Sovereign Analysis / Nigeria

Nigeria: Muddle through is the new normal

  • The recent NGN devaluation is a positive step, but policymakers probably lack the will to see it through to the end
  • Government has paid lip service to diversifying the economy away from oil and gas, with little to show for their efforts
  • If government continues to prioritise FX stability then growth will remain stagnant

The Covid crisis and collapse in oil prices (c85% of Nigeria’s exports, c50% of revenue and c8% of GDP) has hit Nigeria hard, with real GDP growth expected to drop from 2.3% in 2019 to -3.4% in 2020. However, low growth is not new to Nigeria, averaging an anaemic 1.2% annually over the past five years and only once surpassing the population growth rate of 2.6%.

While the government has paid lip service to diversifying the economy away from oil and gas, there has been little to show for their efforts. The Economic Recovery and Growth Plan (ERGP) that government rolled out in March 2017 in response to the 2014-16 oil crash envisioned a growth rebound to 7% by 2020 (see our initial take on it here), but numerous structural factors have led to a lack meaningful progress on industrialisation since then.

However, despite these challenges Nigeria was able to achieve robust growth rates averaging c7% in the decade prior to the 2014 commodity crash. Why, then, does Nigeria now appear to be stuck in the mud with structurally low growth?

A silver lining has emerged from the recent oil crash, with the Central Bank of Nigeria (CBN) devaluing the official NGN exchange rate by 15% and the Importer & Exporter (I&E) rate by 4% against the US$. However, we do not believe the recent devaluation has gone far enough and doubt the government’s stated commitment to unify its multiple exchange rates under one market-determined rate. Barring further liberalisation of the FX regime and wider fiscal reform, we think Nigeria will continue to muddle through as it has done for the past five years.

We explore all these issues in depth in our full report, which is available for Insights Pro subscribers.

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Flash Report / Uganda

Uganda: Industry NPLs are rising, led by weak personal loans as economy slows

  • GDP outlook downgraded to 3.0%-4.0% with outlook remaining gloomy.
  • Personal household NPLs rise 47% qoq with job cuts continuing to bite.
  • Overall industry ROE declines to 16.0% on spike in cost or risk and higher operating costs.
Faith Mwangi @
Tellimer Research
25 June 2020

Bank of Uganda released statistics showing that the overall industry NPL ratio increased to 5.4% in Q1 20 from 4.7% in Q4 20, following a 15% qoq rise in gross NPLs. The regulator projects that the NPL ratio will rise to 6.3-12.3% over the next six months. Foreign currency loans, personal household and agriculture were the most affected segments, with gross NPLs rising 35%, 47% and 22% respectively, on a qoq basis. The regulator reduced its GDP projection to 3.0-4.0% for FY 2019/2020, compared to the earlier projection of 6.0-6.3%.

Other key highlights from the report include:

  1. Private sector credit growth was a mere 0.2% qoq. There was a notable decline in lending to trade (-2.2% qoq), manufacturing (-3.5% qoq) and agriculture (-2.4% yoy). Similar to Kenya, Uganda is facing lower residential property prices which will lower collateral values. We anticipate this to be matched by a higher cost of risk across banks.

  2. 80% of industry NPLs are from agriculture, trade, building and construction, and personal household segments, which individually account for 24%, 25%, 17% and 14% of total NPLs respectively. We expect the reprieve offered by the regulator to restructure loans affected by Covid-19 to help soften the impact of rising non-performing loans. Unlike Kenya, the regulator has not released any statistics regarding restructured loans in the market.

  3. Total assets grew 2.3% qoq with a notable increase in foreign exchange assets which grew 7.3%. Foreign currency loans grew 1.8% qoq. The increase in foreign currency assets is a considerable risk in light of the weakening shilling and the 35% qoq jump in non-performing loans among foreign currency-denominated loans.

  4. Customer deposits increased 3.1% qoq. Foreign currency deposits rose 4.2% qoq compared to the 2.4% qoq growth in local currency deposits. In Q1 20, the banking industry faced lower liquidity levels amidst the economic slowdown, leading to increased interbank rates and increased competition for deposits.

  5. Industry ROA and ROE reduced to 2.8% and 16.0% respectively in Q1 20. This was lower than the 2.9% and 16.8% recorded in Q4 19. We believe most of this was as a result of a sharp rise in cost of risk. Net interest margin remaining fairly stable at 11.1%.

