Chukwu: Foreign Investors Need Clarity on FG's Economic Direction


The Managing Director of Cowry Asset Management Limited, Mr. Johnson Chukwu, in this interview with Nume Ekeghe, stresses the importance of clarity in policy direction from the federal government in order to attract the much-needed foreign direct investments in the country. Excerpts:

Has there been any significant inflow of investments into the country in recent times?

In recent times, what we have seen is more of outflow of investments from the country. In 2010 to 2015, we saw a reasonable growth in foreign portfolio in the country but that began to dry up in 2015 and then now we basically have net outflows from the country instead of net inflows by foreign investors.

Are you saying there are no inflows of foreign direct investments?

It is not that none is coming in, but the amount coming in is in trickles compared to what is leaving.

Why don’t you think the country has been unable to attract foreign investors into the economy?

A couple of factors are responsible. Firstly, is the deterioration in our macroeconomic environment. At some point, we saw a threat of devaluation, which we eventually saw. At another point there was every probability that the naira was overvalued and foreign portfolio investors would not bring money in an economy where there was a high likelihood that the currency would depreciate or devalue. Whatever gain they were going to make in terms of capital gain or return on investment would have been eluded by the devaluation of the currency. Unfortunately now, we no longer have liquidity in FX market. Liquidity in FX market is necessary for portfolio investors to come in because they want to take out their money when the feel like.

But if you do not have liquidity, in your foreign currency, then it becomes difficult because when they sell their investment in local currency, to convert it back to the foreign the currency and would need to take it out. So liquidity in Nigeria’s FX market is one of the challenges.

We have other issues on the economic directions of the government; the delays they had in putting a cabinet and like I said, the not well defined economic policy of the government. We have been oscillating between something that looks like a command and control economy and something that looks like a free market economy. Investors want to have clarity about the economic orientation of a country before they put in their money.

These factors, added to the fact that our foreign reserves have deteriorated significantly which put into equations, the capacity of the country to meet all its maturing foreign currency obligations. So when investors put these things together, they decided to be on the watch to look at how things go. Beyond this, we have also seen a significant some policy choices we have made that kind of affected the assessment of Naira denominator instruments by international rating agencies and international portfolio managers.

We have seen an exit from the JP Morgan global board index because of lack of liquidity in the FX market. We have seen a needed exit from the emerging market index because of lack of liquidity in the FX market and with your instrument no longer qualified as an investment instrument has also seen a deterioration in our ratings by S&P. these are factors investors would consider before they can patronise.

Are the steps taken by the CBN to liberalise the market having any impact?

The Central Bank Governor announced that about $1 came in august. That on its own is positive news but if you look the level of flows we were getting in the past, I think it is still a drop in an ocean. But most importantly is that investors responded to the liberalisation of the FX market. But unfortunately now we have a huge differential between the parallel market and the official market. And when you have a huge differential between the parallel and official market, it is an indication that the currency may still suffer some devaluation and depreciation and investors would not come into a country whose currency has a strong potential to devalue further.

What do you think is responsible for the huge gap between the parallel and official markets?

There are a couple of factors, one of which is that because of the long time it took for use to devalue, it kept away autonomous sources from the market and that let to shortfall in the supply in the parallel market. Also the 41 items CBN excluded from accessing the official market meant that those 41 items would have no choice but approach the parallel market. So the shortage of supply and inability of the CBN to meet demands at the official market meant that a lot of demand that where t the official market had to move to the parallel market and beat up the little supply in the parallel market. So those are the factors causing this gap.

Recently, the CBN has been intervening by supporting manufacturers and airlines, what is your take about that?

That would be sustainable to the extent that our foreign exchange earnings improve and with the hope we increase our crude oil sales and government earning improve. The absence of the improvement of foreign exchange earnings and I’m also happy that the president is meeting Niger Delta stakeholders to try and moderate the level of militancy and bridge of oil facilities in the Niger Delta. If we can achieve that, and go back to oil production of about 2.2 million barrels and supplement it with other policies that allow foreign investors come and invest in some of the core assets whether in Greenfield or brownfield asset, then we would be able to sustain the intervention by CBN. If that is not done, the CBN would wear out its capacity to intervene in the market and that is a challenge because if CBN runs out of capacity to run the market, you would see a runaway depreciation in the economy.

President Muhammadu Buhari is considering borrowing about $30 billion external loan. Do you think that is the way to go?

I support borrowing, but I support borrowing that is purely meant for specific infrastructure. I also think that I we have to borrow $30 billion, maybe we limit the purpose of usage to two or three key infrastructure projects so we can have a completion of those infrastructure project instead of bids of several projects. If you ask me, of the curve I could think of the Lagos –Kano rail, Lagos –Calabar standard gauge-rail. If we do both and maybe we spend about $18 billion and we have another $12 that goes into key highways we would create a corridor of infrastructural asset that will help grow our productive capabilities and possibly improve our foreign exchange earnings.

So, what would you advice the federal government to do to revive the economy?
I think we have to start from the point where we need an economic blueprint. The economic blueprint means the government would indicate how it wants to compete; are we going to be a control and command economy or are we going to be a free market economy. If we are going to be a free market economy, are we going to be a service oriented economy or a manufacturing economy? If we are a manufacturing economy, how are we going to handle the issues of interest rates, inflation and exchange rate? We also need to do something to complement a manufacturing economy like critical infrastructure, power supply transport infrastructure, labour etc.

we have to be at that point where you have a comprehensive economic plan and then we can break it down to different sectorial basis. It is only when you do that, before we can have coordination between monetary policy and fiscal policies. Without a defined economic objective, we may continue to have this disharmony between monetary and fiscal policies because they tend to be pursuing different objectives. When we define our overall economic objective and then the policies – both fiscal and monetary would now be to support the overall economic objective of the country. For example if you want to be a manufacturing economy, you cannot have high interest rate because it would not support manufacturing.

Also you know on the fiscal side, you need to build infrastructure, you need to come up with trade policies that would protect the manufacturing sectors. Also we need to have a coordinating unit maybe in the office of the minister of finance or the Vice President that would make sure there is harmony. And then the economic management team, which includes the fiscal and monetary authorities, should meet and discuss critical economic issues and make sure there is a buy in of this different arms and policies.

What do you think the federal government can do in order to attract FDIs?

The first think I think is that we need to present ourselves as a country as one willing to do business. Out there, the foreign investors are not sure whether we want to attract private investors or not. Secondly, we must involve tools or policies through which the foreign investors can come in.

And at the administrative level, we need to enact the appropriate laws that will make it difficult for anybody to reverse concession granted by the previous government. Those are the kind of things that you would need to do to attract foreign direct investors in the country. On the foreign portfolio investors, we would need to achieve a higher level of FX liquidity for them to consider us as an attractive investment destination.