Adegbohungbe: Increased Investments Required to Boost Economic Growth

The Managing Director, Coronation Merchant Bank, Banjo Adegbohungbe, in this interview stresses the need for to address certain bottlenecks that have continued to hinder economic growth in the country and also calls for increased private sector investment in the economy. Obinna Chima brings the excerpts:

The Central Bank of Nigeria recently ended its weekly foreign exchange sales to Bureau De Change (BDC) operators and since then we have seen the naira appreciate against the dollar on the parallel market. What is your take on the central bank’s action?

It is a welcome development. As you know, there had been a clamour for reforms in the foreign exchange market, and also the country is facing a challenge at the moment. So, when you situate those two factors, it was the right time for the central bank to do this. What they have simply done is to say that for demand for foreign exchange at the retail end, things like Personal Travel Allowance (PTA), school fees, medical payments, among others, that such demands should migrate to the banks. Mind you, people used to be allowed to the banks already.

That was already there for those transactions. But essentially, if the CBN does not supply the BDCs, we expect that demand with the BDCs to migrate to the banks in addition to the demand that the banks are already managing. What is the reason for that? The CBN Governor was quite explicit during his media briefing on the matter, so I won’t talk much on that. But I would say that the banks have already expressed publicly our commitment to support this initiative and ensure that this demand is adequately met and that customers are well served. At the end of the day, we expect that ultimately, it should bode well for price moderation in the parallel market.

So, what is your outlook for the naira?

I think you have seen devaluation in the past 15 to 18 months, given that we had some challenges last year with COVID-19 and declining oil prices. Even though we have seen a measure of recovery, FX liquidity remains a challenge. On the supply side, we still have challenges and it will take some time before that is completely addressed. So, the anticipation is that we could still see some slight devaluation, but they are doing it in an orderly fashion. So, instead of having a big step devaluation, we are having small step devaluations over time. We have had about two or three of such. From N360 to a dollar, to N390 to a dollar and N410 to a dollar. So, you are going to be seeing these types of creeping devaluation. As you are aware, the federal government is working on issuing a Eurobond. This will provide additional support to the reserves, and I think it would further slow down the pace of the devaluation. If the Eurobond is successful and the government raises as much money as they are projecting, that combined with the proceeds of crude oil sales would ensure that we are not too far off from where we are in terms of the official exchange rate.

But what is the role of the fiscal authority in ensuring stability in the foreign exchange market?

On the fiscal policy side, those principles are in place, but you know the execution is not entirely with the government alone. There has to be concise joint participation both on the side of the fiscal and monetary authorities on one hand and the private sector on the other hand. Let me give you an example: People don’t talk too much about exports, but non-oil exports have provided some support for foreign exchange supply in a little over a year now. But everybody focuses on proceeds from crude oil sales. Imagine if our export of things like cocoa, sesame seeds, oil palm, etc increased.

Today, if you breakdown our foreign exchange receipts as a country, non-oil exports account for less than 10 per cent. But when you look at the arable land we have in Nigeria, you hear people say we have not even cultivated up to 20 per cent of the arable land for many of these commodities. So, you ask yourself, what would our foreign exchange situation look like as a country if we are producing in line with our potential and we are exporting, not just the raw products, but by adding value and manufacturing some of these things here and exporting them. So, the picture will look very different, and we won’t be dependent on oil, and we won’t be exposed when there is any crisis that affects crude oil price. These are some of the factors we are looking at in stabilising the currency. Imagine if the investment in agriculture were to match the potential we see and the impact it would have on our reserves.

This is just one example and there’s so many more things we can consider across various sectors of the economy. The fact that we import refined petroleum products is another example. When the Dangote Refinery comes on stream and also the public refineries that the government is talking about refurbishing and we start refining crude in Nigeria, then we would have no business importing refined petroleum products in the country. A big chunk of our foreign exchange receipts are spent on importing refined petroleum products. So, there are some structural things that need to be addressed and you need involvement not just from the government but also from the private sector.

The federal government is planning to issue Eurobond, do you think the environment is ripe given the current situation in the global economy?

First of all, we have a very strong track record of meeting our obligations as a country. Yes, we had challenges in the past, but remember that several years ago we negotiated and successful exited the Paris Club debt challenge. But we have had a clean slate when you look at Eurobonds. We have been meeting our obligations. I agree with you that the risk is such that the pricing might be a bit higher than what should have been obtained if there was no COVID-19 pandemic. But given that the credibility of the federal government as a borrower in the Eurobond market is still relatively intact and also I should point out to you that we have seen quite a number of banks that have issued Eurobonds in the last six months. We saw issues by Ecobank, FirstBank and so on.

Also, in sub-Saharan Africa, recently we have seen issues by Ghana and one or two other West African countries that were relatively successful and the pricing wasn’t that bad and the demand was still there. Don’t forget that in the western world, yields that are available to investors are really quite low and have been low for several years. So, there are a number of factors that if you put together would make you project that the demand is there and we should be successful in raising the targeted amount. Now, in terms of the benefits, the biggest benefit is addressing the issue of foreign exchange liquidity. Whatever is raised would really boost the central bank’s capacity to support the currency and improve the supply situation which has remained a challenge for some time. Last year, we got $3.4 billion from the International Monetary Fund (IMF), but negotiations with the World Bank and all the conditions that they gave us meant that we didn’t get anything else significant apart from what we got from the IMF. We only got some form of infrastructure support from the World Bank. Apart from that, we didn’t issue Eurobond last year. So, I think that whatever we can get from the Eurobond would provide some relief in the short to medium term for the supply side and improve liquidity in the foreign exchange market, which in turn has its other benefits. Again, improving foreign exchange supply, even if it is marginally, would help improve a lot of economic activities that are import-dependent.

