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".