‘Inflationary Environment Double-Edged Sword For Banks’

The current inflationary environment is a “double-edged sword” for the country’s lenders, given that while higher interest rates usually help to boost banks’ income from fixed-income instruments, they can also raise the cost of borrowing, thereby slowing down credit growth and increasing default risks, Coronation Merchant Bank has said.

The bank, which stated this in the “H2 Outlook” section of its recently released mid-year economic report, advised financial institutions to “balance the potential for higher returns on government securities with the increased credit risks in a high-inflation, high-interest-rate environment,” as inflation is likely to remain elevated in H2’24.

It said: “For the second half of 2024, Nigeria’s economic landscape presents a mix of challenges and strategic opportunities that demand careful navigation.

GDP growth in the first half of the year slowed to 2.98 per cent y/y, down from 3.46 per cent y/y in Q4’23, reflecting the persistent structural issues plaguing the economy.

High inflation, currently above 30%, continues to erode consumer purchasing power, suppress demand, and dampen overall economic productivity. “This, combined with the volatility of the naira has compounded the challenges facing the private sector, particularly in managing costs and maintaining profitability.

However, there are sectors that provide some optimism. The oil sector has shown signs of recovery over the past two quarters, and we expect this trend to continue as reforms in the sector take deeper root.

If managed properly, the oil sector could drive modest GDP growth, with our projection for Q2’24 at three per cent y/y, and a revised full year forecast of 3.2 per cent.”