But don’t you think the concerns about Nigeria going into a debt trap are genuine?

You know when people talk about debt, economists would tell you that debt in itself is not bad, but that the issue is what you invest the proceeds of the debt in. The federal government has responded severally to tell people that it is focused on investing the majority of this debt on infrastructure, and if you look around, there has been a lot of infrastructure-related debts that the government has raised over the last few years. So, historically as a country, the challenge we have had is not the fact that we borrow but the economic benefits that we derive from the debts we raised. So, it is not the fact that we borrowed, but what we did with the money. If we can be consistent about ensuring that the money is invested in infrastructure or in sectors that would ensure that there are derivable and tangible benefits in terms of economic growth, job creation and others, that in itself is not a bad thing. That is because when the economy grows, and those jobs are created and productivity improves, the government gets additional revenue in terms of taxes and so on and that improves its capacity to repay. So, while people always look at the fact that the government is borrowing money, they should also be talking about the things that we can use that money for. Infrastructure is a very big example because of our high infrastructure deficit. So, suppose you are to invest in a lot of these critical infrastructures, the evidence is there that it will stimulate economic growth if we invest in things such as power, transport infrastructure, and others. The economy should be experiencing double-digit growth if those enablers were there. So, I think the argument has been largely one-sided when people talk about debt.

So with inflation still around 17 per cent, what instruments will you advise a discerning investor to stake his funds on in order to beat the high inflation rate?

The range of instruments are out there; the challenge is that sometimes people focus a lot on the short end of the curve. But, if you have a much-broader view, there are opportunities. There are good opportunities in equities and there are still some relatively good picks in certain sectors that are doing well. Even in the current economic crisis, there are some sectors that are still benefitting significantly. An example is the FMCG space. Beyond equities, if you look at the fixed income market, yields have improved considerably in the last few months. So, in the fixed income space the bonds have significantly better yields, but not beating inflation yet. And I think one of the things that is also important and which we are also doing, is to ensure that as a bank, we are channeling clients to instruments where they can get the best returns and that there is sufficient awareness of our customers and clients on the sectors that are opening up, such as fixed income, the debt capital market and even equities. And quite a lot is going on in that space where you can get significant returns. I think that on the whole, there isn’t as much awareness on some of these sectors as people have for short-end money market investments.

Your firm recently organised a knowledge-sharing forum to promote inclusion of private companies in the capital market. Can you shed more light on this significance of that event?

There were a number things that we set out to do. One was to bring the investors, issuers and the operators together in one forum to discuss opportunities in one sector of the capital market, which is the private market and to generate awareness about the market. We thought that the private market represents one of the opportunities for investment. In the debt capital market, the private market represents a growing space and we thought that issuers in particular needed to understand from the experts, the opportunities in that market to raise debt and raise equity better than what obtained in the past. So, these were some of the reasons why we did that and I think the response was quite encouraging from the issuers and participants at the forum; not just that we generated that awareness, but we think it is an ongoing conversation and over time you are going to see more growth in activities in the private market segment. People focus a lot on the public segment of the capital market; but we think there should be more emphasis and focus on the private market. We see a lot of growth opportunities in that segment and we wanted to promote that.

What is your projection for the capital market and the economy for the remaining part of the year and what do you think can be done to stimulate economic growth?

We have already talked about exchange rate. I think in terms of economic growth, we are going to see stronger growth in 2021 than in 2020, for a number of factors. So far we have not really had a lockdown and economic activities have really picked up. We have already seen marginal growth in the first quarter and we think that trajectory is going to improve in subsequent quarters as the economy continues to open up both globally and in Nigeria. Also, in terms of economic growth we have seen several positive forecasts, but definitely you know last year was a contraction, but this year I think we would return to growth. It won’t be strong, but certainly anything between two per cent and 2.5 per cent growth is positive. That should have its own effect on things like unemployment and others. Some sectors would do better than others. You must be aware that some sectors such as telecommunications, despite the pandemic have done quite well. Also, some segments of the manufacturing sector, particularly the FMCG space have recovered quite strongly. Real estate has recovered and oil and gas is beginning to recover, with improvement in oil prices.

Mind you, there are still clouds on the horizon, especially with the threat from the Delta variant of COVID-19 and we don’t know if there are other variants and whether this could impact on economic activities. We still see clouds on the horizon. But for now, I think things are going in the right direction. With regards to government policies, we need to encourage investments in certain key sectors of the economy to promote economic growth. We also need a strong collaboration of fiscal and monetary policies to do this. I think on the monetary policy side we have seen quite a lot of interventions from the central bank such as the Anchor Borrowers’ Programme, among others. On the fiscal front there have been some incentives largely in response to the COVID-19 situation. But I think that we still have some way to go. Overall, we expect 2021 to be much better than 2020. The real question will be how do we move things forward from there? Are we going to execute some of the reforms that are required in critical sectors to ensure that the trajectory continues.