Robertson: Govt Does Not Get Credit for What it Does Right

Global Chief Economist, Renaissance Capital, Charles Robertson, spoke about the current state of the economy, the impact of the Central Bank of Nigeria’s policies and the way forward. Nosa Alekhuogie presents the excerpts:

What are your views about the performance of the Nigerian economy so far in 2017?

There have been improvements in 2017. It seems the central bank has changed policies because it could see that investors were unhappy with the exchange rate regime. We have seen inflation start to come down, oil production has picked up relative to a year ago, oil prices have also picked up and also, I have seen the ease of doing business increase as well, which I think is a really helpful signal from the government. So there’s gradual improvement basically.

What do you hope to see by the end of the year, what level of increase are you hoping for?

For the economy, we think it is going to grow roughly about a half per cent. The IMF I think says one per cent, the population is growing by 3 per cent every year so that is still a fall in the living standards of most Nigerians this year. Economists try and look ahead and see how the situation would develop over one or two years, financial markets try and price that in maybe one year ahead so if people buy shares now in Nigeria they are not talking about how the economy is today, so you know how it feels for the man underground today. They are looking ahead twelve months and they are saying; will in 2018, the story
looking better? The IMF is saying that in 2018, it would look better again. So that’s what markets are wondering, whether to invest in Nigeria because of what happens in 2018 or 2017.

What suggestions do you have for investors that are scared of investing in Nigeria?

I cannot guarantee because so much is difficult to forecast. I can’t forecast dollar rates. Three months oil, I can’t forecast that either. On one year, where I think oil would be? I have a view but my view is working for the last two years but that doesn’t mean I can be surethat it would be working in one year. My view might be wrong so, one of the few things we can do is look at the exchange rate and we can measure the exchange rate over twenty years and say over 20 years, is it now expensive or cheap and we have found in the last two years that when currency was very cheap, like south Africa was in early 2016, investors made a lot of money putting money into south Africa. At the end of 2016, Egypt became very cheap and investors were making money too there. So it’s not a guarantee but it’s very likely that investors would make money.

The Nigerian currency is not very cheap at N370 but it is okay. There may be returns, there may be some gains and what changed in the last month was that a month ago, if you tried to put money in Nigeria, it had to come in at N310 or N315 or so and that wasn’t worth it, that was expensive rate, So investors said no and even if they did bring in money, they would ensure they can take money out again.

If you have a pension fund in Texas, you give your money to some emerging market fund or Africa fund that pension fund might want their money back to pay their pensioners. They have to be able to take the money away from the fund but if they can’t take the money out of Nigeria, they can’t invest in Nigeria. So, what has changed in the last month are two things; First, the central bank promising that you can take money out at the new rate and secondly, that the new rate is realistic. So I think that is going to get people looking at Nigeria again. And it is normally portfolio investors, people who buy equity bonds, who move first; they are the ones who can move most quickly when something changes for the better. For indirect investors, people who might bring a factory or create thousands of jobs; that take time, they would want to see in one, two, three years of a realistic currency rate, an improving economy, stable politics.

And then, two years of being lost; It’s not just that alone, but oil prices fell as well, that was going to hurt anyone. It hurt Russia, it hurt Brazil when commodity prices fell, it hurt the golf countries.
Lots of countries have suffered, it’s not just Nigeria but the currency policy has made the recovery slower but that has shifted in the last month; so this is what we are telling people, it is worth looking at Nigeria again and in the long run, I think the government does not get credit for some of the things they have done right. It hasn’t blown the budget, it hasn’t borrowed huge amount of Euro bonds from abroad like other countries have. Ease of doing business has improved; they have tried to do something about corruption, not much was done about corruption a few years ago. So there has been some improvement but that has got lost behind the currency problems, if you get the currency problems partly out of the way, then people might start to focus on other things they are doing.

A lot of people have been expressing optimism about Nigeria getting out of recession soon, do you think having a positive GDP growth would translate to a better standard of living for Nigerians?

Not this year, because you have this working age population growth of three percent per year. You have to have at least three per cent growth a year just to stand still, to keep pace with the population growth. That is not going to happen in 2017. And actually, people don’t feel better off unless their personal income is growing by more
than that, I think countries growing from 2-3 per cent generally don’t feel much better off. When the country starts to feel happy is about 4-5 per cent growth and that is unlikely. When I was forecasting that for Nigeria before 2019, I don’t think forecasting that for 2019 might happen, so I don’t think most Nigerians would feel much better off in the next 1-2 years. People should be balanced in the next two to three years.

