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The Markets in Review: Where Have All the Naira Gone? – Coronation Research

Mar 21, 2023   •   by Coronation Research   •   Source: Coronation   •   eye-icon 285 views

Where have all the Naira gone and what has happened to bank transfers? At the end of last week there were still queues at ATMS and people were still experiencing problems with inter-bank transfers. We think that banks will improve their inter-bank transfers and that bank notes will be reintroduced to the system following the Supreme Court’s judgment on 3 March. A new normal will emerge, but it will involve less cash than before, in our view

 

Where Have All the Naira Gone?

What is the effect of the replacement of bank notes? Given the withdrawal of a significant sum of old Naira bank notes, which we estimate as a reduction of N2.3 trillion (US$5.0bn) over four months, we would expect customers’ accounts with banks – both current accounts and deposit accounts – to swell. And this being the case, we would expect banks to become more liquid than they were a few months ago. This has happened, with the weight of money driving down 1-year Treasury bill rates. Inter-bank rates have also declined gently.

 

 

 

As we described a few weeks ago, some of this liquidity has been absorbed by a high level of issuance of Federal Government of Nigeria (FGN) bonds, so the government is benefitting by selling more bonds early in the year than it had planned. At the same time, the Central Bank of Nigeria has not seen fit to mop up liquidity through its Cash Reserve Requirement (CRR). The CRR is the percentage of customer deposits that must be lodged with the CBN, and it is set at 32.5%. CRR deposits do not seem to be much higher today that they were at the end of last year. So, on balance, the withdrawal of bank notes has made the banking system more liquid than it was.

 

The Nigerian payment system 

The other question is about electronic Naira transfers. We conducted a straw poll last week, asking whether people were experiencing problems with inter-bank transfers and just under one third of respondents agreed that they were. A large retailer in Lagos told us that it was experiencing problems with customers’ debit cards and online transactions, though staff thought that things were improving. “I gave the banking system seven marks out of 10 last week,” said one manager, “but the week before I gave it two.” Two weeks ago, plenty of customers could not pay and were returning goods to the shelves. 

 

On 3 March, the Supreme Court ruled that old notes should circulate again, until 31 December 2023, and the CBN instructed banks to enforce this on 14 March. We wonder what logistical challenges the banks now face in reintroducing the same notes which they had taken out of circulation with a deadline of 10 February. At the end of last week, we continued to see queues at ATMs, which shows that problems remain. 

 

Perhaps 10 February was the moment at which Nigeria was to transition to a cashless, or largely cashless, society. Whoever believed that clearly overestimated the capacity of the electronic inter-bank clearing system. The Nigerian Inter-Bank Settlement System reports that in January 2023 that the scarcity of cash had pushed point of sales transaction to N807.16bn. NIBBS reports that, “This is a 40.69 per cent year-on-year increase from the N573.72bn transactions that was done in January 2022. According to the new data from the Nigeria Inter-Bank Settlement System, total cashless transactions in Nigeria rose by 45.41 per cent y-o-y to N39.58trn in January 2023.” 

 

So, it seems that the system was able to deal with a sharp rise in transactions up until January but by March, and according to our own observations, was facing significant challenges.

 

 

What happens next? It seems likely that old Naira notes will be re-introduced into the system over the coming weeks, alleviating queues at ATMs and taking pressure of the inter-bank payment system. And commercial banks will likely invest more in inter-bank payment systems, so we expect the system to improve this year. CBN data shows currency in circulation falling from N3.29 trillion in October to just under N1.0 trillion at the end of February. In our view it is improbable that cash in circulation will rise to N3.29 trillion again. After all, the overall aim is to reduce the level of cash transactions and route more business through card and online systems. Things will improve, we believe, and there will be new normal

 

FX

Last week, the exchange rate at the Investors and Exporters Window (I&E Window) lost 0.07% to close at N461.83/US$1. Elsewhere, the foreign exchange (FX) reserves of the Central Bank of Nigeria (CBN) decreased by 1.02% to US$36.02bn, as the CBN continues to intervene across the various FX windows. 

 

This does not seem to be the time for a change in CBN policy, in our view. The CBN is likely to continue with its policy of gradual loosening of the I&E Window rate while managing FX reserves at close to their historic highs. We expect only small FX rate adjustments over the coming weeks and months.

