Otunuga: A Recession May Dampen the Morale of Nigerians


Cyprus-based Research Analyst at ForexTime (FXTM), Mr. Lukman Otunuga who was in Nigeria recently, in this interview with Obinna Chima, said the expectations that Nigeria may slide into a recession is a concern to a lot of investors, adding that a recession may weaken morale in Africa’s largest economy

With all the issues in the macro-economic environment, what in your opinion is the future of the naira?
I have been studying the naira for an extended period and it is good to start with the reasons why the naira is where it is presently. We know that Nigeria is heavily dependent on the export of crude oil. So, when oil prices crashed heavily, that impacted the Nigerian economy with government’s revenue taking a big dip. At the same time, if you look at what is happening in the United States where there are expectations that the Federal Reserve may raise rates again this quarter, in order to boost the value of the dollar. So, the whole combination of fall in oil prices, the decision by the United States Federal Reserve have all weighed on the value of the naira. Even though the dollar is not a legal tender in Nigeria, the dollar has a big impact on the economy. Whenever the dollar appreciates everybody around feels the pain.

For example, because most of the items in Nigeria are imported, the prices of goods and services have all increased. What makes the situation worse is the growing concern that Nigeria could actually be on the brink of a recession. The Gross Domestic Product (GDP) growth was below expectation in the first quarter of 2016, and if the second quarter also follows the same negative path, the country would go into a recession. So, when you add all these together, of course it would impact negatively on the exchange rate. To my knowledge, in the black market, the naira is around N350 against the dollar and there is a possibility that it could weaken further as expectations that the economy could actually into recession heightens.

Are the measures being introduced by the monetary and fiscal authorities in the face of the economic challenges facing the country appropriate?
Looking from outside and how the world is viewing Nigeria, there have been many talks, almost vilifying how the President Muhammadu Buhari’s regime has been managing the naira and the economy. I have read several comments by the president about how his out-dated policies of the past are reasons why the country has been managing the exchange rate. What the monetary policy committee (MPC) of the Central Bank of Nigeria did at their last meeting, by leaving the monetary policy rate unchanged. We were all expecting that with the inflationary pressure, interest rate would have been hiked so as to curb inflation. That would have been a short-term measure to reduce the pressure in the economy.

A lot of people are already expecting that the second quarter GDP would also fall below expectations and if that happens, morale in Nigeria is going to be low. Then, we would all know that the economy is in recession. That could actually force the central bank to implement some aggressive monetary policies in order to promote growth. Now, everybody is talking about devaluation and it is a very sensitive topic. With the way things are going, even though President Buhari had stated that he may not want the currency to be devalued, if a recession sets in, Nigeria may be forced to devalue as bad as that sounds. But we have to look at the scenarios. The reason why a lot of people are against a further devaluation of the currency is because Nigeria is an import dependent economy, Nigeria doesn’t do a lot of export. So, devaluation might be a double pain because when that happens, it is going to trickle down to the common man.

If you are to recommend to Nigeria’s policy makers, what policy prescriptions do you think they should consider?
To the best of my knowledge, I would suggest a bond-buying programme or more of a quantitative easing in order to save the economy. It is going to be quite hard. Another thing is that a lot of people are waiting for the modalities about the flexible exchange rate that the central bank intends to introduce. People are waiting to see what they mean by that. So, the central bank needs to work on transparency. Yes, quantitative easing should be seriously considered. We have to remember where the black market exchange rate is and we need to understand that the date is determined by the people and not the central bank. It is the sentiment of the people in the black market that determines the value of the dollar in the black market. And as the dollar keeps rising against the naira, cost of goods and services are being passed down on the people.

What are the likely effects of Nigeria’s recent currency swap deal with the Chinese government?
To my knowledge, Nigeria has tried to do a couple of things to try and pull itself out of the situation it finds itself. We have seen that they have added the Yuan to the currency basket and there was also a $6 billion loan deal. The first thing about the Yuan basket is that it is good because 70 per cent of our imports are actually from China. So, what the CBN actually wanted to achieve was to reduce the demand pressure on the dollar and move it to the Yuan. But that is a very long- term thing. It is not something that we can see the effect in a year or two. It is probably going to take a decade. That is what people should understand. So, it is not something that is going to happen overnight. At the same time we must understand that the Yuan is a currency that the Chinese central bank can easily devalue. If they do devalue the Yuan to boost their export, of course it is going to hit back at Nigeria.

What are the opportunities for currency, gold and crude oil traders?
The year 2016 has been a year of heavy volatility because there are so many things that have happened. At the start of the year, there were concerns over slowdown in global growth which shook the global stock market. The Federal Reserve hiked interest rate for the first time in almost 10 years in December 2015 that caused uproar. At the same time, remember the Chinese stock market crashed in the first part of 2016 as well as a result of concerns about global growth. At the same time, if you look at the Japanese economy, there are fears that it might be on the brink of another recession. Finally, we have the Brexit concerns and the European Union referendum on the 23rd of June. So, if you look at the global economy, there is so much volatility and volatility provides trading opportunities. But you have to understand what the main themes are. The main themes in the market are: as strengthening dollar and the second thing is the price of gold.

This is because gold and dollar are symbiotically linked. Whenever the dollar increases, gold falls. Oil price is another big thing in the market. We know oil price fell because of oversupply worries. The days of triple digit oil price are gone. Once upon a time oil price used to trade over $100, but with over-production globally showing over supply, of course price would fall. But just in recent times, there have been short-term disruption of oil installations in Nigeria as a result of renewed militancy by the Niger Delta Avengers.

But these are short-term disruptions and even though Nigeria’s oil production has fallen from 2.2 million barrels per day to at least 1.5 million barrels, other nations are going to reclaim that market share if Nigeria is not able to come back up. So, for currency traders and traders in general, you must look at strengthening dollars, fall in gold prices and a weakening oil prices. This is a great time for traders especially for dollar, gold and oil traders. With the expectation the OPEC meeting was going to be successful and that is an opportunity for oil prices. Of course gold, if the United States rate increase, the demand for gold would naturally decrease.