Financial markets: No dull moments in 2017
By COLLINS NWEZE On Dec 18, 2017
The outgoing year has been a busy one for the financial markets and the economy. From the naira's huge recovery against global currencies, massive borrowing by the Federal Government from the International Capital Markets, the Bank Verification Number (BVN) policy and the Anchor Borrowers' Programme to the implementation of the Financial System Strategy (FSS2020), there were no dull moments within the year. COLLINS NWEZE captures some of the major events that shaped the financial markets in 2017.
It was difficult to name one event that created the biggest anxiety for banks and managers of the economy within the last one year.
However, the Federal High Court, Abuja ruling on an ex parte application filed by the Federal Government through the Office of the Attorney-General of the Federation on October 21, which granted the temporary forfeiture of funds in accounts not linked to Bank Verification Number (BVN) stood out.
The biggest casualties in terms of deposit loss should the Federal Government go-ahead to implement the court order will be the first generation banks. They seem to have the largest number of customers who have stayed with them for close to or over 100 years.
The banks with the largest impact are likely to lose deposits running into billions of naira, may have to recall loans, and suffer liquidity problems. The Federal Government has secured an interim forfeiture order from Federal High Court which would now allow it to freeze the accounts of bank customers in Nigeria who have no BVN.
The order gave the Federal Government the nod to instruct the banks to disclose any investments made with these funds and to freeze any outward movement from these accounts.
The court order mandates the Central Bank of Nigeria (CBN) to appoint an examiner to look into the books of any commercial bank that fails to comply. The banks are expected to provide the names of accounts without BVN, account numbers, outstanding balances, domiciliary accounts without BVN, branch/locations where these accounts are domiciled.
Although the Federal Government seems to have soft-pedaled on the policy implementation, the anxiety it created within the financial markets, especially among Tier-1 banks, is yet to go away.
Naira stability achieved
The naira started the year exchanging at N490 to dollar in the parallel market. By February 6, the exchange rate worsened to N497 to dollar and by ending of February, it was exchanging at N520 to dollar.
The local currency was however, stable in the official market where it exchanged for N305.5 to dollar. Interestingly, the naira stabilized at N363 to dollar at the weekend, and has remained within that band in the last four months.
The state of the naira then, prompted the CBN Governor, Godwin Emefiele to call for a change of lifestyles among Nigerians. He said in a campaign that: "The size of Nigeria's reserves and the value of the naira critically depend on our lifestyles and on the value and types of imports we allow into the country."
Emefiele's message implied that a change in consumption pattern from foreign to indigenous goods would impact positively on the value of the local currency.
However, some stakeholders attributed the naira's woes to CBN's inability to fully liberarise the foreign exchange market and allow the naira to float.
But sub-Saharan Africa Economist at Renaissance Capital (RenCap), Yvonne Mhango in a report titled: Nigeria: Winds of change- More flexible Forex Policy, predicted that the naira would not be allowed to float on the interbank market. "This view is informed by the partial deregulation of petrol prices on May 11, and Nigeria's history of managing the forex rate. The ideal scenario would be for the CBN to let the market set the new interbank forex rate without restriction, and in so doing, allow for an appropriate level to be found," she said.
Mhango predicted that consumption expenditure would continue to underperform (and weight on aggregate Gross Domestic Product (GDP) in the near term due to declining real wage and thrifty consumers who are wary of uncertain economic outlook and also taking advantage of high interest rate environment to save.
"We believe policy measures to ease supply side shortages in the economy, particularly for forex, and subsequent easing of monetary policy will go a long way in stimulating investment and consumption spending to support aggregate economic performance and naira's recovery," she said.
Measures to strengthen naira
Some of the measures put in place by the CBN to end the crisis include the first Naira-Settled Over-the-Counter (OTC) Forex Futures Market (FFM) launched in June 27 with FMDQ OTC Securities Exchange and the planned resumption of dollar sales to the BDCs.
The FMDQ OTC Securities Exchange (FMDQ) is an organisation with the strategic intent of bringing about revolutionary changes and fostering the development of the Nigerian financial markets.
The naira-Settled OTC Forex Futures are non-deliverable forwards, or a contract where parties agree to an exchange rate for a pre-determined date in the future, without the obligation to deliver the underlying dollar on the maturity/settlement date.
On the maturity date, it will be assumed that both parties would have transacted at the spot forex market rate. The party that would have suffered a loss with the spot forex rate will be paid a settlement amount in naira to ensure that both parties enjoy the rate that had been guaranteed to each other through the OTC Forex Futures.
FMDQ's Managing Director/Chief Executive Officer Bola Onadele Koko said: "The naira-settled OTC Forex Futures product is a major milestone development in the evolution of the Nigerian financial markets. The Futures market is an opportunity to transform risk into certainty – a major paradigm shift in the financial markets landscape.
