In this interview with PETER OBIORA, Editor of Investadvocate, Olufemi Awoyemi, CEO/Founder of Proshare discuss issues relating to the current impact of the postponed 2015 general elections on the Nigerian capital market, some foreign investors seeking entrant in to the Nigerian market despite the falling oil prices and weakened naira that has affect the country’s growth and foreign reserves.
Other issues discussed include: the state of the naira in terms of a devalued currency, the exchange rate, $52 per barrel oil price benchmark recently approved by Nigerian senate and the first quarter outlook in the Nigerian capital market: Excerpts.
The impact of the rescheduled 2015 elections on the Nigerian Capital Market
The consequences has occurred, the after effect has taken place, the issues are gone, look at the point to which they did the postponement, the consequences of that postponement and the manner to which it occurred sent people into shock and they didn’t recover from it and went for safety. In lending credence to so much uncertainty, what the market can take is to be able to price risks. What they cannot take is not to know what the likely outcomes are. What if they postpone and went on to postpone again? What was missing however, was the real intent of the postponement which meant that the information was not properly presented very well. Now the market reacted the way it should and don’t forget that the market had been boiling up to that point and the issues related to the naira and exchange rate side of it, was something that was always waiting in a bubble; because as at December 4, 2014 we had written that the real value of the naira was hovering around N220, N230. So, if we were going to do devaluation, we had two choices we either do the incremental one or you do it once and for all.
The larger question I was worried about is that why were we trying to defend the naira against the dollar, we don’t need a stronger naira to the dollar at that point in time. What we needed was to let the dollar appreciate through its real value, create disincentive for importation, provide revenue for government; because government has less revenue now because of the oil price crash, when they exchange the dollar, they will have more naira to meet recurrent and some commitments in terms of capital expenditure; but most importantly, the CBN ought to drop the interest rate and the cash reserve ratio. We should be able to move the dollar to about N250 and then drop the exchange rate to about eight to nine percent (8/9%) and then drop the cash reserve ratio to about five percent (5%). Once we have such a mix in terms of your interest rates, exchange rates and cash reserve ratio, we have addressed some of the concerns of the banking industry. Don’t forget that for some reasons the CBN, I stand to be corrected here seems to be focused so much about the banking industry as if it were the only engine room of the economy.
Meanwhile, the informal sector is what drives growth and the non-access to capital is what creates the schisms within the whole system, people cannot access loans and the banks obviously I don’t know the reason; either because of the arbitrage within the CBN’s overnight lending rate which makes it easier for them to put money in the CBN, their opportunities in treasury bills which are highly priced far higher than what you will get with less risks. But there is a limit to all these, so if we say for example we target a 10 percent growth rate, we allow our exchange rate to stay within N250, N300 and then you drop your interest rate to about eight percent that means one, even if we are promoting export, we have less to even export, because we have more to give to our people and they can’t import anymore.
Once we drop the pressure on our requirement for dollars not importing, we then have to focus on our dollar requirement to buying what? Equipments, engineering and all those capital expenditure we need to transfer technology locally so we are producing locally and it makes it easier; because importing becomes more expensive for us. All these where always there; but when the political thing came up, it just exacerbated the whole issue, and so people just went for flight to safety. And there is only one rule, when your minister of finance comes and say do not panic, your central bank governor tells you do not panic. By their very nature, they don’t tell you do not panic, once they say do not panic, the first rule is that you must panic, but when they come out to say it the second time, you don’t panic again, you know what you do? You then accept panic as real. Then you act, you go for flight to safety, then self preservation comes in and that what happens? Those flurries of CBN’s pronouncement such as don’t use this dollar, domiciliary accounts and those fire fighting approaches. I empathize with them in that regard and kudos to them that it has been managed up till today, one must give credit. But it’s still a deferred action, because when you look at it really, how did it affect the capital market based your question, it’s a simply analogy, it’s about the profile of our capital market, you have the preponderance of foreign institutional investors in our market who therefore, have been hitherto used to a stable exchange rate; which means they can plan very well. Now we have this kind of incentive, it creates a disincentive for them when they bring money in and it goes into the system, by the time they are changing it back, they might probably have less to takeout. The natural thing to do is that they a running back to safety; because comparatively they are better in moments in which they should put those funds in there. Some people describe it as hot money, but I’m saying they owe no allegiance to us; it’s just a way in which the market works and so that naturally occurs.
