Managing Risks in a Volatile Environment

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Developments in the economy that were occasioned by the prolonged decline in crude oil prices call for the adoption of risk management measures, writes Nume Ekeghe

During the 2008-2009 global financial crises, the Nigerian economy, just like most economies in the world, was hit by foreign exchange crisis, drop in government revenue and threatened financial institutions. However, these same issues have again surfaced causing the same volatility as it once did to our economy. Recently the association of risk managers, Nigeria (RIMAN) held a conference to discuss how to navigate out of the present economic downturn earning from the mistakes made during the last crisis.

Going back memory lane
The President of RIMAN, Mr. Jude Monye pointed out that there have been significant changes in the world economy since July 2015.
“I remember back then we were questioning the longevity of crude oil as a sustainable source of revenue for the economy. Today this question has become a reality as oil prices have slumped and the economy is on the verge of another economic recession. Nigeria and the rest of the oil producing world faced with a global crisis that has inevitably crystallised in the form of energy risk.

“Getting out of this is not going to be an easy road, the economy is already at a volatile state and the last thing we need is a prolonged recession. It is for this reason, we have themed this annual national risk conference as global oil crisis and energy risk,” Monye added.
Also, the Emir of Kano and a former Central Bank of Nigeria (CBN) Governor, Alhaji Muhammad Sanusi II pointed out that the situation in the commodities market was worse during the 2008-2009 financial crisis, compared with what is happening presently. However, he said policy makers were able to mitigate the shocks due to the savings in the excess crude account.

He added: “The situation going on to today is very sad because we ought to have learned from our experiences. In the global crisis of 2008, which started from the financial markets and then hit the commodities market, Nigeria financial system was badly affected, precisely for reasons similar to the reasons we have today.

“But in a sense, 2008-2009 was much less severe than 2015-2016 and the reason was that prior to 2008, the government of Obasanjo had built up a buffer in the excess crude account and therefore the economic management authorities both monetary and fiscal did have some flexibility in their pursuit of countercyclical fiscal monetary policy. It was possible to draw on a huge pool of reserves to mitigate the impact of a collapsing currency and to continue to fund import and to also fund an expansion of government spending.”

Continuing, the former CBN governor said: “In 2009 the CBN and the minister of finance, took the decision that oil price shock would be absorbed by nominal variables. We would rather have the exchange rate and nominal prices take the shock that the real economy. What seems to have happened in 2015 is that the government took the decision to allow the real economy take the shock while protecting nominal variables in terms of exchange rate and that was the choice to make. You do not absorb a real shock of the real economy, it is bad economics.

“As a country, in the years 2010 to 2014, we had a golden opportunity to have learned from the experience from 2009 and when oil prices went up to prepare from the prices would go down and we refused to learn and we refused to listen which is the situation that this administration has inherited. Oil prices have gone down and there are no savings.”

Effects on Institutions
Also speaking during a panel session, the Managing Director/Chief Executive Officer of Heritage Bank Plc, Mr. Ifie Sekibo said as a result of the development, the country’s ratings as well as those of some institutions had been cut, portfolio flows dried up and stock market affected.
“And as organisations, we are bleeding because we are paying so much for energy to drive our operations,” he added.

Also, Head Risk, Stanbic IBTC holdings Ms. Mfon Akpan said Nigeria would always be susceptible to global energy crisis because of its reliance for revenue from the commodity.
She said: “If we look at the global economy, we know that for some it has been opportunities. Such as the UK, US etc. So while it was positive for some nations, the OPEC countries are struggling. We need to look at Venezuela to project and see what the long term downside risk could look like for a country like ours which is heavily dependent on oil export. The days of triple digit oil prices are behind us.

“On the broader scale, at a macro level, this clearly forces issue of diversification. You then have a ripple effect because government is still the largest employer of labour, when you bring it home to the industry itself.”

But the Director, Banking Supervision Department, NDIC, Mr. Dapo Adeleke, expressed confidence in the steps taken by the CBN and NDIC in ensuring that the banks are stable.
Adeleke said: “In 2008-2009, we knew how much the CBN had to give to banks for liquidity support. I knew at that time that when we look at capital adequacy ratio of most of the banks then, they were far below of what we expect prudentially that they should have. Today, that capital is under stress but I believe most of the banks have enough capital to the extent that that they can still be going on their business.”

Exchange Rate Risk

The Emir of Kano expressed optimism that the full implementation of the flexible exchange rate policy would help ease some of the foreign exchange problems as well as attract foreign direct investments (FDIs).
Sanusi said: “The exchange rate was a very big risk at the rate of N197 to a dollar. Now, we have had devaluation down to N280.Unfortunately to my mind so long as the system continues to target rates, you would not resolve the problem.”

Continuing, he said: “All the money we spent on subsidy was keeping the refineries open in Europe. If a small fraction had been spent on building domestic refineries, we would be totally independent of the external world for import. We would be exporting refined crude. The economy would have been immune significantly from the shock to the crude oil price.”
He urged the federal government to create an enabling environment to encourage foreign and local investments.

He said: “We are today in a situation where clearly the government does not have money. Oil prices have dropped, oil output is low because of the Niger Delta Avengers are targeting the energy security of the country and the revenues of the government. Now this point in time, the government needs to make it very clear that it recognises that economic development and investments in infrastructure can only come from the private sector.

“The risks we run are risk that we may send the wrong signals to the private sector because some statements that are made would suggest that the private sector is not welcomed. And if you don’t have the private sector committed to investing, local direct investment and foreign direct investments in the economy, the government simply cannot do it. You need them to come in and build refineries, roads and invest in other critical infrastructure reforms.”

“We are at a point in the history of our country were for the first time in a long time, we have a president that is genuinely committed to fighting corruption and improving good governance but without the resources to implement the much need structural reform. And it is so sad. We do hope that when the revenue position of government improves, we would have the same kind of attitude in government.”

He recommended an improvement in the country’s economic situation. “In terms of broad outlines, I think the government has been doing the right thing. The focus on governance, anti-corruption and I do agree with 80 per cent of what the government is doing or maybe 90 per cent and the 10 per cent which is fuel subsidy and exchange rate which we have now moved closer to each other. So we are on the right track”, he said.

Investing in Alternatives Sources
Furthermore, Akpan said the challenge in investing in alternatives is that the country lacks long-term development capital. However, the RIMAN president said investments in carbon trading should be considered, saying: “Carbon trading is something that can help us. If you look at China, with all the emission they have, the carbon trading is what they are applying to reduce the CO2 emission. Nigeria is almost at zero level. We can make a whole lot of money on carbon trading. But the market today is not due. Let us see how we can develop our market so we can see this energy crisis being brought to a level where it is manageable.”

Going Forward
Going forward, Akpan urged risk managers to understand that their job is not a popularity contest, saying it comes with resilience by having a tough skin, courage and also demonstrating commerciality when one needs to.
“It is not always about saying no. There are times when we have executives that are more domineering but we are professionals and we know what we are required to do to render to you so our standards are being compromised.”