Nigeria’s central bank Governor Godwin Emefiele has unleashed unorthodox monetary policy that is temporarily boosting financial indicators, buying some badly-needed time for President Muhammadu Buhari to unveil wider reforms to stimulate a slow growing economy.
Emefiele’s ban on Nigerian pension funds and other non-bank financial institutions buying high-yielding central bank bonds has sent treasury yields tumbling while breathing new life into one of the world’s worst-performing stock markets.
The stop rate on Treasury-bills at a primary auction last week fell to a three-year low of 10 percent for the one-year bill while stocks closed 0.03 percent higher at the end of trading on Friday.
Lower treasury yields and an improving stock market do three favours for President Buhari, who is currently on a private visit to the UK.
First, the stock market could be set for a rally that turns the fortunes of listed companies around and positively impacts the economy.
Second is that lower treasury yields would help reduce the Federal Government’s high debt service cost, which has eaten into revenues and hindered capital spending.
Third is that a lower yield environment means companies are no longer excessively crowded out by the government and can now borrow at cheaper rates. All three outcomes that should have been achieved by fiscal reforms are now being enforced through unorthodox monetary policies.
Fiscal reforms from deregulating the downstream petroleum sector to adopting a market-reflective electricity tariff would have been enough to turn around the negative investor sentiments that punished stocks, analysts say.
To achieve lower borrowing costs for government and corporates, prioritising equity over debt would have sufficed as it helps the government cut borrowing and dodge expensive interest payments to creditors.
Equity can be raised through the privatisation of redundant government assets and opening up of new sectors for private sector participation would have reduced government borrowing, thereby cutting down debt service costs.
Since his re-election, President Buhari has somehow managed to trudge along without any real impetus to implement tough reforms in his second term, critics say.
That has left the economy, which continues to expand below population growth, exposed with the CBN now trying to fill a gaping void created by the absence of fiscal reforms.
A senior banking source who spoke to BusinessDay fears something could go terribly wrong if monetary policy is relied on for longer to fix the economy.
“If oil prices tumble, Emefiele will be constrained and whatever gains his unorthodox policies have delivered will be tested,” the source, who did not want to be quoted so as to speak freely, said.
For Nigeria, the problem with using monetary policies to fix fiscal challenges is that it often backfires, as Emefiele found in 2016 when the CBN held on to a currency peg.
Emefiele tried to defend the currency by burning through the CBN’s external reserves.
His efforts were, however, futile as it became clear that Nigeria’s dependence on crude oil exports as the sole foreign exchange earner for the government was always going to make aspirations for a stronger naira impossible.
He soon retraced his steps and unveiled a market-driven window to meet the dollar needs of investors and exporters. It worked. The naira stabilised and has been rock solid for two years now.
“Emefiele is always keen to play the role of saviour of last resort for the government,” a former deputy governor of the CBN told BusinessDay.
“His latest move to restrict purchasing of OMO bills does have some gains but it is artificial; the outcomes become natural when no one is forcing the banks to lend and the CBN doesn’t have to play the role of market maker in the fixed income market,” the former deputy governor said.
According to him, the CBN has destroyed the OMO market by offering itself as a market maker.
“Investors are not likely to gain any confidence from that,” he said.
Emefiele had asked commercial banks in July to boost lending or face stiff penalties.
The target was first for banks to lend at least 60 percent of deposits to small businesses before the bar was raised higher to 65 percent. The driving force behind the order was to discourage banks piling cash into high-yielding government securities.
The order pushed banks to start lending more, with retail customers the biggest beneficiaries. The big banks from Guaranty Trust to Zenith have all gone after retail wallets to grow their loan books.
Perhaps, the relative success attained by the policy gave the CBN extra motivation to bring forth another gambit by restricting the purchase of OMOs to banks and foreign investors.
With OMO out of the picture and treasury bills offering yields lower than inflation, pension funds and other large institutional investors unable to purchase OMO bills have headed to the stock market to take advantage of a big dividend play. The dividend yields of a number of big banks have crossed the return on one year T-bills, spurring a bank rally along the way.
Zenith Bank boasts the highest dividend yield among big banks at around 14.8 percent, some 700 basis points above the 10 percent stop rate for one-year treasury bills at last Wednesday’s primary auction.
Zenith’s superior returns have certainly caught the eye of investors who bought a record N5.9 billion worth of the tier-one lender’s shares last Wednesday alone, the most in the last seven trading days at least. Between Tuesday and Thursday, a total of 591 million Zenith Bank shares valued at N10.6 billion were traded.
The lender’s share price gained 8 percent in that period closing at N19.15 on Thursday, according to NSE (Nigerian Stock Exchange) data. That’s the highest price it has traded at since July 2019.
There would be more to come in terms of demand for Zenith Bank as local non-bank institutional investors now banned from purchasing high-yielding CBN securities, otherwise known as Open Market Operations (OMO), pile into the bank’s stocks.
“Zenith has been on a tear since yields on treasury bills started collapsing and is showing no signs of slowing,” one trader told BusinessDay.
“It presents a compelling case for dividend yield play at a time when yields in the fixed income market are fast falling below inflation rate,” the trader said.
The yields on one year T-Bills offer investors a negative return of 1 percent, considering that inflation printed 11.23 percent at the last check in September.
Expectations that yields in the fixed income market are heading to single-digits and with inflation tipped to rise in the coming months means stocks with double-digit dividend yields are likely to see increased demand.
Zenith is not the only big bank with dividend yields above the one-year government debt.
United Bank for Africa has a dividend yield of 10.9 percent. Again, investors are noticing.
A record 67 million shares worth N501 million were traded Thursday alone, the most in the last seven trading days at least. UBA’s share price has jumped to N7.40, the highest since April 2019.
Guaranty Trust Bank also comes slightly under one-year treasury bills with a dividend yield of 9.39 percent.
Investors traded a record 37 million units of GTB stocks worth N1.1 billion on Wednesday alone. The increased demand has pushed the lender’s share price to N29, the highest since September.
“It’s good that the CBN’s policy is rubbing off well on the stock market but as an economist I am worried that the problems Nigeria faces as an economy largely remain,” a chief economist at a global consulting firm told BusinessDay on condition of anonymity as he wasn’t authorised to speak publicly on monetary policy.
Third-quarter GDP numbers are due for release by the National Bureau of Statistics this month, with analysts predicting that the country’s August 21 land border closure may have taken a toll on trade which contributes some 17 percent to GDP, and by extension the economy.
LOLADE AKINMURELE
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