Cyprus-based Research Analyst at ForexTime (FXTM), Mr. Lukman Otunuga, in this interview, stressed the need for the Nigerian government to prioritise infrastructure development and ensure exchange rate stability in order to attract investors. Obinna Chima presents the excerpts:
What do you think the federal government should be doing presently to lift the economy out of recession?
Firstly, in the short term, Nigeria still remains exposed to external risks. Nothing much can be done in the short term because we still have the Donald Trump effect, the situation in China, oil price volatility and the prospects of high US rates could actually weigh-in heavily on Nigeria. But in the long-term, I think that the first thing to do to attract investors and to show that there is stability in the economy may be to actually devalue the naira. That is what the whole world is asking for, that is what the major financial institutions are saying. They are all saying that Nigeria needs to devalue to increase liquidity. Increased liquidity could actually bring in more foreign portfolio investments. In terms of policies, we must start looking at infrastructure spending. It is well know that Nigeria has very weak infrastructure and so the government needs to do more to boost infrastructure. Agriculture is still an important aspect. It is the bedrock of Nigeria. I can say that the fall in oil prices was a blessing to Nigeria because it made the government not to look at agriculture. I think housing is also important in Nigeria. Imagine the impact of housing up to 20 million Nigerians in four years, not only would that boost growth, that would actually create more jobs.
Why are you recommending naira devaluation for a nation that is largely import dependent?
The main issue that Nigeria is facing right now is the lack of foreign exchange and lack of liquidity. So, for them (CBN) to close the gap between the black market and official market, they need to devalue to reduce some pressure.
If we devalue the naira again, how will that translate to increased dollar liquidity?
Devaluing is the first step and it can actually boost investor attraction towards Nigeria. It sends a signal that the government and CBN are actually doing the right things to promote exchange rate stability.
Fitch Ratings recently downgraded Nigeria. What is your take on that?
Recently, Fitch downgraded Nigeria’s long term outlook to negative. It was based on the scarcity of foreign exchange and of course low crude oil prices. To an extent, that doesn’t make sense because the International Monetary Fund (IMF) and the World Bank had predicted that Nigeria would gradually break out of recession in 2017. Of course the internal risk in Nigeria is the foreign exchange scarcity and drop in oil prices. As we speak right now, Nigeria only produces 1.45 million barrels per day, due the activities of the militants in the Niger Delta and the foreign exchange issue remains a problem. The disparity in the official and the black market is actually causing cost-push inflation in Nigeria. Inflation has hit 18 per cent and the global economy is actually afraid that the Central Bank of Nigeria (CBN) may not be able to tame this level of inflation. So, I think there is a strong possibility that the CBN would actually devalue the naira again, probably in six months’ time, probably to N350/$ or N400/$ to try and attract increased liquidity.
Are you comfortable with the 2017 budget proposal?
Looking at the 2017 budget proposal of recovery and growth, it looks more optimistic than the 2016 budget. It does the ability to actually take Nigeria out of recession. But there are many things on paper which are different from reality. The first thing with the budget is that it was pegged at N305/$. That is a problem with the budget. Even though the CBN governor and the president appear to have put their foot down not to devalue, it seems that there is a strong possibility that in six months’ time, it would be devalued. The second thing with the budget is that they pegged the oil price at $45 per barrel. While this was realistic when the budget was planned, the situation at the Organisation of Petroleum Exporting Countries (OPEC) is quite complicated. So, at the end of the year, major oil producers shocked investors by actually securing production freeze. But there are so many things behind that we do not know. Firstly, there is a prisoner’s dilemma. Prisoner’s dilemma is a situation where everybody is watching if somebody is going to cheat. There is no punishment in place for people producing more than the intended. So, the second problem is Donald Trump. Donald Trump has already removed regulations in the United States industries. So oil price around $45 per barrel in the medium to long-term is quite optimistic. We may even see $40 per barrel or even lower. Finally, they pegged the budget at 2.2 million barrels per day. In December, oil production was around 1.5 million barrels per day. So, even though OPEC has granted Nigeria some opportunity to be exempted, the renewed militancy, if not checked, could be a big problem.
Do you see Nigeria and other African countries benefitting from Donald Trump’s policies?
Interesting, as soon as Donald Trump was elected, I wrote an article about how he would be good for the Nigerian economy. With Trump being in power, that would make the dollar weak because of uncertainties. A weak dollar is very good for Nigeria. But the complete opposite happened. When Trump came to power he promised fiscal spending and that sent the dollar to 14-year high and that definitely put pressure on the naira against the dollar. So, Donald Trump and the global economy is still all about uncertainties. He has adopted a strong protectionist stand; he has banned certain class of people from going to the US and might also ban Nigerians from getting two years visa. The problem is that African businessmen going to the US may have problem and they may just have to concentrate in doing business in Africa. These policies that Trump is pursuing actually go against the Africa Growth Opportunity Act.
Your firm is a forex broker that specialises in forex trading, commodities, among others. What opportunities are there in the market presently?
Political risks with the events in Europe. We have elections in Europe, we have Brexit, we have Donald Trump and uncertainties around his policies and we have China. So, uncertainties breeds risk aversion. With risk aversion, people jump to safe haven investments such as Yuan and gold. If you look at the charts, you can see that gold has been appreciating and the Yuan has been appreciating. So, foreign exchange traders can look at all that. Now regards to the dollar and the naira, because there is uncertainty and the economic condition of Nigeria right now is still shaky, naira weakness could still be a main theme. So, on the black market, we could actually see N550-N600/$ in the next six months in the black market. Remember that last year we predicted N500/$ and it got close to that. So, we could see about N600/$, especially if the Central Bank of Nigeria devalues. So, there needs to be some short-term pain to have long term pleasure. Of course the impact of devaluation would impact the common man in Nigeria, but that is the first step to attract foreign investors and to show that there is some stability in Nigeria. The government needs to be transparent. That is by showing the world economy a proper plan to take Nigeria out of recession. There needs to be a clear picture of the steps taken. Thirdly, there is need to urgently fix the broken down relationship in the Niger-Delta.