"This innovation offers opportunities for government, businesses, pension fund administrators, investors and individuals among others to hedge (not speculate) to cope with exchange rate risk.
"It also affords the CBN a greater opportunity to manage exchange rate volatility, thus achieving greater market confidence, liquidity, improvement in business planning, job security, employment, better allocation of resources, global competitiveness of the Nigerian financial markets, and all in all, a thriving economy."
Foreign exchange interventions continue
While the BVN policy was on the table, the CBN consistently funded the foreign exchange (forex) market to protect the naira and make forex available to importers.
Dollar injections into the economy are estimated at $9 billion since February and have helped the CBN achieve long-term naira stability and curb volatility in the forex market.
The CBN had, in the last 10 months, sustained its weekly dollar interventions in the forex market; a large part of it goes into the interbank market, bureau de change (BDCs), Retail Secondary Market Intervention Sales (SMIS) and wholesale spot.
The dollar injections were made to enable stakeholders secure enough forex for their operations, and in the process boost naira's stability.
The gap between official and black market rates started to shrink since February 20, when the CBN resumed dollar interventions in key segments of the economy. Industry sources said the CBN has injected over $9 billion in the last nine months into the market.
The CBN's Deputy Governor, Financial System Stability, Joseph Nnanna, said the introduction of the Investors' & Exporters' (I&E) Forex Window was targeted at increasing forex supply; and allowing the timely settlement of transactions helped to achieve the current exchange rate. He said over $10 billion has been attracted to the economy through the I&E Forex window, adding that the window's success rate exceeded stakeholders' expectations.
The Financial System Strategy 2020
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The implementation of the Financial System Strategy 2020 (FSS 2020) blueprint launched 10 years ago and meant to transform Nigeria's financial sector into a growth catalyst also featured prominently in the outgoing year.
The FSS2020 was also meant to engineer the country's evolution into an international financial centre to strengthen domestic markets and enhance their integration with external financial markets.
The need to get Nigeria onto the same wavelength as the rest of the world prompted the CBN's inauguration of the FSS 2020 which clocked 10 years this year.
The vision was to enhance Nigeria's chances of playing big in the global financial space and sustaining its leadership position in Africa. It was also to allow Nigeria achieve Goldman Sach's prediction of being among the Next 11 countries poised for rapid economic growth by 2020. But, achieving this requires Nigeria to have a robust and vibrant financial system and reformed payment system to power the new economy.
To make the vision a success, the CBN, in collaboration with key stakeholders in the payments community, developed the National Payments Systems Vision 2020 (NPSV 2020). The NPSV 2020 is a sub-set of the Financial Systems Strategy 2020 (FSS 2020).
Former CBN Deputy Governor, Corporate Services and Coordinator, FSS 2020, Suleiman Barau, said that in measuring the milestone of FSS 2020, there was a need to examine them from the existing sector perspectives. For mortgage sector, a robust secondary mortgage has been created with the CBN and mortgage operators streamlined, which has led to the establishment of the Nigeria Mortgage Refinancing Company (NMRC).
Again, the uniform underwriting standard which was nonexistent has now been codified and introduced in the mortgage industry to regulate their practice. "In addition, the framework for the mortgage asset registry has been developed to capture mortgage transactions on a common IT platform. The CBN has also introduced the categorisation of primary mortgage banks into national, state and local. The pension asset has grown from about N3 trillion in 2013 to N6.02 trillion in 2017," he said.
Also within the year, the Nigerian Sovereign Investment Authority (NSIA) was appointed advisers to manage the deployment of pension funds into long term infrastructure deployment. He said through sensitisation and mass advocacy, PenCom has stepped up prompt settlement of pension claims for retirees and is embarking on massive technical trainings, using the Information Technology platform, to ensure prompt service delivery and implementation of the micro pension scheme.
Anchor Borrowers' Programme
The CBN committed N44.1 billion to the Anchor Borrowers' Programme (ABP) through the 13 participating financial institutions.
Its spokesman, Isaac Okorafor, said the CBN is moving into commodity associations where over 300,000 farmers will be mobilised and about two million jobs will be created.
Okorafor listed the CBN's intervention schemes that have impacted positively to the economy as, Agricultural Credit Guarantee Scheme Fund (ACGSF), which has created a total of 5,045,900 jobs; N200 billion Commercial Agricultural Credit Scheme (CACS) – 1,134,772 jobs; N200 billion Small and Medium Enterprises (SME) Restructuring and Refinancing Facility (SMERRF) – 89,860 jobs; N300 billion Power and Airline Intervention Fund (PAIF) – 7,899 direct jobs and 14,304 indirect jobs; the N220 billion Micro, Small and Medium Enterprises Development Fund (MSMEDF) – 139,156 jobs.
