposits among banks in 2012, says Standard  Chartered Bank.

“Nigeria’s interbank guarantees will be lifted in 2012, likely resulting in more competition for liabilities between banks and higher deposit rates,” the bank said in its outlook for the global economy titled Global Focus 2012. The bank predicted that monetary policy would remain tight while the exchange rate would be widened.

It its outlook for Nigeria in 2012, the report stated, “2012 may be a transformative year for Nigeria’s economy, depending on the appetite to push through key reforms. We expect a rebasing of GDP (last done in 1990) early in the New Year. After Ghana’s 2010 rebasing, the first since 1993, it was ‘discovered’ that the economy was 60 per cent larger than previously thought.

“The rebasing exercise is likely to deliver similar results for Nigeria. The importance of the telecom and financial services sectors will increase. With a larger measured GDP, Nigeria’s already negligible debt-to-GDP ratios may appear smaller still, although important shortcomings – such as the inability to collect significant revenue outside the oil sector – will become more evident.

“While recent growth has comfortably exceeded 7 per cent, driven largely by developments in the non-oil economy, much of it has been driven by improvements in agricultural output. With little noticeable increase in productivity, growth has not been transformative. Several reforms expected in 2012 are key to Nigeria’s ability to improve its growth prospects and make a meaningful difference to poverty levels.

“Nigeria’s banking sector resolution process is now largely complete. The bailout is unlikely to involve large fiscal costs. The Asset Management Corporation of Nigeria (AMCON) has bought N3.14trn (USD 20.25bn) of bad debt, and hopes to pay for the bailout by selling these assets at an eventual profit.

Banks will also pay a 30bps levy on their balance sheets, annually for 10 years, into a sinking fund. This, together with contributions from the Central Bank of Nigeria (CBN), should help to meet AMCON’s costs. Three banks were nationalised and another five merged and recapitalised by healthier institutions.

“Monetary policy is likely to remain tight, with frequent open-market operations and FX sales to the interbank market in order to limit spreads between market determined FX rates and the official Wholesale Dutch

Auction System  (WDAS) with a USD-NGN mid-rate of 155). Persistent interbank market weakness may trigger a widening of the +/-3% band around the current WDAS mid-rate. Further rate tightening is probable in the event of inflationary pressure stemming from government spending, the lifting of fuel subsidies, or continued pressure on the FX reserves.

Secondary-market bond trading should remain subdued. This reflects the impact of recent aggressive tightening, with banks holding bonds to maturity to avoid notional capital losses stemming from higher interest rates. IFRS, requiring mark-to-market valuations, will be introduced by end-December 2012.

“Nigeria is set to make important strides towards a ‘cashless’ economy in 2012, given pilot efforts to limit the size of cash withdrawals from banks, initially in Lagos and then in other urban centres. Transporting large sums of cash notes in order to meet demand is thought to cost the banking sector up to USD 700mn annually, which could be channeled into lower loan-to-deposit spreads if  e-channels were employed instead.

If realised, the reforms could be far-reaching, ultimately bringing more of the money in circulation into the banking sector, lowering bank costs and improving the transmission of monetary policy. They could also shed more light on the country’s large errors and omissions (outflows on the balance of payments, which typically account for as much as 30 per cent of known export earnings) and improve governance.”