The second problem is that this market does not have the liquidity, we are not there and in the third instance we do not have a retail culture whereby we can amass savings into our market. Once there is no retail culture and we are just like institutional brokers who are taking action, they take positional statements which are significant. Also, we don’t have savings mobilisation which can create a balance for us and as such we are exposed to the vagaries of all these external factors which we have.
Now going forward, people have then found out that thankfully that the elections were postponed because the issues around the permanent voters card (PVC) that INEC has to do the testing long after the date which does not sound right. Anybody who is in project management understands that these things ought to have been done much earlier in the stage before we got to February 14. Again, its neither here nor there, it then convinces us that people perhaps; it’s not such a bad thing that Nigeria postponed its elections after all and as such, the market begins to factor that into the whole idea and the communications from the presidency and the opposition party, concerning their focus on the March 28 also rekindles the expectation, what should not happen is that should anything derail that particular objective, it will escalate the matter further and the capital market as we have is really bleeding because they are not much activities the operators are actually involved in right now. Therefore, they are going to have some level of stagnancy, what everybody is waiting for now, is for this election to be conducted, for a government to be formed, and for Nigeria to move on peacefully thereafter. I’m sure financial managers have also factored in a period of some in-balance in terms of some concerns and issues, but we do not expect it to move on for too long because the stakes are too high for the Nigerian economy at this time than to delay with such issues.
Despite all these, why are foreign investors still seeking to enter the Nigerian market? Abeerdeen Asset Management said the naira needs to weaken more to lure foreign buyers.
Rather than say the naira has been devalued, we can say has the naira been revalued to approximate the reality for investment purposes, I will feel more comfortable with that. The naira is been revalued to approximate the reality for investment purposes. And as such you see those individuals therefore understand full well that this naira, the way they see it is going to still be revalued and they see arbitrariness. For example the forwards market is already pricing the naira at about N285. So, if they are doing that, a smart investment manager will understand that he can take position at this point in time; hoping full well that he can make some margins. So you will find that what the Aberdeen Asset management said is not rocket science, it makes senses, like I said earlier, I’m saying that we can go as much as N250, N300. Gone were the days when you thought it was there, a strong naira doesn’t work very well for us. Everybody is trying to making their economy against the dollar. Russia tried defending their currency against the dollar, but after awhile, they dropped. We don’t need to; but there are important arguments against Nigeria allowing its currency to a free float. One we are not an export economy like most of the countries who were able to allow their currency to a free float. That said, we cannot even afford to be an export economy in the next few years, so we must find some pragmatic means to balance it; that’s why I used the word ‘Revalue’. We revalue I will rather than take the incremental approach; the difference for me is that did we take the incremental approach or take the one bite. For example, I believe that the central bank should have just gone to N200 in one of the Monetary Policy Committee (MPC) meetings late last year. I do not see the essence of holding an MPC meeting in 2015, because there is nothing we are going to do to that was significantly going to alter anything going into an election, we would have taken that and would have dropped the Monetary Policy Rate (MPR). Again, if you find them looking at the answers, from the a banking perspective, you will see it all in terms of the banking industry; but they look at the larger 70 percent of the population which is in a formal sector, they would understand that they need to re-change the banking focus to align with the economy and that for me is something I think that the industry is moving closer towards each other and these schisms in January and February in the exchange rate has allowed both the central bank to discuss with the organised private sector and begin to understand that yes you can discuss with the organised private sector and everybody; but hold on, this economy is farther than beneath an informal sector.
EDITOR’s NOTE:
On February 16, Kevin Daly,who helps manage $13 billion of developing-market debt atAberdeen Asset Management Plc in London told Bloomberg that the naira needs to weaken more to lure foreign buyers.
Will the current foreign reserve of $31 billion enough incentive for foreign investors to be lured back to the Nigerian market?
$31 billion is less than a year credit cover for Nigeria. The question is this, what is the optimum mix of credit cover as reflected in terms of our reserve vis-à-vis our ability to pick a position in terms of our exchange rate policy. If you compare those who have the production levels of Nigeria and all other OPEC countries, vis-à-vis their reserve, you will find out that people like Russia, Saudi Arabia can wear out the challenges of this oil price crash for a longer period because of the reserve they built up over the years and don’t forget that in terms of economic indices, like poverty etc some of them also have issues like us, but they learnt the whole idea of building reserves, not only do they have reserves, they have very significant sovereign wealth funds which they have held to provide what we call support system for themselves when they face these vagaries in their economy. But Nigeria will only be comparable with somewhere like Venezuela which is even in a worse case that we are. So, what is catching up with us is the years of not having a culture of managing properly the economy.
