Group managing director and chief executive of Afrinvest West Africa Limited, Ike Chioke in an interview with journalists speaks on the Nigerian economy and the banking industry. BUKOLA IDOWU was there. Excerpts.
The federal government has been delaying the signing of the Africa Continental Free Trade Agreement (ACFTA), in your opinion, should Nigeria go ahead to sign it?
Nigeria has many endemic issues which makes the economy competitive. So, for the government to sign it, it will be a disservice to the manufacturing sector but at the same time we can’t live as an island when the rest of Africa has signed and they want to move on. I feel what could be done is to set a time frame to which we will be compliant and sign. I think, for instance, if you look at the manufacturing sector, the lack of power supply is one of the biggest challenges.
For everyone running a business in Nigeria power is far much more expensive. The cost of diesel in terms of kilowatts per hour is much more than what a proper cost reflective tariff will cost the same company, if they can deregulate the power sector. By the time they do that they will find out that obviously many residents who are used to cheaper electricity tariff maybe complaining hence they need to balance it up by maybe subsidizing poorer income level people with power subsidy and that can be structured rather than the way we are currently subsidising fuel consumption.
If you look at the number of cars in Nigeria and where fuel consumption subsidies really end up, I will say 80 to 90 per cent end up in Lagos, Port Harcourt and Abuja. So, our approach might be that we have a structured entry to ACFTA and you don’t sign immediately with the intention of being compelled to enter and then force the arm of your manufacturing sector which will be harmful to the economy.
The banking sector is yet to increase lending to the real sector, how do we get these credit lines to manufacturers to boost the economy?
The sector is faced with a lot of uncertain issues, and it will actually take between nine to 18 months for that loan to translate into income. In Nigeria, a lot can happen in nine to 18 months. In which case you already know that the minute the loan is drawn down you actually have a bad loan because of the endemic nature in the economy. Hence, what we need is a more comprehensive approach to resolving all these economic issues because once you can resolve them, it will be clear that businesses can make money and the banks will be the one to go to businesses owners to say ‘My friend, I can give you facilities in this area to expand your business’.
The apex bank has kept rates unchanged to curb inflation, but we have seen inflation trending upwards, why is this?
The rising inflation is coming from food pricing inflation and that is expected given the challenges we have in the middle belt region of Nigeria particularly in the north central between the herdsmen and the farmers. So, again we can see how our security issue is affecting our agricultural sector and then coming back to the fiscal side in terms of inflation.
The Monetary Policy Committee of the apex bank has kept the rates unchanged for a while, what are we likely to see at the end of the next meeting?
I think they may probably keep it as it is because as we go into the election period, we all know what we all read in the newspapers about dollars raining at the primaries for both APC and PDP. As we go into the elections, more cash is going to hit the system and the Central Bank of Nigeria (CBN) is going to be concerned about maintaining price equilibrium, so lowering interest rate may not be the right thing to do at this time and I think they may just stick to the status quo and try to manage themselves till the election is concluded.
The stock market has been seeing some sell-off for quite some time. Are we likely to see a return of the bull to the market soon? What would be your outlook for the market?
The sell-off we have seen can be attributed to four major points. The first one is the improving yield in developed markets. Foreign investors are moving their investment to safer ends and we also look at the contagion effect for the emerging markets. Selling off reduces their exposure and that has also led to some of the sell-off we have seen. We will recall that in the last two or three weeks the sell-offs have subsided compared to what we used to get. And then, we also look at the moves by our politicians in the last two or three months. We saw the issue with the MTN that also dampened foreign investors’ confidence in terms of the capital importation documents issued.
Some of those things were combined together to affect the sell-offs that we have seen and looking forward, we expect that as we approach 2019 election, there will be continued caution in terms of investors trying to watch the next move of the government. In addition to that, we have seen some local investors also trying to take position ahead of 2019 election. We know that whether it is going to be a new government or the incumbent that will come to power, Nigeria will move on and we expect that there will be significant improvement in terms of the market probably after the election.
So, we expect that before the end of this year market may remain soft but investors have also been able to identify stocks that have strong fundamentals. We have seen that in terms of volume in the top banks. Despite their current price level investors have been taking significant position ahead of the election.
How do you see the banks in respect of their capital reserves and what should we be expecting to see by the end of the year?
We have really seen major improvements, most of the banks especially the tier one banks have boosted their capital reserves. Tier two banks are also doing quite well with an average of about 16 to 17 per cent, which is much lower than tier one banks which is around 24 per cent. Industry-wide, we have about 20 per cent. So, they remain in a position of strength and we must note that the different banks have different areas of operation.
There are international banks. We have those who are just operating nationally. So, for most of the banks under our coverage they remain in very strong position. In terms of the asset quality of the banks since 2016, during the economic recession we see that banks were exposed to some sectors such as the power sector, oil and gas sector and lately we see ICT with Etisalat. We still have some banks with exposure to these assets and they continue to provision for those assets.
A major tier one bank that has been particularly hit by this issue. Lately, we have seen that the management of the bank have strengthened their risk management framework and they are restructuring some of these loans and we have been seeing improvement in the provisioning as well as in their total non-performing loans. So, there have been gradual improvement as a result of what management is doing in the bank.
For others as well, we have been seeing continued pressure with obviously the underlying micro environment is still challenging. Usually, agriculture was really the bright spot but since 2017 from about four per cent growth in Q4 2017, agriculture is now down to one percentage in Q2 2018, so, that is very challenging. Manufacturing is still very weak in services, but when you take it over an extended period of time you see that the performance of the non-oil sector is still very weak and fragile.
For our expectations for the rest of the year, we are still hoping and optimistic that most of the gains we will see will come from spending due to the election, and favourable oil prices which has risen to a high last seen in 2014 as well as oil production which has stabilised and increasing gradually.
Obviously, these are the reasons that inform the caution by banks. When you talk about the creation of risk assets extending loans in the real sector, obviously, there are so many problems in the real sector and banks are currently very cautious. Basically, capital adequacy levels are still robust and in terms of non-performing loans, it is elevated. Banks are taking steps to resolve them.
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