Background
Indeed, the global pandemic has not only claimed over 5.8 million lives globally as at 15th of February 2022, but also with associated unprecedented economic crisis. The lock down of over two – third of the world economy stretched the global economy to near total collapse, to the extent that many businesses were pushed into liquidation and countries into forced recession, leaving lasting scars through lower investments, erosion of human capital occasioned by job losses, as well as fragmentation of global trade and supply linkages.
This, made governments of various countries rolling out stimulus packages to ameliorate its effects on the public and private sector operators. Of course, the scenario which has largely altered global economic predictions, equally took many back to the drawing board, while rush to take all sorts of revival loans from multilateral financial institutions, has become the dominating feature of the unending period.
Covid- 19 and the Nigerian Economy
With the global economy reeling under covid-19 attack, the Nigerian economy which was on the slippery slope of recovery was not spared. The Nigerian economy with its pre-existing conditions including, high inflation, high unemployment, poor infrastructure and overall economic contraction, was severely hit by the pandemic. For a largely import-dependent economy, the unprecedented fall in price of oil in the international market due to low demand, further exerted pressure on the economy. Government revenues were weakened substantially, driving increase in debt profile and service ratio. This also contributed to the considerable adjustment of the official exchange rate of Naira to N416.21 to $1 from N360 to $1, in furtherance of the exchange rates unification. The development however, exposed Nigeria to spikes in risk aversion in the global capital market, with the possibility of putting more pressure on forex market, as foreign portfolio investors exit the Nigerian market.
As a result, the GDP growth rate fell below 4% in early 2020, to 1.87 and -6.10 percent in the first and second quarters respectively, reflecting a drop by 0.23 and 8.22 percentage points below the 2.10 and 2.12 percent recorded in 2019, Q1 and Q2. In third quarter the GDP recorded -3.62 percent.
The Central Bank of Nigeria (CBN), was at the vanguard of Government’s efforts to ameliorate the adverse impact on key economic variables, taking a number of measures to mitigate the long-term effects on the growth prospects of the economy. These include cutting policy rates, supporting households that have been severely affected by the pandemic and targeted interventions to support critical sectors, such as agriculture, manufacturing, energy, and health. Cumulatively, according to the CBN, the bank’s intervention efforts represented about 3.5% of the GDP.
Some of these measures include; provision of N1trillion in loans to boost local production and manufacturing across critical sectors, one-year extension of moratorium on principal repayment on CBN intervention facilities, reduction on interest and intervention loans from 9% to 5%. The package also included N50 billion targeted credit facilities for households and Small and Medium Enterprises (SMEs), N100 billion Healthcare loans to pharmaceutical companies, healthcare practitioners to expand capacity.
Also, the Federal Government developed the Nigeria Economic Sustainability Plan (NESP) involving a stimulus package of N2.3trillion in response to the health and economic emergencies. Under the plan, the key projects focused on mass agriculture, public works and road construction, support for MSMEs and digital technology etc., expected to sustain economic activity, boost production, create jobs and save foreign exchange.
With the relaxation of restrictions, the economy came alive again and there were dotted gains as Nigeria’s economy wiggled itself out of recession in Q4 2020 (0.11percent) and achieved GDP growth of 5.01 percent year-on-year recorded in Q2 2021 and 4.03 percent in third quarter 2021 while consumer price index (CPI), has been on the downward swing for ten consecutive months, reaching 15.6 percent as at January, 2022, although prices of goods and services are still on the high side.
While Government is trying to take the economy out of the woods, there are still continued and fresh challenges coming up. One of such is the increased inflation especially in developed economies such as United States (US), with threats of interest rates going up in the global market. This will certainly have some negative impacts on emerging markets, the key one being a declining capital inflow, thereby exerting pressure on businesses as it concerns raising funds – tightened global funds in flow and increased interest rates on local funds.
Another of the emerging indices is the ongoing war between Ukraine and Russia which has incredibly increased the global oil price between $100 and $107 per barrel in the last two weeks. Some schools of thought are projecting that the oil price might be increased to $300 per barrel if the war lingers. This is greatly contributing to unwarranted global tensions and growth inhibitions of the world economy, after the unpalatable effects of covid 19 pandemic. This has led to trade restrictions, supply chain disruptions of the global economy and impact directly on inflation.
The Nation’s debt profile which stood at N38trillion as at September 2021, according to the Debt Management Office (DMO), is equally a cause for concern, as it pertains to its sustainability. This is expected to increase more as the 2022 budget with a deficit of about N6.25trillion, is expected to be financed essentially by new borrowings. Amid weak revenue mobilisation, debt servicing gulped an average of 61% of revenues pre-pandemic and skyrocketed to 83% in 2020. The DMO had raised the debt-to-GDP limit from 25% to 40% in its medium-term debt strategy for 2020– 2024. While Nigeria’s debt-to-GDP, is lower than those of its peers, its debt-to-revenue is too low to sustain the country, forcing huge percentage of the country’s revenue on debt servicing, leaving the development of critical sectors to lag behind.
