The Role of Financial Market in Nigeria’s Post-Election Economic Development

The general elections in Nigeria have come and gone but the intrigues before, during and after, leading to the outcome would remain evergreen in the country’s history.
After days of waiting, Prof. Mahmood Yakubu, chairman of the Independent National Electoral Commission (INEC), declared Asiwaju Bola Timubu, candidate of the ruling All Progressives Congress (APC) President-elect winner, having scored the highest number of votes cast. Be that as it may, the living standard of Nigerians today, and the economic situation remain a function of political and economic reforms. Some schools of thoughts differ on the superiority and independence of economics.
In today’s reality different societies, especially developing nations, largely underpin the determinant role of politics. However, it has also become almost incontrovertible that the state of the economy has universally become the key yardstick for assessing the success or failure of the government or politicians (those who play politics) in all jurisdiction.
Therefore, the ability to script an economic roadmap and effectively implement same and through thereby advancing the wellbeing (real development) of the people remains a daunting task for the government.
With the ruling party wining February polls, it should not be business as usual. It will be near possible to change policies and economic managers in the next dispensation of four years. Even as the incumbent government is handing over to a new administration of same political party, we expect new policy formulations for various sectors or ministries that could be partially or totally different from the previous government.
It is expected that the new dispensation will not only try to build on, or carry on the agenda of the past government, while creating result-oriented policies or reforms that will outperform the last administration.
Nigeria is arguably rated the biggest economy in African continent, based on such economic indices and factors ranging from manufacturing, volume of trade, exports, population, aggregate income and other statistical data. Let
In expectations that the government would play its role in providing Nigerians with the basic infrastructural facilities to boost productivity such as power, roads, schools, hospitals, security and others.
The government needs a robust and active financial market to drive its programmes and policies, by deepening the economy through effective policies and strong regulatory framework that protect depositors and investors at all times, boosting confidence that support progressive economy to create wealth.
The financial markets and institutions remain the engine room of economic development and growth, as government tackle unemployment, insecurity and poverty through enabling business environment and effective monetary and fiscal policy that gives incentive to businesses to help them expand, and even create new businesses that engage the people. Also drive economic activities that support prosperity of any nation.
Research has shown that monetary policy of nation set the pace for its growth and development by effectively stabilizing price all time by managing instruments that will have direct impact on prices of goods and service such as exchange rate and interest rate that propel circular flow of fund in the financial market.
Knowing that the central bank through its Monetary Policy Committee cannot control interest rate, inflation and exchange rate all at the same time, and would rather use one or two of these variables to manage price stability.
The financial market is divided into two, the money and capital market, both provide instruments or window that drive economic transformation.
The money market deals with short term financing and borrowing while capital market deals with long term instrument like bond, shares and others to provide long funding or browning.
Short term interest rates will remain elevated, and market liquidity tight due to the expected contractionary monetary policy and expected removal of fuel subsidy without proper plan to address the multiple effects on the people and economy in short term.
All existing policy measures deployed towards achieving the monetary policy objectives of the CBN should remain in force – at least into half-year 2023.
In the light of the bloated federal government borrowings, the high interest rate regime could exacerbate any crowding out effect which may negatively impact bank lending rates and cost of funds, with attendant implications for growth and profitability.
The highly regulated foreign exchange environment is expected to remain unchanged.
With foreign exchange reserves recording more than US$1.0billion decline in recent time, oil price had rebounded from its 15 months low of $70 to almost $80 this week, we see room for the CBN to maintain a policy of defending the currency. Now that crude oil is oscillating up and down in the international market, the nation’s reserve is falling like pack of salt.
While this, in our opinion, may provide some level of stability and positive view for the currency in the short term, a continued decline in crude oil prices will create downside risks to further accretion in reserves, and capacity and continue to support to currency.
It is not unlikely therefore that we will witness a divergence in the rates offered at the CBN interventions and rates available on the Investors & Exporters (I&E) Window.
We expect the CBN to continue to monitor activities within the market that could adversely affect foreign exchange stability.
Asset Quality
A close scan of the industry reveals that there’s a positive relationship between performing loan book and oscillating global oil prices, and the reason is not far-fetched as over 30% of the total industry exposure are to the oil and gas sector. With oil prices relatively elevated, the industry had to contend with high liquidity ratio to protect depositors, loan loss against shareholders’ fund which decreased capital, declining loan book due to the relatively low demand for credit and reduced capacity of banks to lend and create money. We expect banks to intensify efforts to grow their loan books albeit to quality risk rating names, and also expect Non-Performing Loans to decline from present’s level even as rate hike support banks to boost interest income, it has it own danger to bank operations as witnessed recently across the globe.
Consolidation in the Industry
The mergers and acquisitions in the banking industry in the recent years and the HoldCo structures are expected to boost the financial sector activities and bottom line. With the holding company model, more merger and acquisition will continue which still requires the approval of shareholders and regulators, is expected to make the new entity the largest commercial bank as well as the biggest retail franchise in the country. Barring any unforeseen issues, the likely mergers will increase the competitive landscape in the industry. The post-integration challenges and downside risks cannot entirely be dismissed on the back of historical experience of one of the banks but we expect that the process will be well-executed by the banks and properly monitored by the relevant regulators. The success of the merger could trigger other such mergers, with the potential to strengthen the industry.
In view of tightening monetary and normalising interest rates, uncertainty in the oil market, slowing global economy, fear of recession and capital flight from emerging markets, Nigeria’s economic performance will be largely dependent on the interplay of these external factors especially the global oil market in a year that will be split into two halves. The likely slowdown in rate hike may redirect funds to emerging market going into the future.
The second quarter will be dominated mainly by politics and transition activities amidst mixed economic activities which may translate into muted or inflow of capital inflow, increased or decreased pressure on the naira and declining or increasing external reserves. We expect some level of normalcy to return in the second half of the year translating to strengthened investor confidence, increased capital flows, softened pressure on the naira and decreasing yields on government securities as well as the likelihood of increased inflationary pressure.
That said, the expected normalization of interest rates by the U.S. Feds, lower oil prices, weaker-than-expected oil output and a tense post-election environment pose downside risks to our expectations.
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Omordion Ambrose
Chief Research Officer
InvestData Consulting Limited
08028164085, 0817954605