The increasing outflow by foreign portfolio investors (FPIs) is taking its toll on Nigeria’s external reserves, which has fallen to $47.388 billion as of last Friday.
The current position of the reserves represents a decline by $411 million since this month, compared with the $47.8 billion it was at the beginning of the month.
Aside the external reserves, the rise in the level of outflows has also continued to impact negatively on the country’s stock market.
According to the Nigerian Stock Exchange (NSE), outflows from the market spiked by 125 per cent in May. The NSE had also revealed a 3.45 per cent decrease in foreign inflows to N62.06 billion (US$172.3 million) in May.
But analysts at CSL Stockbrokers Limited noted that: “Rising foreign outflows are not coming as a surprise to us.
“Indeed, the recent rise in global bond yields particularly in the US continues to fuel sell offs in emerging and frontier markets. We note that the US Federal Reserves has hiked rates twice in 2018.
“The Federal Reserves has also guided the markets to two more interest rate hikes in 2018.”
With this in mind, they stressed that FPIs into the Nigerian market will remain muted as investors seek higher risk-adjusted yields elsewhere.
“Inasmuch as Nigeria’s economic fundamentals continue to strengthen, (underscored by the prospect of higher GDP growth, easing of inflationary pressures, improved liquidity in the forex market, all of which are expected to support company earnings), we believe global uncertainties combined with a less attractive carry trade on a risk-adjusted basis will continue to undermine capital flows to Nigeria.
“On the domestic front, election uncertainties in the run up to the 2019 elections also mean investors will stay on the sidelines, and this will weigh on activities,” CSL Stockbrokers Limited added.
Meanwhile, the pan African credit rating agency, Agusto & Co., has attributed the decline in banking sector lending to the stringent regulation in the system.
Agusto & Co. stated this in its latest Banking Sector Report made available to media source.
According to the firm, regulation continues to squeeze funds available to the banks for lending thereby increasing cost of funds.
Apart from regulatory liquidity requirements which demands banks to reserve a minimum of 30 per cent of assets in liquid or ‘near cash’ assets, the cash reserve requirement (CRR) is also a major drag on profitability, Agusto & Co stated.
The Central Bank of Nigeria’s (CBN) official CRR currently stands at 22.5 per cent (or 27.5% for banks that are unwilling to lend to sectors prioritised by the CBN).
“However, the effective CRR for some banks is as high as 31 per cent given CBN’s tight monetary policy stance. This implies that the industry has only about 47.5 per cent of its deposits available for lending. “Banks preferably lend these funds to top tier large corporates (with a concession on rates) to avoid further deterioration in asset quality,” the report added.
In addition, the report noted apart from banking sector asset quality issues which have negatively impacted the financial institutions’ interest income, there has been a shift in lending preference to top tier corporates in a bid to reduce risk in the industry’s loan book.
“These corporates, which are perceived to be less risky are typically interest rate sensitive and are often granted concessions in form of interest rates reduction.
“Income from investment securities (which are largely in risk free government debt securities) is also on a downward trend due to fiscal strategies aimed at refinancing local currency debt with foreign currency debt raised from the international market,” it added.
The report showed that banking industry’s earnings grow at an annual rate of 13 per cent in three years, despite downturn in the economy.
It, however, noted that over the last three years, the industry’s core lending business has been adversely affected by persistent weaknesses in the macroeconomic environment which resulted in major asset deterioration for even Tier I banks.
“In addition, the Industry’s margins are thinning out; thus, putting pressure on profitability. Historically, at monetary policy tightening episodes, interest rates paid on deposits tend to rise slower than interest rates charged on loans, allowing banks increase their net interest spread.
“While this trend has forestalled a significant decline in the Industry’s NIS over the years, we have seen a different pattern in the last few years. Despite the gradual rise in MPR since 2012, the industry’s NIS has maintained a downward trend,” it stated.