The 2022 budget of N17.1tn signed into law, on a benchmark oil price of $57/barrel has started receiving boosts as a result of the increase in prices of crude oil in the global market. No doubt, more revenue will accrue to the government which will facilitate some stability in the foreign exchange, as government will be able to mop up more forex from the sale of the crude oil. However, this will be eroded by the subsidy that will be paid to the importers of fuel for sale locally, since government has put on hold the removal of fuel subsidy.
Also, on the list of factors to be considered, is the upcoming general elections, which might hamper investment in the economy. The fear of violence pre and post elections might elicit capital flight as investors might withdraw their capital to where they perceived as more stable and investment friendly economic environment.
However, it is imperative to continue to ensure policy initiatives for economic recovery and take the economy out of the woods. This will require a big push in capital formation to fill the wide financing gaps in various sectors of the economy and this is where equipment leasing is very relevant. Globally, as a creative financing alternative, leasing has been facilitating easy and convenient access to capital equipment, with an estimated total annual lease volume of $1.5 trillion, accounting for 20% of total investment in equipment and contributing about 1.5% to GDP. The whole essence of leasing is to enhance the planning, improvement and development of any economy by building and supporting productive ventures.
Nigerian Leasing Industry in Covid 19 Economy
Since inception in Nigeria, leasing has been supporting economic development. Today, the impact of leasing is pronounced in all sectors of the economy, enhancing capital formation, generating employment and creating wealth. The industry remains resilient, maintaining its growth trajectory notwithstanding the prevailing challenging environment. Recent statistics, show that new business volume grew by 4.3 percent at N2.01trillion in 2020, from outstanding lease volume of N1.91trillion in 2019. The industry’s contribution in the past ten years is over of N12trillion and leasing is becoming more relevant in our prevailing economic situation with the incessant rise in prices, which makes outright purchase of productive assets increasingly difficult, especially to the Small and Medium Scale Enterprises (SMEs).
Indeed, the leasing industry was not insulated from the impact of the pandemic as it affects business volume and operations. While it is hard to accurately capture the impact due to uncertainties, there are certain headwinds that become glaring in the leasing industry including:
– Delayed rental payment, arising from instability of cashflow of customers, and consequential cost of repossession, due to slow business activities;
– Increased cost of assets and operations, resulting from the “adjustment” of the Naira, and other impacting variables. This affected the capacity to finance more lease transactions;
– Possible business collapse due to incessant credit losses and low liquidity;
– Tight liquidity, as a consequence of delayed rentals,
– Decline in new business origination, owing to the fear of portfolio risks;
– Access to funds for leases became tighter, given the risk appetite and liquidity profile of financiers.
– Demand shift to more productive and essential assets as non-essential commodities were less sought after.
Indeed, leasing can play a major role in driving the developmental agenda of government at all levels. Many countries across the globe have been utilising leasing in this regard, especially in this challenging time. For instance, recently the Indian Government under its National Monetisation Pipeline Approach, is leasing out specific national assets to private investors for four years, projected to generate US$81billion. The fund raised from the project will be channelled to boosting public finances battered by the pandemic and fund new infrastructure. Based on the resilience and viability of leasing industry, it has the capacity to facilitate the various policy initiatives of government, aimed at bringing the economy out of the woods.
It is not all bad news , there are still emerging opportunities
A major lesson learnt on Government’s decision process in recent times, has been to highlight the imperative of economic diversification from the monotonic oil and gas economic base, to multi – sector based economy, for enhanced revenue streams. This realisation has prompted the government to take proactive measures to develop policies aimed at improving a variety of other economic sectors including agriculture, Information Technology and innovation, Telecommunications, Social infrastructure and so on. There are opportunities in the new year to initialise critical reforms to achieve a paradigm shift in governance and policy design in Nigeria. The extent and duration of time, which the economy will need to fully recover from the effects of the pandemic is unpredictable. What is certain however is that, if the country’s economy continues on its current trajectory, then it is very well on its way to strong recovery.
Government is planning to expend more on infrastructure development. For instance, the capital expenditure of N4.89trn, will be spent on Transportation, Agriculture, Power. Others are Health, Works and Housing – these are areas to watch out for investment, while taking into cognisance the necessary strategies to put in place in order to be successful in the sectors.