Then what normally happens is after recession, the recovery is better than what people expect so people don’t believe how bad it would get.
It gets worse than they think, then they get depressed and say it’s going to stay bad forever and then it starts to recover, people are reluctant to believe it and it starts to accelerate and it usually beats expectations.
We are financial market guys, the more liberal we see the currency regime, it easier it is to get money in or out, the more money comes in. It may depend on the 2019 elections, so the elections might prove quite important for policy and also, if they can sort out electricity.

You have got a population which is getting better educated every year, you have high quality people at the very top, high quality level of Nigerians, some here and some have gone abroad. You could jet propel this economy over five to ten years, we would see. But the next one to two years is not going to feel good for most people, would be my

The CBN intervention in the foreign exchange market has helped to stabilise the Naira, Is this sustainable and do you think the Nigerian currency is where it ought to be?

Yes, I think the currency is what we think is fair value at N370 to N380. So if it’s N400, it’s a little bit cheap to our estimated fair value, its good value. I am hearing different numbers being quoted for the INE rate. So yes the currency is a fair value, yes it’s sustainable provided oil value stays around two million barrels a day and the oil prices is around $50. If oil production goes down to one million barrels, then we have a problem, if there is not
enough dollars in the system, I think the currency needs to weaken. If oil price goes to $35, then there is a problem but if oil production goes up, the stronger the currency becomes, if oil price goes to $60, stronger currency is just a fight, so there is a lot of variables. So you have to forecast oil production which is tough, we don’t even know what happened last month and then you have to forecast the oil price which is even tougher and then you can make a good guess.

As it stands now, we think the currency is about the right rate. It’s the first time it has been at the right rate, well this decade. I’m referring to the INE rate not the interbank; the interbank is N315, which is still not the right rate.
I think what CBN is doing is sustainable with the oil production and prices are the way they are, that’s a condition attached to it. It wouldn’t always be that rate so if right now, if we’ve got N380 say to a dollar, it’s the right rate. In one year time, if inflation in Nigeria is 10per cent, then we have to add 380 plus 40 to gives us 420, so in a year time, I would be telling you that N420 to a dollar
is the right rate, and if there is another 10per cent inflation in 2018 0r 2019, we take that to 460, that’s another 40. As long as they don’t try to stick the rates at one level and they let it move with inflation, then it’s sustainable.

So is N380 sustainable for the next three years?

No, that needs to move up with inflation. The reason currency doesn’t move in Europe and America is because inflation in these countries is the same. So Euro or Dollar doesn’t need to move. If something is one dollar in America and one Euro in Europe and you get one percent inflation and that goes to 101 because of one per cent
inflation in America, inflation is going up in both countries by the same amount. So the currency can actually be the same i.e 101 to 101 but in Nigeria, if inflation is 10percent and US inflation is one per cent, prices in dollars are going to go from 100-101 and prices in Nigeria are going to go from N100 to a N110, so the exchange rate has to change, it has to move weaker.

If inflation in Nigeria is higher than in America, I think inflation in Nigeria will be higher, everyone does so, if inflation is going to be ten per cent in the next year, it goes from N380, then you add ten per cent of 380 which is 38, let us call it 40, so adding 380 plus 40, that gives us 420 in a year, 460 in two years, roughly 500 in three years and that is the same currency rate. N500 in three years is the same as N380 today, once you take out the inflation story. The rates you see in the market daily keeps on going weaker over 10, 20, 30 years but actually if we strip out the inflation, it is not which is hard to explain but it is true.

What other option do you think is available to the CBN in case the interventions fail in the long run?

It shouldn’t fail. I think they have tried them all but they can always go the Venezuela route. They have banned the export, you are not allowed to take currency out of the country. You can just get more restrictive. The trouble is that human beings are too clever and Nigerians are certainly too clever to be trapped like that. People would always get a way of getting round regulations but it can be done. When a country like Venezuela keeps on doing that policies which it has been doing, eventually the economy collapses. Zimbabwe did the same thing and the economy eventually collapses. So the more restrictive you get, the messier it gets in the end.

The other option is to go more liberal and let the currency float and then there would be a demand and supply. Eventually, the currency finds a level where people would say it is really worth coming in which today we think N500 to a dollar is a good value. I had investors in Abuja using the parallel exchange rate in February. They said N500 to a dollar which is the rate they were able to get at Bureau de Change, Nigeria was cheap for the first time they have ever been here. At that point, people should bring money into Nigeria because it is undervalued.

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