Government, Banks, SMEs and/or Consumers… who is benefiting from the crashing rates?
As the CBN continues to tighten the lid on any incentive to invest in Nigerian Treasury Bills (NTB), banks are compelled to continue to open their taps for lending to consumers and SMEs. At the close T-Bills Primary Market Auction (PMA) on 11th December 2019, T-bills stop rates hit another new-year low. In fact, T-Bill rates have now declined by over 30% across all tenors in the last one month. At the current inflation rate of 11.61%, the real return on T-Bills is now zero.
A lower yield environment is positive for the government’s swelling debt service costs and presents a good opportunity for SMEs, Corporates to raise debt at much cheaper rates. At the other end, it creates a conundrum for Pension Fund Administrators (PFAs), fund managers, who are now stuck with negative real returns on new investment in T-Bills.
As if the low yields on T-Bills aren’t enough, CBN Director, Banking Supervision Department, Mr. Hassan Bello mentioned that The Central Bank of Nigeria will increase banks’ Loan to Deposit Ratio to 70% by 2020, he gave this hint during the week while speaking at the 2019 workshop for Finance Correspondents and Business Editors.
The Monetary Policy Committee (MPC) had noted in November an increase of N1.17 trillion in absolute gross credit between May and October, this was attributed to the adjusted LDR for deposit money banks. Manufacturing was the largest beneficiary, accounting for N460 billion of the increase. Consumer loans shared N360 billion from the total.
Despite these positive moves by the CBN, sadly, there is very little impact this can have in the long-run without commensurate fiscal efforts.In an economy stuck in a low growth cycle and susceptible to erratic and inconsistent government policies, we can only hope that the Government will handle its fiscal responsibilities with more urgency to reap the full rewards of a low-interest environment.
In plain language, imagine getting a loan from the Bank at 12%, then you spend 4 hours out of 10 productive hours in traffic daily, you can only power your factory 11 hours out of a possible 18 for fear of diesel cost, your raw materials spend 34 days at the port instead of 2 days, etc.
Beautiful monetary policies and lower interest rates without commensurate fiscal policies to fix infrastructures will always make a 12% interest rate feel like 27%. It’s the responsibility of fiscal policies to fix roads, power and ports.
Updates from the Stock Market: Greetings from Santa
December! Always a month to remember, the green trees laced with red and lightings, the merry mood and the memorable feelings that come with it…
Look closely at the images below, particularly the month of December, the red spots are supposed to give one a feeling of merry, except that in this case, it’s the gauge for daily performance of stocks in the equities market. Unlike the Santa feeling that comes with December, red in the equities market means the market is bleeding, losing money.
In fact, the first few days of this December are the worst of all the years under review (2012-2019). The gains (green) recorded so far were as a result of the fall in treasury bill yields after the 11th of December Auction. Typically, bearish treasury yields create bullish opportunities for the equities market, exactly what played out on 11th and 12th as seen below, sadly, headwinds in the economy wouldn’t let the equities market enjoy the excess funds flowing from the money market.
Falling ASI or stock prices cause panic in some investors, but fluctuations in the stock market represent business as usual for others. Investors who are comfortable with this reality know how to respond to falling prices and how to pick companies that are good buys when stock prices are on the downward trend.
What should you do when the stock market is in red?
Find a good company that is underpriced, buy and be patient. Most importantly, you must know your investment objective, risk appetite and investment horizon.
Here is a list of some underpriced stocks with potential for high dividend yields and capital gain. (Please note that the stock picks and the potentials presented are not guarantees, they are only recommendations. The equities market comes with its own risk, consider your risk appetite before investing)
Smile! There are still enough trading days left to make this December one to remember.