With Improved FX Liquidity, Banks Foresee Green Shoots

• With Improved FX Liquidity, Banks Foresee Green Shoots

Following the significant improvement in foreign exchange(FX) liquidity in the economy, operators of commercial banks in the country believe the economy has past the worst of what was described as “the most severe downturn in 25 years.”

Renaissance Capital, a financial advisory firm stated this in a report, at the end of its 8th Annual Pan-Africa 1:1 Investor Conference in Lagos recently.

According to the firm, one of the big theme at the meeting with investors was the year-to-date (YTD) improvement in FX liquidity, which allowed for the unwinding of some outstanding obligations.

Trade facilities and velocity increased as a result, it cited one bank to have disclosed.

During the height of the FX shortages, trade cycles lengthened to 12 months, from a typical four-to-six months.

“The trade cycle is now contracting. Banks are cautiously optimistic about the Investors and Exporters (I&E) FX window. One bank thinks it is a tacit devaluation and precursor to a more liberal FX policy.

Another sees the FX rate settling at N370-400/$1,” it stated. In addition, the report revealed that banks see little incentive to lend with Treasury yields, while non-performing loans (NPLs) tend to lag the economy.

It also quoted another bank to have estimated that there was 18 months to go of high NPLs and downside surprises.

“Retail transactions fell, when households cut spending, have yet to pick up. That said, banks believe things are getting better. In the short term, they see opportunities in manufacturing, agriculture and infrastructure.

They are steering clear of the oil & gas, and haulage sectors. One bank thinks the nascent recovery is led by an improvement in the oil sector, and fears that if it is not sustained by structural reform, it will be fragile. The banks’ biggest concern is regulatory changes,” it added.

On the other hand, it stated that consumer companies held the opinion that the fundamentals of the microeconomy – consumers and businesses – have not changed.

“They think the consumer is still stressed; unemployment high and inflation elevated. Consumers have reduced the frequency of purchases, found substitutes and traded down. One consumer company shared with us the example of a middle-income mother buying smaller sachets of a product, when she can afford a larger pack. Her argument was that in these challenging times, she can control consumption more easily in her household with sachets.

“Lower income mobile subscribers are reacting to high inflation by dropping from two SIM cards to one, according to a telcos company. Tight FX liquidity led to some companies delaying capex. Some consumer companies cannot pass on the cost of FX to the end consumer. Even those with a relatively larger share of locally sourced raw materials told us that its pricing is still impacted by FX. The companies see stability returning,” it added.