Banks are anticipating increased lending and borrowing activities in the third quarter of the year, driven by expected upsurge in economic activities during the quarter. This was one of the highlights of the second quarter Credit Condition Survey report of the Central Bank of Nigeria (CBN) released last week. The report among other things revealed that, optimism that the nation is firmly on the path to positive economic growth translated to increase in demand and supply for loans, as well as improvement in loan default by households and businesses in the second quarter. The report stated: “The availability of secured credit to households increased in Q2, 2017 and was expected to increase in the next quarter. Brighter economic outlook remained a major factor behind the increase. Lenders reported that the availability of unsecured credit to households increased in Q2, 2017 and was expected to increase further in Q3, 2017. Lenders reported that a favorable economic outlook contributed to the increase in unsecured credit availability in Q2, 2017.
“The overall availability of credit to the corporate sector increased in Q2, 2017 and was expected to further increase in Q3, 2017. The anticipation of a brighter economic outlook was a major factor contributing to increased credit availability in the corporate sector. Demand for secured lending for house purchase increased in Q2, 2017 and was expected to increase further in the next quarter. Despite lenders stance in tightening the credit scoring criteria in the current quarter, the proportion of loan applications approved in Q2, 2017 increased. “Demand for total unsecured lending from households increased in the current quarter, and was expected to increase further in the next quarter. Due to lenders stance on tightening the credit scoring criteria, for granting total unsecured loan applications, the proportion of approved households total loan applications decreased in the current quarter and was expected to decrease further in the next quarter. “Lenders reported increased demand for corporate credit across all firm sizes in Q2, 2017 except from the other financial corporation ( OFCs). Lenders also expect increased demand across all firm sizes in the next quarter, except the large PNFCs and the OFCs. Following the wide spreads between bank rates on all firms’ size businesses and MPR, the proportion of loan applications approved for medium and large businesses decreased in Q2, 2017.”
Volatility in cost of funds to persist
The volatility in cost of funds in the interbank money market is expected to persist this week due to uncertainty over liquidity inflow and outflow during the week. Specifically, there is uncertainty over the amount of liquidity outflow for dollar purchase as well as the issuance of the N200 billion treasury bills announced by the CBN last week. The CBN on Thursday had announced it was going to conduct N200 billion treasury bills issuance on Friday to mop up liquidity in a bid to further reign inflation. Vanguard investigation, however, revealed that the bills were not issued on Friday as announced, fuelling speculations that the N200 bills may be issued this week. Last week, while outflow of funds for dollar purchase jerked up cost of funds to over 100 per cent on Monday, inflow from matured treasury bills worth N164.8 billion caused a reversal to below 20 per cent at the close of business on Friday. Data from the Financial Market Dealers Quote (FMDQ) showed that interest rate for Colateralised lending rose from 17.67 per cent the previous week to 116.7 per cent on Monday, but dropped to 15.17 per cent at the close of business on Friday. Similarly, interest rate on Overnight lending rose from 18.5 per cent the previous week to 126 per cent on Monday but dropped to 15.67 per cent at the close of business on Friday.
Rising expectation of further exchange rate convergence
The improving fortunes of the naira against the dollar in the Investors and Exporters (I&E) window which persisted last week has led to rising expectation of further convergence of exchange rates this week. Last week, the naira appreciated further by N7.99 as the Nigeria Autonomous Exchange Rate (NAFEX) dropped to N365.29 per dollar on Friday from N373.28 per dollar the previous week due to increased dollar inflow into the window. According to the CBN, the window has recorded about $2.2 billion cumulative transactions since it was introduced in April. The appreciation of the naira in the I&E window narrowed the gap between the NAFEX and parallel market exchange rate to N2.29 from N9.50 the previous week.
Though the two rates converged at N367 per dollar on Tuesday, they however went in opposite direction, with the NAFEX declining while the parallel market exchange rate rose. Analysts at Vetiva Capital Management Company were however optimistic that the two rates would move closer this week. “We anticipate further convergence in the FX markets as the CBN continues with its liquidity injections in a bid to shore up the naira”, they said. A similar view was expressed by analysts at Cowry Assets Management Limited. They said: “In the current week, we expect further convergence in the foreign exchange market with possible appreciation against the dollar subject to CBN’s level of intervention”.
Analysts downgrade inflation outlook
The less than expected May inflation rate of 16.25 per cent announced by the National Bureau of Statistics (NBS) during the week have prompted analysts to downgrade their inflation outlook for the rest of the year. According to the NBS the inflation rate declined for the fourth consecutive month in May to 16.25 per cent from 17.24 per cent. This according to analysts at Vetiva Capital was lower than the 16 per cent expected by the market. They noted: “Inflation has consistently lagged behind expectations from the start of 2017. Rising base effects have moderated headline inflation but the drop has been less steep than expected on the back of a surprising consistent surge in food prices. This is despite reduced currency impact and energy price stability easing pressure on Core Inflation. “The supply-driven rise in food prices shows no sign of abating (May m/m food inflation the highest this year) and compels us to adopt a more bearish stance on inflation trend for the rest of the year.
So, whilst we expect base effects to consistently drag down headline inflation, we expect this to happen at a relatively slow pace and project 16.1% inflation in June (previous: 15.2%), bringing 2017 average inflation to 16.5% (2016: 15.6%).” Analysts at Financial Derivatives Company (FDC) also stated: “We expect inflation to ease further in June based on technicality (waning base year effects), among other factors. However, it is unlikely that the inflation rate will slide back to pre-economic crisis levels. This is because inherent structural issues such as high interest rates, weak private and public investments etc. still exist. In the short run, seasonality is expected to eclipse any respite in food inflation as we expect further food price increases. As regards monetary policy, a slowdown in inflation will strengthen the hands of the doves within the Monetary Policy Committee who are clamouring that interest rates are too high.”