**Expects Tighter System Liquidity, Rise in Interest Rates in 2021
By Dipo Olowookere
One of the leading financial institutions in the country, Guaranty Trust Bank (GTBank) Plc, is projecting a further increase in interest rates.
In its Nigeria Macro Economic and Banking Sector Outlook for 2021 obtained by Business Post, the lender said the spike in the interest rates would be triggered by “the additional borrowings by the government as well as relatively lower OMO maturities into the system.”
GTBank disclosed in the report that it also foresees the Central Bank of Nigeria (CBN) sustaining its “policy stance going into 2021 driven largely by the need to improve credit flow to spur economic growth.”
Recall that recently, in a move to attract portfolio flows and reduce the consistent exit of investors, the CBN increased yields of fixed income securities, causing investors to abandon the equity market, which has so far lost 4.03 per cent this year.
Liquidity expectation
Commenting on the liquidity outlook for the year, GTBank said it expects it to be tighter, noting that, “For one, only N4.3 trillion in OMO securities will be maturing this year, with over 50 per cent of that maturing within the first quarter of the year which implies about N2.5 trillion of liquidity injection into the system in Q1, with attendant CRR implications assuming that the CBN maintains its trend of reissuing a portion of the maturing securities.”
The lender noted that, “This could result in the outflow of more funds from the market in form of CRR,” adding that from Q2 2021, however, “we expect a shift in the liquidity situation of the market, based on the significantly reduced OMO maturities of N1.7 trillion.”
According to the bank, “In the absence of other liquidity injection sources, market liquidity is expected to tighten significantly with a resultant decline in special CRR debits.”
“As a result of the tightening of liquidity conditions expected in the market from Q2 2021, we anticipate a rise in volatilities within the money market and fixed income space.
“We also anticipate a renewed scramble for deposits by banks and other financial institutions to meet demands on them for funds.
“Money market rates, should on average, rise steadily across the period with a resultant pull on deposit and lending rates.
“In view of the above, the CBN might have to consider the possibility of releasing some of the CRR sterilised by it,” the report further said.
Banking sector capitalisation
In terms of the capitalisation of the banking sector, GTBank said it foresees some players struggling with the regulatory minimum capital adequacy ratio (CAR) of 15 per cent as a result of the devaluation of Naira.
“Consequently, we expect banks with shortfalls in their capital positions to retain more of [their] earnings to shore up their capital and keep themselves within touching distance of the minimum regulatory capital requirement.
“It is also not unlikely that the apex bank will offer some form of regulatory forbearance to banks that fall short of the minimum regulatory capital,” the report noted.
Over a decade ago, the banking sector in Nigeria went through a major transformation, with mergers and acquisitions to meet up with the minimum capital base of N25 billion. Some observers have called for a revisit of this amount because of the devaluation of the local currency since then.
Banks and Fintech competition
GTBank said in its report that it projects a level playing field for traditional banks and their non-bank competitors, which are mainly the financial technology (fintech) companies.
It explained this is expected because the CBN, with an expanded role in the new Banking and Other Financial Institutions Act (BOFIA) 2020, would likely increase the operational and regulatory costs of fintechs, which would stifle their drive in the long to medium term.
FX Outlook
In the report, the lender projected a tightening of the gap between the parallel market rate and the official rate due to a marginal adjustment of the currency in 2021.
“Our expectation of the appreciation of parallel market rates is predicated on increased supply to that market, however, it should be noted that a devaluation in the official market usually triggers an immediate devaluation in the parallel market even if short-lived.
“Notably, a further devaluation to levels closer to the general consensus of the true value of the Naira is expected to trigger increased foreign portfolio flows into the country,” it stated.
