Wednesday, April 25, 2012 / ARM Research
 

The CBN recently released figures for monetary aggregates for March 2011. Broad money (M2) was restrained, rising 14% YoY to N13.3 trillion, and basically flat (-0.3%) year-to-date. Incidentally, government spending (via FAAC-disbursements) for the quarter stood at ~N1.8 trillion, a 17% QoQ rise from N1.6 trillion in Q4 2011, but appears to have been tempered by CBN’s OMO activities.  Restraint was also reflected in similar growth in Net domestic credit, the 2.1% rise in Net foreign assets which moderated the 4.3% dip in narrow money (M1) during the period.
 

Perhaps the most important item was credit to private sector (CPS) which, at N14.2 trillion in Q1 2012, was also flat QoQ and 1.1% higher MoM, despite a ~50.7% YoY jump. The YoY rise reflects, in part, the base effect of AMCON purchases in Dec 2010 and Q1 201--adjusting for these purchases moderates the YoY increase in CPS to 14.3%--but also reflects a rather strong jump in H2 2011 which post-dates the sharp rise in fixed income yields.

 
Figure 1: M2 and CPS Trend 


Source: CBN, ARM research

The trends appear to corroborate patterns discernible in the recently released financials of domestic banks which highlights much slower loan growth relative to investment securities. This may reflect shifts in preferences on the back of significant provisioning—particularly in Q42011—in favour of the relative safety of government debt in the light of higher prevailing yields. We also conjectured that sharp growth in Q4 2011 may have been reflective of attempts by banks to re-denominate existing NPL ratios to avoid forced sales of loan exposures considered at risk by CBN to AMCON at unfavourable terms. We also highlighted the possible impact of industry-wide competition for prime corporate borrowers on lending decisions. All these reasons could plausibly explain the sharp rise and subsequent flattening of CPS growth over the past six months. 
 

A more cautious outlook                           

At the last release of monetary data in March (see Daily Market Commentary 23^rd March 2012), we outlined our view that credit to private sector will reflect moderate but sustained growth in 2012, basing this expectation on likely monetary trends and fiscal reforms which would simultaneously increase cut public demand for bank funds and create alternative opportunities to deploy assets. We have since noted the CBN’s adamant support of interest rates and government’s apparent lethargy in pushing through initiatives scheduled for 2012. While this does not fundamentally alter our outlook for CPS growth, it does suggests that much of the growth in 2012 will likely materialise later in the year to coincide with the new timelines we envisage for the corresponding monetary and fiscal drivers. 
 

Nevertheless, the current stall in CPS growth may contain valuable information on outlook for the consumer sector which is not altogether positive. In particular, corresponding with the slew of adverse themes, including a likely decline in discretionary spending, disruptions in supply chains from unrest in the north and high borrowing costs, flat CPS may also reflect weaker uptake from suppliers and distributors, presaging softer operating performance among consumer goods companies. This phenomenon has been discernible in the performance of PZ, the only one of major consumer companies to have reported financials that reflect a period that extends into 2012, thereby reflecting the impact of these factors. If this happens to represent a template for other players, the market may be in for some disappointment, especially since some segments, particularly brewers, have already seen healthy rallies thus far in 2012.  

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