With the lifting of lock down and restriction, the leasing industry picked up its momentum in 2021, despite the continued adverse impact of the pandemic on socio-economic fundamentals. It is expected that the industry will achieve close to pre-pandemic performance of double-digit growth, as figures are being concluded for the year. The growth was driven mainly by the resumption of economic activities, stable environment and demand, as businesses tried to do catch up.
More business opportunities abound but where will the business come from?
The Economy – Essentially, the existing huge financing gap in the economy is being exacerbated with the advent of the Covid-19 pandemic, increasingly harsh economic conditions, unavailable and/or inadequate infrastructure and inflation. These throw up several opportunities for lessors and enhance their capacity to impact the economy. The opportunities cut across several facets of the economy both the traditional and emerging sectors including
- Oil and Gas, where the enactment of the Petroleum Industry Act (PIA) is expected to overhaul and transform the Nigerian oil and gas industry, to make it more attractive to investors, (though there are skepticisms whether it will be a game changer at a time where major oil producers are seeking to transit to clean energy). The “Decade of Gas” initiative is equally being implemented, aimed at bringing to focus the utilisation of the nation’s huge gas resources. Already, ELAN members are being approached to fiancé conversion kits for vehicles. Also, the Dangote refinery is expected to commence operation this year. The further boost of activities in the sector, will equally expand leasing demand in the sector, where leasing culture is already entrenched.
- Healthcare: The Nigerian healthcare market is large and diverse with a potential of over $5bn USD. Its value chain comprises: Manufacturers, Health Service Providers, Medical Insurance, Retailers, Distributors, Health Financing Entities, and Medical Education Providers. A myriad of investment opportunities exists, especially in replacing outdated healthcare technology and addressing the deficiency in infrastructure.
- Construction: The industry is expected to post an average growth rate of 3.2% in real terms between 2022 – 2025. The demand for construction equipment and technology is huge as various projects are being undertaken across the nations. ELAN secretariat in recent times, has been receiving increased request in this direction.
- Agriculture, despite interventions from government, agriculture remains constrained by poor infrastructure. There are financing gaps across the value chain: Production, Processing, Packaging, Storage and Distribution.
- Mining: With mineral resources being discovered and exploited in various states and the active support of the Federal Government, this sector is an ever-growing one. Mining activities require the use of specialised and general equipment, which the mining firm, especially artisan miners may not have the capacity to acquire on their own.
- Information and Communication Technology (ICT): Developing Nigeria’s Digital Economy has positively impacted the contribution of the ICT sector to National GDP. The sector has grown from less than 1% in 2001 to 17.92% of GDP in Q2 2021. The provision of telecom infrastructure and ancillary equipment provides a viable market for leasing.
- Consumer/retail market is where the most rapid transformations in the economy are taking place, everybody is generally involved – the consumer wants to participate, so also are SMEs, Banks, FINTECHs, HMOs, insurance, MFBs.
- MSMEs Leasing – although Nigeria’s vibrant private sector has several large firms in all sectors. MSMEs, numbering more than 40 million, dominate Nigeria’s enterprise landscape and production in key sectors of the Nigerian economy is driven by them. However, the requirement for equipment is difficult to finance through conventional sources like bank-loans, particularly, due to the stringent formalities and collateral requirements.
Public sector – Government policy thrust and its developmental focus coupled with economic dictates based on current realities, further widens the role and scope for leasing. The expansive spending of government starting with this year’s budget and the focus of the MTNDP 2022-2025 are, key areas of interest to watch. The pre-election spending for the 2023, is also significant to consider. For instance, huge investment is being made in infrastructure to address the gap, which the government alone cannot meet. Government intends strengthening the frameworks for concessions and public private partnerships (PPPs), to encourage private sector participation in capital projects. The Federal government’s (and even some states like Lagos) intervention programs and investment in priority areas – infrastructure, power, food, security, works and housing, job creation, Information and Telecommunications (ICT) and the diversification efforts of the economy, with the persistent increase in the non-oil sector contribution to GDP, added together to underscore the scope of demand for capital asset.
While the opportunities are real, the leasing industry must position itself with the active support of other stakeholders to tap and exploit these opportunities to enhance its contribution to national economic growth. Government on its part should deepen its support for the industry, improving the regulatory and operating environment. This will involve: full implementation of Equipment Leasing Act 2015 to strengthen the capacity of the industry; facilitation of long-term financing including: access to intervention funds and establishment of a National Lease Fund, deepening the utilisation of leasing in public sector to achieve efficiency and cost savings, incentivising lease investments in critical sectors such as agriculture, health and mining, through access to funds and tax rebates and more importantly, checking the spate of insecurity across the country as no meaningful economic activities can be achieved without adequate security.
