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Economists Expect Further MPC Interest Rate Hike as NNPCL Projects Improved Performance on New Hirings

Mar 21, 2023   •   by Proshare Research   •   Source: Proshare   •   eye-icon 302 views

Being an Analyst Note issued by Proshare Research on March 21st, 2023 

 

MPC Set to Raise Rates 

The Monetary Policy Committee is expected to announce a 50bp rate hike at the end of its two-day meeting today. More members of the committee are expected to vote for a half-percentage point rate following the rise of inflation to a record high of 21.91% in February. Analysts expect a similar trend is expected to play out in South Africa, Egypt, Morocco, and Kenya regardless of the crisis that has rocked the global financial system involving the European giant - Credit Suisse. While rate hikes generally aim to tackle rising inflation and attract capital inflows at once, Analysts believe that only small progress can be made in both regards if the legacy supply bottlenecks are not addressed. Analysts also worry about the impact of even higher costs of funds on the businesses of private enterprises whose operations have been severely hurt by the cash crunch. The Central Bank Governor is expected to field questions on the extent to which the Apex Bank plans to reduce the currency in circulation in pursuit of its cashless policy. According to the CBN, Currency in Circulation reduced from N3.01trn last December to N1.38trn while Currency outside of bank vaults over the same period fell from N2.57trn to N789bn a development which has hurt several businesses operating in the cash-based informal segment of the economy.

 

Expatriates Would Boost the Efficiency and Effectiveness of the NNPCL 

In a statement by the Chief Corporate Communications Officer of NNPCL, Garba Deen Muhammad, the national oil company has appointed Jean-Marc Cordier, a renowned international oil trader, as Head of NNPC Trading Ltd. The NNPCL trading arm was set up to market crude products, engage in direct oil trading activities, and make profits from oil operations for the group. According to the communications officer, the onboarding of Cordier, which is part of the repositioning of the company, would improve growth, performance, and service delivery. 

 

Analysts have argued that the efficient and effective operation of the NNPCL as a profit-oriented company hangs on its willingness to leverage both local and foreign expatriates. Hence, we believe the hiring of Cordier, who has over 30 years’ experience in physical and derivatives oil trading, risk management as well as in reorganization and creation of a trading business, would support sales optimisation and the promised listing of the NNPCL. Howbeit, we recognize the need for the NNPCL to comply with the Expatriate Quota of the Nigerian Content Development Monitoring Act, 2010, which provided for a maximum of 5% of management position as Expatriate Quota subject to a succession plan.


Stable Deposit Bases and Solid Liquidity Keeps African Banks at Low Risk, Says Moody’s 

In the wake of recent happenings in US & UK banks (SVB, Signature Bank, and Credit Suisse), Moody’s Investor Service has commented on the risk of banks in Africa. The rating company stated that the risk for African banks is relatively low compared to other regions, given that deposits have been historically stable for large banks and their solid liquidity that can buffer large deposit withdrawals. Although the African Bank’s credit ratings are generally low and have a negative outlook due to foreign-currency shortages, rising credit risk, and tight global funding conditions, the liquid assets to total assets for rated banks is at 43% and the estimate of 20% of assets are in form of cash, balances with the central bank and other interbank exposure while the remaining are in form of local sovereign government bonds.


As estimated by Moody, US commercial banks have the highest percentage of investment in government securities at 24%, followed by African at 20% while euro area banks have 12%. African banks’ investment in mostly short-maturity bonds (less than a year) has made the banks less exposed to the rate hikes that have affected the market value of securities. Analysts affirm the positive outlook for African banks, however, for Nigeria, the outlook might be slightly optimistic given the recent demonetization policy that has affected customers’ confidence in Nigerian banks and once the withdrawal limit is relaxed, we believe Nigerian banks might see a sudden large deposit withdrawal which will significantly affect banks’ liquidity. Also, Nigerian banks’ investment in government debt is relatively high and increasing with the large deposit inflow triggered by the naira redesigning policy, slightly raising their exposure. 