 

Bonds & T-bills

Last week, the Federal Government of Nigeria (FGN) bond secondary market was bearish as the average benchmark yield for bonds rose by 20bps to close at 13.27%. Across the curve, the yields on the 3-year bond expanded by 75bps to settle at 11.90%, while the yields on the 7-year (14.16%) and 10-year (14.42%) bonds remained unchanged. At the FGN bond auction, the Debt Management Office (DMO) is expected to offer N360.00bn (US$777.82m) across the February 2028 (reopening), April 2032 (reopening), April 2037 (reopening) and April 2049 (reopening) maturities. Our view remains that elevated Federal Government domestic borrowing will drive yields upwards over the course of the year. 

 

Activity in the Treasury Bill (T-Bill) secondary market was bearish as the average yield for T-bills rose by 173bps to 5.36%. The yield on the 356-day T-bill closed at 8.68%. At the T-bill primary auction, the DMO offered and allotted N161.87bn (US$349.73m) worth of bills. Demand was strong relative to the last auction. The auction recorded a total subscription of N1.10tn, implying a bid-to-cover ratio of 6.77x (vs 2.79x at the last auction). The auction result was mixed as the stop rate on the 91-day bill rose by 111bps to 2.55%, while the stop rate on the 182-day (-100bps to 5.00%) and the 364-day (- 51bps to 9.49%, implying a 10.48% yield) bills declined. Elsewhere, the yield on the 46- day OMO bill remained unchanged at 3.01%.

 

Oil

Last week, the price of Brent declined for the second consecutive week, down 11.85% to settle at US$72.97/bbl. This was the largest weekly decline since August 2022. Brent is down 15.06% year-to-date and has been trading at an average of US$83.08/bbl, 16.15% lower than the average of US$99.09/bbl in 2022. Oil prices declined following concerns that recent turmoil in the global banking sector could cause a recession and a decline in fuel demand. That said, we expect a breather this week following news of the Swiss bank UBS buying its stricken rival Credit Suisse in an emergency rescue deal aimed at stemming panic in the banking industry. 

 

We maintain that oil prices are likely to average well above the US$75.00/bbl set in Nigeria’s government budget for 2023, expecting that a strengthening Chinese economy will drive global oil demand going forward.

 

Equities

Last week, the NGX All-Share Index lost 1.58% to settle at 54,915.39 points. Consequently, its year-to-date return slipped to 7.15%. Ecobank Transnational Incorporation (-10.00%), Access Holdings (-8.20%) and Oando (-7.24%) closed negative while BUA Foods (+4.21%), Unilever Nigeria (+3.70%) and Honeywell Flour Mills (+2.27%) closed positive. 

 

Performances across the NGX sub-indices were broadly negative as the NGX Banking (- 4.59%) sub-index led the losers, followed by NGX Pension (-2.73%), NGX Insurance (- 2.45%), NGX-30 (-1.56%) and NGX Industrial Goods (-0.27%) sub-indices. The NGX Oil & Gas (+0.00%) sub-index closed flat while the NGX Consumer Goods (+1.11%) sub-index closed positive. 

 

Model Equity Portfolio

Last week the Model Equity Portfolio lost 1.37% compared with a fall in the NGX All-Share Index of 1.58%, outperforming it by 20bps. Year-to-date it has risen by 8.03% compared with a rise of 7.15% in the NGX All-Share Index, outperforming it by 88bps

 

 

Last week, it seemed the market took a breather after three consecutive weekly gains, driven by selloffs in MTNN, Geregu and most tier-1 banking names. While we held our all notional positions from the week before, our underweight position in MTNN helped cap our losses. However, our overweight notional positions in Zenith Bank and GTCO also cost, something which may be attributable to the global bearish sentiment for bank stocks in the wake of bank failures and efforts by global regulators to prevent contagion. Nevertheless, we look forward to the FY 22 earning reports of Nigerian banks and their dividends. We expect to see a rally off the back of strong performances and positioning ahead of the dividend announcements. 

 

We are also pleased with the positive contribution from BUA Foods in which we are currently index-neutral. We plan no changes this week.

 


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