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Sunday, May
31, 2020 / 09:00 PM / Coronation Merchant Bank / Header Image By @coronationmb
Despite the uncertainties
in economy, Coronation Merchant Bank remains optimistic that there are yet
investment opportunities in Nigeria's economy. This was disclosed by a team of
analysts at the Coronation Breakfast Session, tagged "Discovering the New
Normal: Impact of COVID-19 and Collapse of Oil Prices" that held recently in
Lagos.
The breakfast session
which held via an online video conferencing platform had in attendance business
executives from various sectors of the economy. While giving his opening
remarks, the Managing Director of the Bank, Banjo Adegbohungbe stated that: "there
is a new reality that has enveloped the whole world and Nigeria is not immune
to these changes. These are very uncertain times and our intention is to
provide clarity. We believe this is the most critical thing organizations need
to navigate their path forward in this unchartered terrain".
Head, Research, Coronation
Asset Management, Guy Czartoryski, analysed the shifts in economic power that
the COVID-19 pandemic and the fall in oil prices are bringing to the world and
outlined what Nigerian companies need to do about them. According to the
research expert, China will grow by over 10% over the two years 2020 and 2021,
gaining ground over the US and Europe while in Sub-Saharan Africa, Ethiopia,
Ghana and Kenya will move ahead.
"In terms of the real
sector, manufacturing is just about still growing, it had 0.4% Y-O-Y growth in
the first quarter of the year. However, the impact of the shortage of raw
materials on the supply side as well as reduced consumer expenditure on the
demand side may ultimately result in a recession for the sector".
On the impact of the twin
crises of COVID-19 and low oil prices on the Nigerian economy, COVID-19 looks
like the lesser threat. Although there are many uncertainties around the spread
of the disease, one asset Nigeria has is its youth, with 93% of its population
under the age of 55 and 62% under 25. It appears that the disease strikes
hardest those who are elderly and with pre-existing medical conditions.
Oil prices are rallying at
the moment, with Brent crude up to $35.0/bbl from its lows of under $20.0/bbl
in early April. However, there is no certainty about oil prices later this
year, and we know that the nation's finances work best when Brent crude is
trading over $50.0/bbl. So, it is prudent to think about how to conduct
business during a period of prolonged low oil prices, just in case oil prices
do not reach $50.0/bbl soon.
Commenting on how
businesses can hedge their exchange risk in the current business environment,
Iyobosa Sorae, Treasurer of the Bank stated that: "Businesses can go into a
bi-lateral forward agreement with either a bank or an exporter to close forward
transaction. This way, they can mitigate their exchange rate risk by agreeing
on a forward rate and settling against that rate on a pre-determined
date. In addition to this, the Central Bank of Nigeria has worked so
hard, especially when you consider the NDF platform that has been put in place
for the market. All of this was to take into consideration, ways by which we
can mitigate exchange rate risk when FDIs and corporates inflow their funds
into the country. So, what we have seen is that the window - in terms of the
maturity bucket - for the NDF transactions has been extended further to about
five years for loans and FDIs while import related transactions have been
extended to about thirteen months".
On interest rates, the
research expert was of the view that one might expect a time of pressure on the
currency to be one when interest rates rise. But this is not the case at the
moment. The rates of Nigerian treasury bills (T-bills) are around 3.0%, well
below the inflation rate of 12.3%. This means that businesses are being
encouraged to borrow and expand. Until when the rates go up, there are
opportunities for those businesses prepared to attempt to take market share off
their rivals.
"This is unlikely to be
straightforward, however. With inflation running in double-digits and the rate
of economic growth slowing down, the consumer is under renewed pressure. So,
sales of basic foodstuffs and goods are likely to do much better than discretionary
items or even high-quality branded goods. Routes to market are likely to
change in many areas" he added.
Speaking also at the
event, Chief Risk Officer of the Bank, Magnus Nnoka stated that: "Historically,
there has always been a new normal after every pandemic. To make it to this new
normal, institutions will have to pass through two phases. First is the
immediate phase - which is what most businesses have gone through - which
speaks to the risk managers attitude and the actions they have put in place to
cope with the pandemic thus far. For the next phase, institutions are expected
to continuously reappraise their business continuity actions as well as the
stress test carried out so as to ensure it is appropriate for the current mode
in which the business is operating. More importantly, organizations need
to begin to align their risk management practices to business objectives as
well as identify new opportunities in the current situation. Therefore,
it is only businesses that have gone through these two phases that will be
prepared for the new normal".
Demola Adekoya, Group
Head, Corporate Banking stated that: "For us, the pandemic presents an
opportunity for us to further enlighten our clients as to how they can navigate
these uncertain times. The Coronation breakfast session is an ongoing event
that provides a platform to create significant value for our customers around
major issues that impact their businesses objectives".
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