CBN Gov Forecloses Rates Rise Fears Asset Bubble

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The Central Bank of Nigeria governor said  last Thursday that saw no reason to raise interest rates, days before a monetary policy committee meeting, but said he was concerned about the risk of another asset bubble forming. Governor Lamido Sanusi also said four international banks were among the likely bidders for Nigerian banks rescued last year in a $4 billion bailout and that he expected bids to be in by the end of the month.

Nigeria’s benchmark interest rate has been on hold at 6 percent for a year despite double-digit inflation as the Central Bank strives to stimulate growth in the wake of last year’s banking crisis.

“We see no compelling reason to raise rates,” Sanusi told reporters on the sidelines of a conference in London. The Central Bank’s monetary policy committee is due to meet on Monday. It warned in May that an expansionary budget and the soaking up of bad bank loans could pose inflationary risk later in the year.

Sanusi described headline inflation of around 11 per cent in May as “relatively stable”. He said he expected foreign investment in Nigeria to rise as investors bet on rising oil prices, increased Nigerian oil production, and improved regulation of the banking sector, but cautioned this could lead to another asset bubble building up.

“My concern is we get this tremendous inflow from everyone who thinks markets are going to go back up,” he said. “There is basically a high risk of money flowing to capital markets. How much of that is recovery and how much is a bubble being formed, that’s a concern”.

Last year’s banking crisis was largely the result of an asset bubble caused by banks lending heavily to stock market traders and oil distributors and then finding themselves dangerously undercapitalised when the markets turned against them.

The Central Bank’s top priority has been to restore the health of the rescued banks by taking bad loans off their books and finding new investors to recapitalise them. Parliament last week approved legislation to create Asset Management Corporation of Nigeria (AMCON), a “bad bank” which will buy up non-performing loans in exchange for government bonds, but the bill needs final presidential approval.

“The presidential bill is a formality. We expect it to be transmitted to the presidency this week and hopefully we can get a sign-off as early as next week,” Sanusi said.

He said he expected bids for the rescued banks by the end of the month. “We expect (the bids) by the end of July from local banks, foreign banks and private equity firms,” Sanusi said. “The bulk of them are local, there are four international banks.” The results of the bids would be released by September or October, he said.

Most of the rescued banks reported a return to profit in the first quarter but analysts say the figures mask the fact that the banks have not had any underlying growth. They say the figures reflect the booking of recovered loans as profits after higher-than-expected provisioning last year.

Sanusi said the profits had three main sources — loan reduction, a cut in overheads including redundancies, and lower interbank borrowing rates.

“They used to take deposits at 15 per cent, now they take them at less than 5 per cent so it’s really a no brainer that they are in profit now,” he said, but added that shareholders’ funds were still negative.