In this interview with Yemisi Izuora, Sewa Wusu, Head, Research and Investment , Sterling Capital assess the economy in line with crashing oil price.
Excerpt
How would you assess the national economy?
The performance of the Nigerian economy is not too far-fetched, one as an oil dependent economy.
We have pressure in terms of our earnings, for oil exporting, definitely when oil prices are down, our revenue goes down, and that is exactly what affected us, our revenue has gone down in terms of our earnings because we are mono product economy, and what that means is that government will not be able to finance some of our projects.
So if government cannot finance its project, what it also means is that the economy will not be able to stimulate in terms of investment to boost the economy, in creating employment and generating the needed investment in some critical sector of the economy.
so the bottom line is that our economy is challenged by the decline in oil price, everything revolves round the oil price. Globally, so far as an oil exporter and as a mono product economy, we are challenged. That is the basic thing.
Then if you look at countries like India, they import oil, so a decline in oil price is favorable to them because they import and can deploy the excess to another area of the economy.
So India is more or less enjoying the declining price unlike we that export oil.
So that has affected our economy drastically and if you look at our budget, our budget is being pegged based on the amount of dollar we earn from oil.
Now that the prices are down definitely, we would not be able to meet the budget expectation, and that explains why we are having deficit in our budget every year.
So it’s a big a challenge to our economy that is why everything is a bit slow.
So how do you think the economy will fare in 2016?
Well we have seen the reality now, (CBN) Central Bank of Nigeria has come up with a policy to stop dollar sale to (BDC) Bureau De Change.
What that means is that the BDC sector will not have access to sales from CBN. They are to source their dollars from autonomous sources, that is done to kind of reduce pressure on the reserve.
The immediate impact of that is that the parallel market is stressed up, it goes as high as N300 – N305 per dollar and the CBN governor was summoned to come and explain why there was pressure on foreign exchange, I think basically that is the challenge.
Because if we don’t get enough foreign earnings there is no how the currency will not be pressured.
One , we are a mono product economy , we are not producing, everybody is calling for devaluation, yes the right thing to do is to de-value, looking at situations of things, but if we de-value, we are not producing anything that is cheap, that will attract foreign interest to buy.
It is when your production is cheap, that when you de-value that outsiders will want to buy, then you can earn foreign exchange, but if you are not producing and you de-value, you will hurt your economy because we are an import dependent economy.
Those that are importing will be importing at higher cost, Naira/dollar exchange will be very expensive and that will be a burden to importers, and they will in turn increase the price and pass the burden to consumers which is what is called imported inflation, that is why we are challenged now.
How does the crashing of oil price affect the capital market? What is the correlation?
Everything revolves round oil. For instance look at the quoted companies, remember there was a time around 4 – 7 years back, a company quoted on the floor of stock exchange has a terrible blow in terms of foreign exchange rate.
I am talking about flour mills, when the value of naira drops significantly, it affected flour mills, exchange rate increased.
Immediately the market got that note and their share price dropped. Once the oil price is down the market will be affected.
It is a general phenomenon, oil price revolves round the whole of the economy, everybody needs oil, the vehicles, engines and machines, industrial production companies will run on oil, so in a situation like this, it will affect the market.
Do you foresee foreign investors coming?
The level of foreign direct investment into the Nigeria has dropped, the reason is because of the global economic challenge.
Secondly is our Naira. There is no clarity in terms of the foreign exchange, if I bring in $20 million how much will I convert it to, how much will I earn under this condition, that is why foreign investors are leaving.
There are two types of foreign investments, we have the foreign direct investments and we have foreign portfolio management. Those ones come to look for returns, they want to invest in equity, invest in governments bond, they want to invest in treasury bill, they Want to invest in something that will give them returns commensurate with the risk they are taking.
If they come they bring their money, convert to Naira and then they get some benefits in terms of returns, and for them to repatriate their returns and their capital.
If they cannot find foreign exchange, so they will rather stay away instead of risking to come.
Foreign direct investment is what our economy needs to grow because those that are the long term fund that any emerging economy needs, but they have to be attracted by providing a conducive environment to do business.
Your laws, and other factors that should be in place for you to attract them to come, because they will come and invest in different sectors either in mining, agriculture industries and they will create job opportunities, so government need to attract those foreign direct investors and if this type of investment comes from abroad, it will also help your foreign reserve.
What can government do to boost the capital market or to revive the economy?
What they can do is that government will be ready to spend more money.
That explains why a lot of emerging economies are revisiting their monetary policy so that people can invest, have access to credit and interest rate at a lower rate and borrow at a lower rate.
What the government can do to stimulate the economy is through spending more, they have started that through this budget, which is the largest budget in the history of the country, and how do you fund your budget?
You have to borrow from abroad and you have to borrow domestically as well. If you borrow from abroad, dollars will come in, and that will help your reserve substantially, just like Ghana did lately.
As a matter of fact IMF approved another 115million US dollars for Ghana recently. When they received the first tranche, their foreign reserve appreciated and it boosted their economy.
So we need to borrow more and we need to also spend judiciously, not just spending anyhow, there must be a clear cut blue print of our spending.
If we can budget N 6.08trillion, how do you allocate this fund to get the desired result in the economy?
But I think if this government will follow this budget and spend accordingly, I think we will see the desired result, but if it is not well monitored and executed, then it will not be easy to achieve the economy objective.
How do we sustain the on-going e- dividend campaign?
If you look at what is happening in the world now, everybody is talking about electronic payments etc.
We have no choice than to follow suit because that will make life more easier for investors.
Instead of waiting for dividend warrant your dividend will just be credited directly to your account without stress, it is a better option.
How do you rate Nigerian Stock Exchange side by side with other emerging market?
Nigerian Stock Exchange is very okay, we have a very ambitious management team, and they are working hard to improve the market in terms of making different products available.
In terms of regulation and corporate governance and in terms of quick response to market issues, I think they have tried.
We have young management, very agile, proactive, though I’m not praising them, but it’s obvious. When you look at products offering, many new products has been introduced into the market and these are products that thicken the market. We cannot say the market is not ripe for these products, when will the market be ripe?
Somebody must do something. If not because of the global development, I think we would have seen tremendous impact on the Nigerian Stock Exchange, but because of the global meltdown, that is why you see that share prices are falling, Investors have lost confidence, that does not mean that the market is not well.
The fundamentals of the market are very strong, we the investors are very speculative, we don’t have patience, if this current scenario changes, investors will be happy.
The government should re asses the budget plan in terms of dollar peg, probably to review it downwards, because the way the crude oil price is sliding or falling now is apprehensive.
We need to change the bench mark that they constitute the budget with so that they will be on a proper level with their estimate.
But the output bench mark we have calculated is about 20 US dollars, that it is very ambiguous we need to bring it down. When oil price is dropping definitely it will affect our Naira, the Naira will keep depreciating, and it is not going to be easy.
The government also said in the budget that they are going to diversify the economy into non oil sector growth.
I think that is very good, if we are operating a diversified economy, oil is just one of them, it means we will have foreign exchange from mining sector, from Agriculture and from other sectors that are not even been looked at before, then if price of oil is dropping, it will not affect us because we are earning more from other sectors of the economy that will help the budget.
So oil will just be an added advantage. But we have neglected other critical sectors and concentrated mainly on oil that is why we are been pressured. But I think this budget is meant to address this.