  6. Tier 1 capital was 21% and Tier 2 was 22.6%. This was higher than the 20.1% and 21.8% in Q4 20. Bank of Uganda directed banks to not pay 2019 dividends in order to shore up capital buffers.

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Macro Analysis / Global

Key events in EMEA and Latam next week

ING Think
3 July 2020

Russia: Expect higher inflation and a wider budget deficit

Russia is likely to see CPI growth accelerate from 3.0% year-on-year in May to 3.3% YoY in June. This will largely be the result of the low base effect of June 2019. The Bank of Russia has indicated that an acceleration of CPI in the direction of the 4.0% target is to be expected, therefore the pick-up in inflation is unlikely to threaten the 50bp downside to the key rate in the second half of the year. Meanwhile, the pick-up in gasoline prices as well as other non-food items on protectionist measures and the post-lockdown recovery in activity will remain factors to watch.

Balance of payments data for 2Q20 is likely to show resilience in the current account, which is likely to show a surplus close to the US$10bn figure in 2Q19, as the drop in oil revenues is being offset by the drop in imports of goods and services, as well as by lower dividend outflows. Meanwhile, some acceleration in private capital outflows, modest portfolio inflows into the local bond market, and a likely reduction in the central banks’ FX sales are factors that are likely to limit ruble appreciation in 2H20.

We expect Russia’s federal budget deficit to continue widening in June, as the recovery in oil prices is ‘darkened’ by the OPEC+ mandated cut in the oil production, while spending growth has likely remained high. Ahead of the vote on constitutional amendments, increasing social guarantees to the population and widening the powers of the president (and allowing the current one to nominate himself in 2024 and 2030), President Putin has increased the overall fiscal stimulus package from 3.5% to 4.0% of GDP, targeting both social payments and support to business. The 7-day voting concluded with 78% ‘in favour’ with a 65% turnout. With around 40% of the population directly dependent on the budget, fiscal policy is likely to remain an important tool in supporting household income.

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Macro Analysis / Russia

Russia: Industrial production fall poses risk to unemployment, income in H2 20

  • Industrial production dropped 9.6% yoy in May despite budget expenditures growing 26% yoy in 5M 20
  • May retail trade dropped 19.2% yoy as expected; salary pattern and 6.1% unemployment surprised on the upside
  • Cost cutting by large companies is the main risk for Russia in H2 20
Natalia Orlova @
22 June 2020

Russia’s retail trade dropped 19.2% y/y in May, which is not surprising, in our view, considering the longer-than-expected lockdown. The 1% y/y increase in nominal salaries in April and 6.1% unemployment rate in May were a positive surprise, confirming our disappointment with the 100bps CBR rate cut. The pause in the policy rate cut cycle, signaled by the CBR on Friday, and a strong ruble leave large Russian companies with a high level of uncertainty, which could push them to focus on cost-cutting in 2H20.

Retail trade dropped 19.2% y/y in May in line with our expectations: Retail trade dropped by 19.2% y/y in May which came well below market expectation of 17% y/y contraction, but in line with our expectation a 19% y/y drop. This points to some recovery from the 23.2% y/y revised decline in retail trade in April, however the figure remained weak due to the continuing lockdown in Moscow and a number of other regions during May. Light vehicle sales were down 52% y/y in May, just a modest improvement from 72% y/y collapse in April. Another important observation from the retail trade data is that, as a result of the lockdown, the share of food in the food plus non-food consumer basket jumped to 55% in May, well above the 48% average seen in 2019 – at the moment it remains unclear if this a temporary shift due to the lockdown, or if it is already a showing sign of increasing poverty.

Salary pattern and 6.1% unemployment surprised on the upside: While the strong contraction in retail trade is not surprising, the unemployment figure for May has surprised on the upside. While we did not rule out that this indicator should go to 6.5-7.0% level given that the size of officially registered unemployed continues to increase at a scale of 0.7mn people per month, Rosstat has reported the unemployment rate at just 6.1% y/y, which is very low versus the 13% unemployment reported in the US. Another positive surprise is that nominal salaries reported for April continued to increase by 1% y/y, which translated into a 2% y/y contraction in real salaries. All in all, the income side seems to perform in line with our expectation of a 5% y/y contraction in real disposable income for 2020, which we see being positive. Both salary growth and unemployment figures confirm our disappointment with a 100bps rate cut by the CBR last Friday, which looks too steep for us.

