Omodele Adigun

As the United States (US) and  China flex muscles over tariff hikes, Nigerian banks may have to brace up for challenges ahead as the looming  trade war may engulf the activities that help churn out their earnings.

Raising the red flag in Lagos during a chat with Daily Sun was an analyst, Mr. Keneth Ukanwa, Manager, Technology Advisory with KPMG Advisory Services.

According to him, the banks in Nigeria thrive on economic activities since the business of the banks basically is deposit mobilisation; “getting money from the people who have excess and giving it to the people who don’t get enough. When I said economic activities, it covers investment generally, whether it is Foreign Direct Investments (FDIs) or Foreign Portfolio Investments (FPIs). You know that one of the inevitable ways an economy can boom is the more you invest, either in infrastructure, healthcare or education. And if we don’t have a lot of money moving in the economy, it is also going to affect the boom we are beginning to experience again in the banking sector.

“As you may be aware, the banks’ audited financials for 2017 show improved performance. A bank like Zenith Bank, for instance, made a profit after tax of N178 billion. That is only possible because a lot of economic activities are going on in Nigeria. So typically, the US-China trade crisis can have long-reaching impacts on (local) banks in Nigeria,” he said.

Foreign media reported last Wednesday that China has listed $50 billion goods for possible tariff hikes. This is due to  an escalating technology dispute with the US on plans to raise duties on a similar amount of Chinese goods.

The clash reflects the tension between Trump’s promises to narrow a US trade deficit with China that stood at $375.2 billion last year and China’s development ambitions.

A list which the US issued of products subject to tariff hikes included aerospace, telecoms and machinery, striking at high-tech industries seen by China’s leaders as the key to its economic future.

Explaining more on how this may spill over to the Nigerian banks, Ukanwa stated: “As you know, both China and US are among the super powers. What that means is that they control a significant portion of the world’s economic activities. Of course, if they are to disagree today and decide not to do with each other for the purpose of buying and selling or for whatever purpose, that means they are going to put sanctions on each other. And what you will find out is that there would be factions. The world economies would become divided: some tilting in favour of China, obviously for their own selfish purpose, while some towards the US. What that means is that it is a crisis that would impact not on US and China alone, but also on other countries in the world economic village, and Nigeria is not left out. And what it means is that Nigeria may not be able to buy certain products from China or from the US. As you know today that Nigeria is import dependent. And what it means again is that we buy a whole lot from China. Nigeria has made a lot of money from importing from china, and we also patronise the US a whole lot. So what it means is that, depending on where we tilt, depending on how the crisis pans out, we may have similar restrictions if such restrictions are placed on economic activities either by US or China. This is going to affect economic activities in Nigeria.”

Most Nigerian banks have correspondent relationships with US banks. Investopdia, an online dictionary, defines  correspondent bank as a financial institution that provides services on behalf of another, equal or unequal, financial institution. It can facilitate wire transfers, conduct business transactions, accept deposits and gather documents on behalf of another financial institution.

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If Nigeria aligns with China in the ensuing trade war, it is likely the US will impose sanctions on companies, banks inclusive, doing business with Nigeria. This may ultimately affect the business relationship between Nigerian banks and their correspondent banks in the US. This may invariably lead to contraction in the earnings grossed by the local banks.

Recently, the US government warned Nigeria and other African countries to be wary of Chinese loans. According to its immediate past Secretary of State, Rex Tillerson, China “encouraged dependency, utilised corrupt deals and endangered Africa’s natural resources.”

He added: “We are not in any way attempting to keep Chinese ‘dollars’ from Africa,” he said, “(but) it is important that African countries carefully consider the terms of those agreements and not forfeit their sovereignty.”

Tillerson said Chinese investments “do not bring significant job creation locally” and criticised how the country structures loans to African governments, saying if a government accepts a Chinese loan and “gets into trouble,” it can “lose control of its own infrastructure or its own resources through default.”

The Chinese government has pumped billions into infrastructure projects across the continent, although critics say there is often little gains for local economies because Chinese firms and nationals build the roads and rails.

Commenting on the likely fallout should Nigeria align with the US, Ukanwa said: “If the Chinese is no longer committed to investing in Nigeria;  if we see those Chinese technocrats going back to their country, obviously it is going to affect investment.”

China’s investments in the country as at the end of 2016 was said to have exceeded  $13 billion. Last year alone, it invested $1.79 billion. This showed that the Asian country is one of Nigeria’s top sources of FDI.

The United Nations Conference on Trade and Development (UNCTAD), in its Global Investment Trends Monitor of 2013, said Nigeria’s FDI declined by about 20 per cent to $5.5 billion, largely due to asset sales by foreign oil companies such as Royal Dutch Shell and Chevron.

China has, however, maintained its trade with Nigeria, with bilateral trade volume between both countries rising to $13 billion in 2012 from $2 billion in 2002.

The China EXIM Bank funded $984 Zungeru hydro-electricity project and the $450 million loan for the construction of Keffi Road.