December 20, 2019/Coronation Report

Conditions for a credit boom in place
                
Since October Nigeria has operated a two-tier interest rate system (see chart, below), resulting in steep declines in T-bill rates (page 5). Combined with the Central Bank of Nigeria’s (CBN) tough lending targets for banks, the results are deep cuts in commercial borrowing rates.

Economic opportunities, economic risks   
 
It is easy to understand the potential of these policies to stimulate the economy: it is also easy to see the risks. A build-up in bank loans without adequate and compensating growth would likely cause credit stress, not to mention a build-up in inflationary pressures. 

Foreign investors, foreign exchange
        
High risk-free Naira-denominated interest rates are still available to foreign investors (page 8) as they are still allowed (unlike domestic institutions) to buy the CBN’s open market operation (OMO) bills. There are question marks over foreigners’ comfort with the new rules, which may prove significant as foreign portfolio investment is important to maintaining the CBN’s FX reserves.
      
On the other hand, the CBN has other routes to foreign exchange and, although the pressure on reserves recently has been strong, we believe the CBN can hold the exchange rate at close to the current N360/US$1 for at least the first half of 2020.

Are the banks up to the job?
             
The issue that comes up repeatedly in our study of current policy is the small scale of Nigeria’s banks relative to the economy they serve. Total bank credit amounts to just 12.8% of GDP. This means the potential economic effects and risks of these policies are limited (though the banks themselves may still encounter problems if the policies don’t work). The CBN Governor already has argued for higher bank capital, a theme which we expect to see taken up again in 2020.

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