Industrial production dropped 9.6% y/y in May despite budget expenditures growing 26% y/y in 5M20: The fact that the industrial production slid into a deeper contraction in May, below the 6.6% contraction in industrial production reported for April, was a negative part of the Russian growth story last month. We believe that the poor May results was mainly due to the new OPEC+ agreement on production cuts which caused a contraction in Russian oil extraction of 13.5% y/y in May versus a 3.2% decline reported for April. As for manufacturing, output contracted by 7.2% y/y in May versus a 10% y/y decline reported for April. That said, the Russian federal budget expenditures growth of 26% y/y in 5M20 versus 24% y/y in 4M20 shows strong fiscal stimulus but the IP growth response was very weak. Additionally, our concern is that electricity consumption was down 6% y/y in June after declining only 5% y/y in May and 3% y/y contraction in April, implying that industrial output is unlikely to deliver a stronger recovery in June.

Cost cutting by large companies is the main risk for Russia in 2H20. According to the Economy Ministry Russian GDP contracted by 10.9% y/y in May after being down 12% y/y in April; this implies that 2Q20 GDP will contract by around 9% y/y which we see being rather positive. At the same time, there are growing risks that the recovery in 2H20 could be weaker than we initially expected. First, there are no longer hope to supportive economic policy: the CBR last Friday has guided the market for a possible pause in the rate cut cycle. The ruble exchange rate is much stronger than we had expected it to be these days. The fears of a second wave of pandemic are dominating the markets and industries. Our concern is that the high level of uncertainty will trigger large companies to optimize their costs and generate higher pressure on income and unemployment in 2H20. While the beginning of Covid-19 pandemic was associated with SME risks, it could now be that the recovery will be delayed due to potential cost-cutting from large corporations.

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Flash Report / Kenya

Kenya: Restructured loans escalate as Covid-19 bites; negative for banks

  • Kenya banks have restructured a total of KES360bn in loans as at June 2020
  • This is negative overall for banks because of the risk of these newly restructured loans defaulting on payments later
  • We expect banks’ asset quality to continue to weaken in Q2 20
Faith Mwangi @
Tellimer Research
17 June 2020

According to the Treasury Cabinet Secretary, Kenya banks have restructured a total of KES360bn in loans as at June 2020. This represents 13% of total loans and is an increase from the 9.6% reported by the Central Bank of Kenya in April. Of these, personal household loans accounted for 53% of total loans restructured against a backdrop of continued job losses and pay cuts as well as shutting down of key employment sectors including tourism and horticulture from the Covid-19 outbreak. This is negative overall for banks as the escalating restructured loans may end up defaulting in the long term – the current restructuring measures may only be a stop-gap in the short term.

In addition, since the Central Bank of Kenya is overseeing the restructuring of loans and only granting them where the borrower has been negatively impacted by Covid-19, restructured loans would then represent potential asset quality weakness in the future. This is especially so if the economic pressure worsens, impacting the ability for loans to be repaid under the restructured terms. Overall, this would be of considerable risk to banks as increases in cost of risk would negatively impact earnings.

Although the Treasury Cabinet Secretary did not provide a breakdown of the full figures for restructured loans in June, we have relied on the central bank’s most recent figures for April and individual banks’ reported numbers for Q1 20 for our analysis (see full report).

One of our main concerns is that across banks, there seems to be no uniformity on how the restructured loans are treated. At present, the non-uniform nature of reporting has meant that some banks have downgraded the loan quality ranking of the restructured loans while others have kept it the same. There have also been no clear-cut criteria on how restructured loans are ranked in the different IFRS 9 stages. However, given how the pandemic developed towards the end of Q1 20 in Kenya, we expect Q2 20 numbers to have more uniform reporting as most restructurings were done within Q2 20 and because the central bank has been offering guidance to the banks on how to treat the restructured loans.

The overall industry NPL ratio was 13.1% as at end-April 2020 compared to 12.5% in March 2020, according to the Central Bank of Kenya. The top 7 banks (which account for c63% of total loans) had restructured 7% of loans at the beginning of April, and 3% in March.

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