Keynesian’s idea of a Macro stabilizer: AMCON a case study.

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Monday, 13 October 2014 2.45PM / Babalola Temitope / CoffeePost       


The Asset Management Company of Nigeria at the end of 2013 its revenue across board rose by 38.7% from 203.57 billion naira to 293.78 billion naira.

Core inflow in 2013 grew by 33% to add 53.2 billion naira y/y to net inflows, while net inflows was  72.4% of the whole revenue composition of 2013 compared to 80.1% of 2012. Inflows arising from operational activities climbed upwards by 151% to add 43.1 billion naira y/y; this is as a result of improvement in both fair value and operational income. The chunk of other comprehensive inflows revenue shrunk by 0.51% to stand at 5.89 billion naira compared to 11.996 billion naira; inflows was reduced due to lighter foreign currency translation gain compared to 2012.The core expenses and operating expenses stood at 556.84 billion naira and 121.17 billion naira respectively. When compared to the previous year when core expenses rose slightly by 1.9%. While on the other hand operating expenses was reduced by 40.8%. In   2013 the trading profit and loss account was more vulnerable to impairment loss. Which impairment losses in 2013 rose by 57% when compared to 2012; which is both internal and external? We feel the passage of time seem to be eroding the market value of assets available for disposal, which is more of an external effect. The Increased cost attributed to discontinued operation and Increase exposure of physical damage and obsolesce to asset left idle.


This is reflective in the increase loses attributed to asset discountinued. These two factors make the internal factors, which also made write back passive in the trading activity of 2013. Fair value in its entirety in 2013 provided an inflow of 20.9 billion compared to the previous year where it provided an out flow of 104.73 billion. Although expenses attributed to cost centres, which do not have cash outlay such as depreciation offset revenue as passage of time keeping rolling on. At the same time there have been an increase in asset disposal and a stronger market value compared to 2012. The net loss margin climbed by 2.13% from 497.8 billion naira to 508.4 billion naira, while total loss margin shrunk by 10.19% from 702.7 billion naira to 627.59 billion naira. This was primarily as a result of both subdued credit loss expenditure and operating expenses.



Fig3: A chart displaying the comparison loss differential between 2012 and 2013 AMCON at the end 2013

The loss to be borne by equity share holders shrunk by 10.8% and the loss to be borne by non controlling holders rose by 358% at the end of 2013. While the total loss to be borne by equity holders shrunk by 9.8% and the burden of loss to be borne by non controlling holders rose by 358%. At the end of 2013, the size of its asset reduced by 3.55% from 2.62 trillion to 2.53 trillion, while its liability rose by 1.40% from 5.93 trillion naira to 6.03 trillion. 



 In 2010 we were in a position which supported a “stability vehicle” giving the prevailing condition as at then; in the wake of the global crisis when there was a wide spread of nonperforming loans, many nations were exposed to high debt to gross debt and sluggish growth. We had a strong margin of safety as external debt to Gross domestic product was low and most of the non performing loans were denominated in the Naira fiat. We still retained our monetary sovereignty, although defending the existing exchange band became more stressful due to earlier downward movement in oil prices and depleted revenue. Risk premium on fixed instruments began to retreat as most economies began to employ loose monetary policies.  Obviously we did not need to let the banks fall compared to Iceland where most of its bank were exposed to foreign debts but majority of the non performing loans in Nigerian banks were denominated in naira asset. Using both domestic money and bonds to serve as an instrument of stability on one hand and at the same time reinforce structural guards in a more flexible manner.


This seemed to be a better way out and why? We will be shutting the door against growth needlessly for structural reform, in attempt to let the banks fall. While some felt we were throwing good money after bad money but in reality we were taking bad loan or rather “bad money” out of the banking sector using domestic bond. At the same time some analysts were quick to point out we had caught the “big to fail fever”.  Well the question of when to let banks fail is determined by the nature of such bad loans and the possible ripple effect weighed against all options. Many times we are never certain of the depth of macro slump in reaction to a rigid structural reform. Especially when it might erode price stability in a mono economy, certainly the aftershocks will be enormous. In recent times banks are left to fall when the cost of rescuing such bank becomes a bigger burden on growth on the long run compared to letting it go under e.g. Iceland. In addition a balance approach is best used. Therefore the apex’s bank chooses to absorb the debt by securitizing the toxic asset and in return contain the existing rippling effect.


While the central bank will gradually begin to reverse the policy on the medium term, so as to allow structural policy take foot. In certain forms this policy of absorption of toxic asset on the medium term has also been adopted by the European central bank (ECB), Banks of Japan (BOJ) and Federal Reserve Bank. Therefore AMCON became a stability “vehicle”. Eventually we were reducing the level of volatility in the market and at the same time avoided a deep slump.


The conditions which supported such deep accommodation are gradually waning as push effects seem to be emboldened and how?  While the low rate climate experienced in the United States will last for some time but we feel it can begin to rise within an 18 month corridor. This will begin to trigger an increase in the cost of foreign debt and also as the domestic currency keep losing space. In addition as at August 2010 external reserve began to pick up from 38.09 billion dollars as a result of a more consistent rise in oil price. On the other hand from June of 2014 oil prices have been on a descent, touching a 2 year low of 90$ a barrel in October. In 2010 the average amount of crude produced was 2.47 million per barrel but so far the average amount of crude produced per day has been 2.25million barrel per day.  Certainly in the near term we will be left to sterilizing instrument to stir domestic growth as foreign buffer will be under pressure. Therefore a rise in other liabilities in AMCON balance sheet by 183% from 597 billion naira in 2012 to 1.689 trillion naira in 2013 will weigh heavily on the balance sheet and reduce the space for monetary manoeuvring. A lighter balance sheet which involve reduction in the size of liabilities and improved retain earning will improve discretional liquidity.


We are of the opinion that a wider space of discretional liquidity supports a more flexible monetary policy. Although there have been an increase level in asset sale by AMCON but factors such as continuous passage of time will strengthen  the effect of impairment loss on the trading profit and loss. At the same time there is a possibility of carrying cost of net asset of entities held presently to exceed its present market value. Therefore it is important that an increase pace of winding down should be employed by AMCON. While we do believe that active stabilization is needed to prevent either short run difficulties to become a long term or build up to hysteresis; like what is experienced in the European Union. At the same time on the medium term the idea of reacting to shocks might be hampered if there is a pattern of rising liabilities and thinning out of soft landing position.


Source: Coffee Post

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