About whether the $31 billion foreign reserve enough incentive for foreign investors to be lured back to the Nigerian market, the whole idea is that if you look at the benchmark or perhaps what we use in terms of our pricing, even if Nigeria sets up a budget in terms of revenue, what naturally comes to Nigeria is far higher than the revenue, an argument that I’m still finding it difficult to understand; because I do not understand how a country can budget a revenue far less than their expectations. If that is true, then it creates concerns that those indices we are looking at may not be true measure to make any sound analysis hence sometimes we do not understand how the economy continues to thrive despite the analysis. But if we stay within the prism of the analysis and assume that those figures are correct therefore, my sense is that we are going to face a bit of challenges, because we will draw down on those things having a huge cash requirement and that’s the more reason why Nigeria will have to revalue and adjust the exchange rate upwards so that they can have more naira to meet salaries, payments and bills; because no other place they can get it. There are no incentives on this; the whole idea is that you are a candidate for borrowing right now; but not in a strong position to even dictate terms; because you don’t have the reserves. If there is anything, it’s a disincentive because you borrow money when you have more money. You don’t borrow money when you have less and they price your borrowings at a very high rate, your risk is higher because you have huge borrowings; but if you then look at Nigeria debt, the total debt-to-date for Nigeria relative to GDP is still well within tolerable limits. I think from the last calculation done, having factored so many other things in place, you will see that we are still within the range and you find other countries going up to 40 percent and 50 percent, Nigeria is still not up to that level. So, there is headroom for Nigeria to still take specific borrowing. However, the question is and should be if there is going to be any borrowing, is this borrowing going to go into recurrent expenditure? No it shouldn’t. Is it going to go into capital expenditure that is going to create some value added and some succour for us during the short term so that we don’t overexpose ourselves too much? I can assure you that whichever way you look at it, come May 29, whoever sits in that office, either the incumbent or the new person has some serious economic management issues to deal with.
FACTS CHECK:
Nigeria’s foreign exchange reserves dropped 9.04 percent to $30.87 billion by March 4, from $33.94 billion a month earlier, CBN data showed on Friday.
A Reuters report say the central bank has used the reserves to support the ailing naira currency in Nigeria, which has been affected negatively by falling global oil prices and uncertainty over the delayed presidential elections due later this month.
Click here to view CBN’s Movement in Reserves (30-Day Moving Average with effect from November 2011)
On companies doing rights issue and foreign investors standing aloof
Two concerns in terms of the rights issues, first banks have to comply with Basel II that means they have to take care of their capital requirement, given the distressful state of the IPO market, they cannot raise the money. So they will learn how to do some rights issue, they needed to do some rights issue that means they are calling upon members who really own the company to say look at the viability of the institution, even though there maybe challenges now, we can ride the storm and that means they have to convince certain people why they can take up their rights or trade it.
Again, we need to understand the nature of these institutions coming to raise fresh funds through rights issue. For example, Access Bank Plc is different from a United Bank for Africa Plc (UBA). Access Bank by its nature is mostly owned by institutional investors, in fact the reason why they had the issue around technical suspension were activities and concerns raised by their institutional investors. The more interesting thing to know is whether those institutional investors took up their shares or traded it. Also, the real figure which we should be looking at is to breakdown these rights issue whenever they are concluded to look at who took up and who did not. That should tell you the direction to which they are thinking, my sense is that the bank is doing the most responsible and credible thing; like every other bank that did before it; including Diamond Bank who was marked down initially after it did its rights issue like it happens normally and it then picked up again. I think we are confusing the issue in terms of the rights issue and stress test.
The rights issue is a natural reaction to them meeting their requirement, if that is true therefore, and you do a stress test, you should do a stress test for capital adequacy as well and the ability to meet Basel II. The natural thing is that when you issue out a stress test, you come out and publish a report explaining it. The CBN only sent out its opinion that the stress test it covered was appropriate. And it specifically said it relied on year 2014 figures, these are figures not yet fully released to the public. But some of us have looked at some of these figures from their management and audited accounts and I can assure you, that if they say a bank has passed a stress test, it will be important to look at the same parameters that was released during the Sanusi Lamido era; whereby you have all those indices in which you look for in a stress test are there and you can take cue from the one recently done on American banks; just last week, whereby it published those criteria they looked at and said this is how American banks will fare and then you can tell the period it covered.
