Private Sector Growth; Headed for the Rocks?



Thursday, April 21, 2016 11:21 PM / Cordros Capital 

In what appears to be an open agreement with our opinion (expressed in our most recent economic note "Monetary Policy Committee May Tighten"), the CBN Governor, Godwin Emefiele, on Saturday (April 16, 2016), revealed that the country's Monetary Policy Rate (MPR) will still have to rise. The CBN boss hinted this in Washington, at the International Monetary Fund (IMF) headquarters, noting that keeping the MPR at current level, in the face of rising inflation rates, faults sound economic policy.


In a bid to offer consolation to the private sector, Emefiele reiterated the CBN's continued effort at supporting and promoting sectors of the economy -- e.g agricultural, solid minerals and the real sector -- with huge growth and employment potentials. While this looks concrete on the surface, we are more critical about its reality.


We refer to our March Post-MPC commentary, "Monetary Policy Committee Tightens to Stun the Market; Changes Gear from Growth Stimulation to Inflation Targeting", where we expressed that the Committee's policy shift (from an accommodative stance to tightening) may crowd-out the capacity of the private sector to borrow.


Adding to this risk is the concern that the weakening prospect of a major improvement in the macro environment may be brewing increasing conservatism among the commercial lenders. It was recently reported that (1) DMBs have cut loan growth projections for the 2016 financial year due to rising non-performing loans; and (2) foreign banks have pruned credit lines to Nigerian banks due to the lingering forex challenges in the country.


The waning prospect of an oil price recovery dogged by the inability of major OPEC members to reconcile economics with politics combined with rising production challenges faced locally (in addition to the ongoing force majeure on Shell's 400kbpd Forcados facility, it was reported yesterday that Agip declared force majeure on its 160kbpd Brass River export facility) suggest (1) the potential for far lower than budgeted oil revenue; (2) an increased drive to augment the oil revenue shortfall with the already ambitious non-oil revenue target; without which (3) budget deficit may widen. It appears the welfarist philosophy of the current administration's style of governance is gradually waning as reality bites.

Compared to four (4) months ago, it appears the FG is taking a more benign view of austerity measures to achieving its non-oil revenue target which hitherto seemed too drastic in their view. We note the possibility of VAT increase as one of the issues discussed in the National Economic Council retreat that held last month. Eventually, this will add to pressure on the private sector.


In the meantime, uncertainty regarding (1) the passage of the 2016 appropriation bill; (2) protracted fuel supply shortages; (3) epileptic electricity power supply; and (4) a possible devaluation of the Naira, continues to impact the business decisions adversely.


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