Key View: Nigerian credit growth is set to return to positive territory over the coming months as banks' appetite to lend increases on the back of improving asset quality and stimulatory measures from the Central Bank of Nigeria. We expect banks' lending to the government will also rise over the coming months although the net effect of this on asset growth will be offset by decreasing holdings of central bank liquidity management instruments.
We believe that Nigerian private sector growth will return to positive territory over the coming months amid accelerating economic activity, improving asset quality and stimulatory measures by the Central Bank of Nigeria. We are also expecting bank lending to the government to pick up over the coming months as public spending accelerates in the lead up to the February 2019 election. However, the net effect of this on asset growth will be watered down by the fact that banks are likely to withdraw from instruments issued by the Central Bank of Nigeria that had previously been issued to mop up excess liquidity. We are forecasting private sector credit growth of 3.0% and 10.0% in 2018 and 2019 respectively, up from a contraction of 3.2% in 2017. Overall assets, meanwhile, are forecast to expand by 10.0% and 12.0% in 2018 and 2019 respectively, compared to 9.2% in 2017.
We believe that private sector credit growth in Nigeria, which has been negative for the last 11 months in year-on-year terms, will return to positive territory before the end of 2018 with several factors leading to improved credit conditions. Asset quality, which deteriorated sharply as oil prices declined in 2014, is steadily recovering amid improving economic conditions, which have boosted borrowers' abilities to service debt. After rising steadily from 3.0% in December 2014, non-performing loans appear to have peaked at 15.1% of total outstanding credit in September 2017. NPLs fell to 14.8% in December 2017 (latest available data) and bank financial reports, which broadly show large declines in loan losses during the first of 2018, suggest asset quality has continued to improve during 2018. We believe that rising economic activity and improving economic conditions (characterised by increased FX liquidity and falling inflation) will see asset quality continue to improve over coming quarters and this will increase banks' willingness to lend.
Stimulatory measures from the Central Bank of Nigeria will also help to boost lending over the coming quarters. Although the July monetary policy committee ( MPC) statement struck a decidedly hawkish tone, we believe this was more an effort to anchor inflation expectations rather than an indication that monetary policy will be meaningfully tightened ( see 'Hawkish Monetary Policy Statement No Precursor To Tightening In Nigeria', July 26). Indeed, in the July statement, the MPC indicated that it is looking at lowering the cash reserve requirement for lending to certain sectors, effectively a monetary easing move that would increase deposits available for lending on.
We are also expecting bank lending to the government to accelerate over the coming months. President Muhammadu Buhari finally signed the 2018 budget in June, which means that the capital spending plans will start to be implemented. Furthermore, we are expecting recurrent spending to accelerate in the months leading up to the February 2018 election and this will increase the authorities financing needs.
However, the extent to which this boosts overall asset growth will be offset by the fact that bank holdings of CBN liquidity management tools are likely to fall. Indeed, the banks' holding of these open market operation ( OMO) instruments increased rapidly during the first half of 2018 as the CBN attempted to sterilise liquidity from maturing Treasury instruments. New debt issuances to finance spending during the second half of the year will act as a liquidity management tool, reducing the need for the CBN to intervene via OMOs.