Others are Textile Sector Intervention Facility (TSIF) – 1,668 jobs; Nigeria Electricity Market Stabilisation Fund (NEMSF) – 1,180MW Capacity Recovery by Generating Companies (GENCOS) and over 414,000 units of meters procured; and Anchor Borrowers' Programme (ABP) created 653,250 direct jobs.
He said a total sum of N44.18 billion has been released through 13 Participating Financial Institutions (PFIs) in respect of 200,000 small holder farmers across 29 States in the country cultivating over 234,581 hectares of farmland in the ABP.
The CBN targets 500,000 participants by end of 2017 on the ABP. He said the CBN is expanding the ABP through the direct engagement of commodity associations. "Currently we are working with the Rice Farmers Association of Nigeria (RIFAN) to mobilise 300,000 rice farmers who would add two million tons of rice to the national output in one year.
He said the CBN is also working with the Federal Ministry Agriculture and rural development which aims at the pilot stage to create at least 10,000 jobs in each state of the federation.
In order to provide access to finance for MSMEs, the acting director noted that the CBN has facilitated the establishment of the National Collateral Registry (NCR) to ensure that MSMEs and the millions of budding entrepreneurs across the country can use their movable assets to raise finance.
FGN Savings Bond
The Federal Government also within the year, generated over N6.69 billion through the monthly issuance of the Federal Government of Nigeria Savings Bond (FGNSB) since in March this year. The bond issuance, was in pursuit of its objective of financial inclusion by attracting retail investors into the bond market.
The amount raised since inception grew to N6.69 billion following the conclusion of the FGNSB Offer for October 2017. Out of the N6.69 billion raised since inception of the FGNSB, N3.71 billion was for the 2-Year Bond while N2.98 billion was for the 3-Year Bond.
The Debt Management Office (DMO) which issues the FGNSB on behalf of the Federal Government said the high level of subscription by investors since the debut offer in March, shows that the product appeals widely to investors. According to the DMO, 9,103 subscriptions have been received so far from investors across the county.
Analysts praised the DMO for introducing the Savings Bond into the securities market for retail investors and taking the instrument to the grassroots. The DMO plans to sustain investor interest in the product through sensitization of the public about the gains of investing in the Bond which has a competitive fixed interest rate with its income exempted from taxes.
Besides, the Federal Government within the year, raised N100 billion through the Sovereign Sukuk, also called Islamic Bonds.
According to DMO Director-General, Patience Oniha, the fund will be used for the construction and rehabilitation of sections of key economic roads across the six geopolitical zones in the country.
The Federal Ministry of Power, Works and Housing also listed 25 road projects the fund will be used for. For the CBN and DMO, Islamic finance is needed to take financial services to the grassroots, and open new investment frontiers in government-issued securities.
Eurobond borrowings
The Moody's Investors' Service downgrade of Nigeria's long-term issuer and senior unsecured debt rating to B2 from B1 (with a stable outlook) within the year means higher cost of international borrowing, top financial analyst Bismarck Rewane has said.
In an email report, the Financial Derivatives Company Limited boss, said Moody's action means that the Federal Government's plan to raise $5.5 billion through Eurobonds sales within this fourth quarter will attract higher pricing.
This will bring the total funds raised through the Eurobond–International Capital Market (ICM) by the Federal Government to $7 billion in less than one year. A total of $1.5 billion was previously raised in two tranches of $1 billion and $500 million.
In a report, Vice President – Senior Analyst Moody's Investors Service, Lucie Villa, said Nigerian authorities' efforts to address the key structural weakness exposed by the oil price shock by broadening the non-oil revenue base have so far proven largely unsuccessful.
But in a swift reaction, the Federal Ministry of Finance (FMF), Central Bank of Nigeria (CBN) and the Debt Management Office (DMO) said the challenges that are highlighted in Moody's rating are clear, and are being addressed by the government with the environment having improved significantly since the last period of assessment.
Mhango said the plan to borrow $5.5 billion through Eurobonds will raise the country's debt service to revenue cost beyond 62 per cent.
She said capital releases for the 2016 budget continued into the first quarter of this year while public debt has increased by seven percentage points of Gross Domestic Product (GDP) since 2014.
On the debt service/revenue, she said: "Nigeria's debt service/revenue has risen sharply in recent years to 62 per cent as at June 2017 against 29 per cent in 2014. This largely reflects the Federal Government's low revenue/GDP target of four per cent this year. The Federal Government plans a $5.5 billion Eurobond issuance before year-end 2017, as part of its efforts to lower local interest rates, by reducing domestic debt/total public debt to 60 per cent, against over 70 per cent today."
Mhango said budget performance in the first seven months of this year and debt developments showed there were no capital releases for the 2017 budget, because it was passed late. She said the Federal Government's 2017 budget of N7.4 trillion was 6.2 per cent of GDP, and was signed by the executive, after being passed by the Senate in May.
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