Friday, February 27, 2015 3:00 PM / ARM Research
The CBN released a circular reminding all banks to facilitate the transfer of all Ministries, Departments, and Agencies’ (MDAs) revenue bank accounts to the Consolidated Revenue Fund (CRF). The circular also emphasized banks responsibility of sensitizing and setting up an internet banking platform for government’s revenue payers, who will henceforth use the platform in transferring government’s funds. This circular reinforces an earlier reminder by the Accountant General of the Federation on the 24th of February 2015, mandating 28th of February 2015 deadline for MDAs’ deposits to be transferred to the Treasury Single Accounts (TSA) be adhered to.
The TSA is a unified structure of government bank accounts that gives a consolidated view of government cash resources whereby all funds belonging to the Federal Government are domiciled in one account with the Central Bank of Nigeria, with payments out and collections into the account done via an electronic payment platform. The system, along with Government Integrated Financial Management Information System (GIFMIS) and the Integrated Payroll and Personnel Information System (IPPIS), is part of measures the government is putting in place to optimise the use of its funds.
FG revenue search could turn up interesting finds
In line with our expectations, pressures to government revenues following the slide in oil prices have resulted in a contractionary fiscal stance. However, the onset of 2015 general elections, which pits the ruling party with a formidable opposition, limits options available for significant expenditure reduction and induces a shift in FGN emphasis to plugging leakages. In many respects the move is unsurprising as the belt-tightening that the current environment demands must begin in earnest at some point. Indeed, the real question is why it was not done sooner as the cost-saving benefit appears self-evident considering the negative spread implied by the rate at which government borrows versus more muted returns on its significant deposits.
Overall, efforts to address the revenue pinch remain evident in other measures such as cutting overheads, including foreign trainings, and working to raise taxes. Regardless, the impact from these measures (including TSA) may not resonate strongly as reforms to address the domestic leg of the revenue problems from source, including control of vandalism and metering. But perhaps it is only a matter of time before the FGN’s focus switches to this direction.
Banks face dehydration shock but are withdrawal symptoms of more concern?
One economic segment that will clearly feel the impact from the TSA directive is the banking sector. First, the overnight loss of
N2.8 trillion of FG’s deposits sitting within the banking system is certain to result in a significant loss of revenue from ‘float’ as the overall fund flows reduce.
However, after prior public sector CRR hikes (to 75%), the immediate impact is limited to an additional
N689 billion to be withdrawn. Regardless, this is no small amount, especially given the tight liquidity conditions. Already the impact over the last two days is evidenced by increased activities in the SLF window, an average of N55.4 billion3] in February 2015 (January 2015: N3.6 billion) as well as spikes in O/N NIBOR rate.
In tandem with the revenue pressures, we also expect a significant scramble for deposits, either via this measure of SLF or through inter-bank borrowings, to drive aggregate borrowing costs within the banking sector higher. In all, we expect the excision of FGN deposits to exacerbate earnings pressures for the banks going into 2015. However, the real impact of this move is the future starvation of the financial system from the FAAC allocation on which it is currently dependent, given its historical influence in providing much needed liquidity to the system.
In our view, the directive adds another layer of pressure to the multidimensional pressures facing equities, in general, and the banking industry, in particular, with the deluge of CBN circulars restricting income generating activities, impact of currency devaluation and potential associated delinquencies and limited asset-creation appetite by the banks themselves dampening earnings outlook. Indeed on the latter leg, massive loan callbacks or non-disbursement is a likely corollary of efforts to comply with the TSA directive.
At first glance this dour dynamic would appear to be replicated in the fixed income space as the confluence of direct withdrawals, SLF-tapping and deposit pursuit would firmly hint at higher yields. However, we believe the current situation significantly alters supply-side dynamics which was the primary consideration in setting out strategy for the year.
In summary, FG’s need to fund its deficit and the probability that it will be forced to look inward to do this informed a view that sovereign domestic paper supply would rise and lead yields higher. Whilst this has largely materialized, recalling the dominance of recurrent expenditure in the budget, we see the new directive as a material change in terms of FG operations that could potentially curb the extent of bond issuance.
Furthermore recent Eurobond issuance by some African sovereigns at reasonable rates suggests the ‘foreign option’ may not be as closed as we initially thought, although there are other considerations at play. In all, whilst we continue to expect the deficit to be larger than projected, the foregoing, combined with mild recovery in crude prices over the last few weeks, suggests the ascension in yield levels may not be as marked, from current levels, leaving only the small matter of keeping an ear on political noise decibels.