UBS's Acquisition of Credit Suisse and the Global Banking Industry

The recent announcement of UBS acquiring Credit Suisse in an all-share transaction for US$3.2bn reflects the current challenges facing the global banking industry. The deal comes amidst concerns over bank solvency and the fear of another liquidity run. This highlights the importance of maintaining financial stability in the banking system and the need for strong regulatory oversight to prevent another financial crisis. Following the news of the acquisition, Credit Suisse's share price opened trading at 1.86 CFA and recorded a drop of 129.63% to close at 0.81 CFA in the last trading session. Meanwhile, UBS Group's share price grew by 1.50%, starting the week at 17.11 CFA and closing at 17.37 CFA. 


Analysts believe that the cancellation of US$17bn worth of Credit Suisse's higher-risk bonds and the Swiss National Bank's loan of up to 100bn francs to UBS to support the deal reflect efforts to mitigate the risk of bank failures and ensure the stability of the financial system. However, the fact that Credit Suisse shareholders, including Saudi National Bank, will receive only a fraction of the bank's US$8.5bn market capitalization is a clear indication of the severity of the situation. This underscores the need for banks to prioritize good management practices, risk management strategies, and transparency in their operations to avoid such situations. Although UBS is larger than Credit Suisse, the latter wields considerable influence in the financial industry, managing over US$1.4trn in assets and operating major trading desks worldwide. The bank caters to high-net-worth individuals through its wealth management business and provides significant mergers and acquisitions advisory services. 


Despite weathering the 2008 financial crisis without assistance, Credit Suisse is now facing a potential legal battle and hefty losses, as part of a deal that will wipe out approximately US$17.3bn in higher-risk bonds. The acquisition of two banks with long histories dating back to the mid-19th century threatens Switzerland's reputation as a global financial centre. The deal puts Switzerland on the verge of having a single national bank that is too big to fail (see chart 1 below).

 

Chart 1:

Chart, line chart, surface chart

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Ivory Coast Set to Join Nigeria, Others in the Enactment of Startup Act

In order to prioritize technological innovation, the Ivorian government has unveiled the Startup Act, a legal framework meant to assist high-potential firms. This act is currently pending legislative approval and will usher in a new era for their entrepreneurial sector. This act was modelled after the Tunisian Act and then adapted to suit the needs of the ecosystem. The government intends to conduct adequate research to meet the demands of the Cote d'Ivoire ecosystem, allowing businesses to compete efficiently regionally and globally. Beneficiary start-ups will have access to additional resources for training, finance, and promotion to support their operation in the ecosystem.

 

Upon approval, Ivory coast is one step closer to joining the league of countries like Nigeria, Senegal, and Tunisia that have enacted their respective Startup Acts. Startup Acts in Africa have an unprecedented history of being a veritable tool for developing a sound startup ecosystem. Nigeria launched its Startup Act last year to address the dearth of issues causing a high startup failure rate in the country. The act addresses issues relating to capital, talent, regulation, and infrastructure to increase the success rate of early-stage startups in Nigeria.

 

E-Bills Payment Falls by 44% Over Cash Crunch 

Analyses of the latest data from the Nigeria Interbank Settlement Scheme (NIBSS) indicated that the volume of electronic payment of bills such as electricity bills, tax payments, toll payments, cable TV subscriptions, hotel bookings, school fees, and airtime top-ups, among others, fell to N90.93bn in February 2023. The payment of bills electronically declined by 44.86% from N164.89 despite the Central Bank of Nigeria’s naira redesign policy. Analysts expected growth in e-bills payments when the CBN announced its naira redesign policy and withdrawal limits in 2022. On the contrary, the policy depressed the economy and affected many businesses as the lack of solid infrastructure by banks for large-scale e-banking led to the failure of many bank apps and POS services, which affected e-bills payment in the first two months of the year (see chart 2 below). 

 

Chart 2:

 

 

 

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