Positioning for these opportunities – Critical success factors
Generally, the macro-economic and industry situations, will continue to determine the level of performance of the leasing industry in 2022 and beyond. However, it is imperative for the leasing industry to sustain its resilience to sail through these testing times and this requires continued realignment of strategies and adoption of innovative approach. Specifically, these success factors should be considered:
- Broad and deeper funding structure that would strengthen the capacity of lessors to expand their leasing activities and take advantage of emerging opportunities. “Money is the raw material for leasing” and the ability to attract adequate and cheaper funds will determine the extent of participation in the leasing industry. ELAN, has been advocating for lessors to gain access to potentially idle funds such as the National Pension Fund (NPF) and establishment of National Leasing Fund, in addition to engaging private financiers (local and international), to support the industry with necessary funds. While this is being done, non-bank/financial institution lessors especially, should adopt proactive approach in addressing the funding challenges, which include trade finance from their vendors and funding from their insurers. Vendor financing has proven to be a sure way to solving funding issues, especially for high tech assets. Also, lessors can collaborate for syndicate funding of lease equipment for large projects, such as the provision of transportation and logistics for the Oil and Gas sector, Mining etc. Collaboration also has the effect of mitigating risks.
- Prioritising risk management and processes. This will involve monitoring in-house vulnerabilities – assessing financial, operational risk and transaction risks. Lessors for instance by bringing risk management to fore as part of the strategic planning process, they can routinely simulate how interrupting events as well as other variables could disrupt their businesses and use those insights to design their operations and resource distribution. It is also helpful to have regular customer – risk profiling in place, to fully understand their needs and expected reactions.
- Enhancing internal capacity to improve processes and performance through constant staff development; proper alignment into the organistion’s goals and objectives; participating in capacity building programmes and ensuring adequate working infrastructure including right technology. Leveraging for instance on technology, can greatly improve processes in various areas of operation, including customers on-boarding, risk assessment and lease structuring as well as asset management functions and financials. Essentially, to reinvent processes, technology must be seen as a core factor in the business model.
- Sound Corporate Governance, has always been a major hall mark of any organisation that desires success. Embracing sound corporate governance, will enhance the profile, visibility and patronage of the organisation and endear it to potential investors.
- Improved leasing infrastructure, a favourable regulatory environment will create more visibility for the industry, support the promotion of the ideals of leasing, and more effective participation and contribution of the leasing industry. The ELRA, will be a major booster to leasing activities this year, when it comes into operation. ELAN, has been strengthening its advocacy – engaging with Government and other relevant stakeholders to achieve a healthier leasing environment.
- Maintaining and improving portfolio quality while keeping the balance: This requires understanding of the market dynamics, market intelligence, development of product and niche market, competitive pricing and adapting to market shifts, to grow portfolio within acceptable risk appetite. A total knowledge of your assets is also required, this will guide your reactions in times of eventualities.
- Constructive engagement with market and relevant stakeholders is necessary to secure support from customers, employees, suppliers, creditors, investors and regulatory authorities. It is particularly imperative, that lessors constantly engage with their customers, understand their challenges and reassuring them of having them in mind during whatever times. This will endear the customers to them and sustain the business relationship.
- Continuous review of value propositions to customers, to facilitate a win-win relationship at all times. Endeavour to be seen as problem solvers – this will help to retain their loyalty.
- Controlled back-office costs. Financial discipline and adopting cost saving mechanism to achieve a low back-office cost, will enhance profitability. This has been the main strategy in the industry over the past two years, cutting down on discretionary costs.
- Strategic/Financial Planning – Set smart goals and objectives, constantly monitor and track your budgets, within the context of the business environment while measuring performance from time to time.
- Pricing: set your profitability line, and structure your leases with the right pricing. Also of importance is the consideration of non-financial benefits, lessors should not only cancel relationships based on pricing, but should look at other benefits that may generate from such engagements. For instance, engaging blue chip companies may relate to long standing business relationships.
- Specialisation – players should develop their niche product for the market segment of their choice, however, adequate knowledge of managing these assets is key, to buffer against loss in eventualities.
Indeed, the Nigerian leasing industry in post Covid economy, will continue to be resilient, sustaining its growth and contributions to capital formation. Essentially, the catalytic role of leasing in economic development and especially at Nigeria’s efforts to revamp the economy remains critical . While the opportunities the economy present for the leasing industry are real, the capacity of the industry to fully exploit and meet the huge demand for capital assets appears limited. Overcoming this will require the collective engagements of stakeholders. With the leasing industry redefining its course, developing and adopting appropriate strategies supported by Government policies and goodwill from development partners and other stakeholders, achieving the growth potential and full developmental impact of leasing, is guaranteed into the future.