Now, was the CBN doing this stress test while all the exchange rate challenges were going on? And if it did so, it will be important to see a component therefore, how do the Nigerian banks who are exposed to dollar denominated borrowings cope with it? How did they also factor Nigerian companies who are also exposed to dollar denominated loans but who earn in naira manage to keep their books in order? Now, if the CBN can explain some of the incidents around the exchange rate exposures, it will also help us understand that beyond the traditional things we look for in a stress test, they have factored in this new thing as well. So, maybe we would want to wait for the CBN or the banks for the CBN to actually publish the impact of the foreign exchange challenge on the Nigerian banks.
Do you see the exchange rate moving up to about N300 before the elections?
This is from data and based on what I see in terms of the features market and I see in terms of comparative advantages around the economies and currencies globally. I envisage that by June or thereabout, Nigeria’s currency should be moving around N250, N260 in the black market. Hopefully by the end of the year, early next year, and if we get our acts right and we understand the triggers of which we can achieve growth in the economy, we would naturally increase that as well up to close to about N300. This is not just in support for the devaluation; it’s just a harsh reality before us. And we need to do that to promote our local activities so we must take that single action; but we can’t just take it in isolation. We would have to take it with consideration to our fiscal policies to our tax rate and to those specific sectors which we expect to energise the economy. For instance agriculture, giving loans and tax waivers so that we can balance the whole idea. It’s not just so much as drop the rates and leave everything hanging; but I honestly believe that we should be moving towards that.
On the $52 per barrel as oil benchmark price recently approved by the Nigerian Senate
I have never taken the benchmark serious on a personal note, why because in the last four (4) years the Nigerian federal government has never met even its own revenue target; but it’s always tried to meet its expenditure target, and that for me means that the benchmark really doesn’t matter; because we shouldn’t be planning to spend far much more than we earn. When we therefore have a mix of whereby 70 percent is in our recurrent and 30 percent in our capital expenditure. What we are expected to be doing is to understand how will we fund our capital expenditure. Here is my own philosophy about it, we take the oil revenue from the country and use it to fund our capital expenditure. Then our non-oil revenue, taxation from people like me, you and everybody. Such should be used to fund recurrent; then one or two things will happen, is either we begin to adjust our recurrent relative to our income; but we grow our non-oil revenue as well. The key issue in Nigeria is never about whether we want to diversify the economy, the economy is as diversified as we may want it, and the revenues of government are not diversified. And in the cases where they are identified and properly noted, the collection has challenges because there are so many leakages in the system that you can’t get it. If you look at the Federal Inland Revenue figures; it’s been year-on-year increasing; but what about all those parastatals that also earn revenue, what has been happening to theirs, when was the last time we saw the audited account of the country been made public for us to see. I think the issue for me is not to go round all these. I will like to see audited accounts of the revenue centres of the economy and that of the country itself and then we can begin to understand what is the meaning of budgeting. Why are we talking about budget? When we don’t even see the audited results for us to make sense to know whether is in order. We are just talking about the budget in a vacuum.
EDITOR’s NOTE:
Nigeria’s Senate and the House of Representatives on Wednesday settled for $53 as the crude oil benchmark price for the 2015 budget, according to Investigations by Punch Newspaper.
The report say the Conference Committee of the two chambers had agreed on the figure ahead of today’s (Thursday) anticipated passage of the N4.3tn budget by the National Assembly. The two chambers of the National Assembly had earlier opted for separate oil benchmark figures before the reconciliation. While the Senate settled for $52, the House of Representatives recommended $54. However, both chambers adopted $53 as the final figure after harmonisation.
Source: Punch
Outlook for the first quarter of 2015 in the Nigerian capital market
It won’t look good for the market; it will be a negative position because there is nothing that will happen between now and then that would change the overall year-to-date negative position that has been there. But, it is fairly reflective of the state of the market as it were in terms of its breadth, depth and liquidity position. We cannot get any better than what we have right now. And I’m sure the Nigerian Stock Exchange (NSE) knows that; same with the Securities and Exchange Commission (SEC). And I’m sure they are trying to make the best of a bad situation right now; so there is really nothing to get excited about; don’t forget we are dealing about institutional investors; both foreign and local, also the component our retail investors are gone. When you are talking about this, you are just talking about a small window of opportunity. In this market, I think we should be interested in seeing how the market in the OTC market has built up, how the FMDQ is now building up its capacity, resources and in terms of its activity. We have more markets than one now. We should be able to look at the whole market in totality and in any situation as one market goes up, the other market is going down and we then create a balance as it were. It will be good when we have the situation whereby all the markets are good; but we can’t do so in isolation of the economic realities, so for me I think whatever we are getting from the Exchange now is almost the best we could get under these circumstances.
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