Managing Director/CEO, Cowry Asset Management, Mr. Johnson Chukwu, in this interview, speaks on the state of the Nigerian economy. Nume Ekeghe presents the excerpts:
What are your thoughts on the state of the Nigerian economy?
The economy is in a state of slow recovery. We have seen the second quarter Gross Domestic Product (GDP) with a slow growth rate of 1.5 per cent, compared with the 1.95 per cent we saw in the first quarter of the year. The basic factors that may have led to a slowdown in the GDP growth rate are the displacement of farmers in the north-east added to the long term existing displacement in the North- central and then we have also seen an uptick in arms bandits in the north-west, which have also displaced farmers in states like Zamfara, Sokoto and Katsina.
The second contributory factor to the economy which is the oil and gas sector, which accounts for between 13 to 15 per cent of the GDP also saw a slowdown. In January 2018, crude production was about 1.8 million barrels per day (bpd)but when we got to the second quarter of this year, we saw consistent decline in crude production to as low as 1.5 million bpd. So that reduction in crude production affected the contribution of the oil and gas sector in economic activities. And these two sectors almost account for 84 per cent of the GDP. As you are aware, we are now in an election season, so we have seen instances where foreign portfolio investors are pulling out or pulling back from the Nigerian economy principally because of heightened political risks. We have also seen normalisation of interest rates in the US.
How soon do we see a turnaround in the economy, especially regarding capital outflow?
The turnaround would come at the end of the first quarter of next year depending on how the elections go. Should the election go smoothly and there are no major agitations after the elections, then foreign investors would come back significantly. Their concern like I said earlier is more political so once the political risk is overcome I believe many of them would comeback. Our assets are still giving good yields. If you go to the equities realm, you would see a lot of stocks trading below their intrinsic worth and some of them are trading their net asset value which means the opportunity for income capital gain on those stocks.
On the fixed income end, even the treasury bills or short term 91-day bills in the primary market are still doing 10.3 per cent. And given that our exchange rate in the near future is still going to be stable, so the yield environment is still attractive both in the fixed income segment of the market and equities segment of the market. So, if we tidy ourselves through the political season and we have a smooth election that doesn’t lead to major agitations, post-election violence where all the parties accept the outcome of the elections, I believe the investors would come back.
Comparing our MPR rate with other emerging markets, do you think it is proper to continue to keep interest rate high?
The way I would look at it is that managing the economy is a very delicate balancing act. Today, the primary objective of the central bank is given that we are having outflows of foreign investors, they need to keep rates high as to sustain the interest of a few those who are ready to ignore the risks in favour of the yield. So the central bank in as much as they know the economy is growing slowly, is not in the position to lower the monetary policy rate and inject more liquidity into the economy, that could bring pressure on the demand for foreign exchange and could possibly reverse the trend we have seen in inflation.
I believe that after the election, the priorities of the government would change and at that point, it would be more of growing the economy. We have seen inflation drop to 11.14 per cent in July and for the monetary policy rate, it is low enough to justify a reduction in MPR. But given that we are in a period where you expect a lot of liquidity injection from budget disbursement and at the same time exit of foreign investors, the central bank or the MPC cannot at this point in time and it is not auspicious for them to reduce the MPR. Even if they do, banks are not going to lend because banks are not going to lend in an environment that is very politically charged. So, after the election, the government would have to redefine its economic priorities. And I want to believe that at this point, the priority should be on growing the economy to create jobs and expand economic opportunities for Nigerians.
You mentioned that banks are not likely to lend in a politically charged environment and the loan books of banks have been on the decline, are you saying we are going to see a continuation of this trend?
I want to believe we are going to see a further decline in the loan portfolio of banks in this fiscal year up to the first quarter of next year and subsequently if we have a very calm political environment, banks will resume lending. The key thing about lending is that nobody wants to give out their financial resources at such periods when you are not sure of how the environment is going to remain. It is just a natural defence mechanism that financial institutions adopt. I want to believe that it will continue till the end of this year even as we approach the election period, business leaders will also roll back their investment and business activities.
I believe we are going into a period of comical relief, where many of us will be sitting in our offices from morning till night watching people dancing and campaigning. At such period, not many people want to put their financial resources in long-term instruments, you see that the beneficiaries will be short term instruments like money market, treasury bills while we all wait till the election and the election outcome will also determine the direction of the country and where opportunities will emerge.
If banks are not lending do you seebus them taking the opportunity of the CRR single digit long term loan of the CBN?
I don’t think it will be very bullish in the period I referred to as a period of slowdown of economic activities. But subsequently once the policy environment is good and the political environment is good then the banks will take advantage of it. The basic thing is that these are funds are sitting at the central bank at no interest rate and no income to the bank. So any opportunity they have if the environment is good, they will want to pull out such funds and lend, though at single digit interest rate. The reason they will not want to lend is that there is no risk sharing. The risk still resides solely with the banks, so should they lend to projects that fail, they will still have to bear 100 per cent write off for such loans. So it is not a risk sharing initiative.
It is basically to reduce the burden of the cash reserve ratio that are with the central bank and make it kind of productive. So what the central bank is basically doing is to free up financial instruments that are sterilized and then deploy it back into the economy for productive engagement. But even at that, because the risk still resides with the banks, the banks are not likely to be very bullish; they will rather live with a zero income than loss of principal. But I want to believe that once the environment is more positive, the banks will latch onto that opportunity.
Do you think the interest we are seeing in the commercial paper segment of the market will continue after the elections?
Yes, after the election, the economic direction will be known, economic policies will be enunciated, investors will want to look at those policies and now decide when to play, but for now, with the political environment, no one wants to play long term.
The equities market has been in the red?
Some of us had predicted in the early part of the year that the equities market is going to suffer from the pre-election uncertainties and it wasn’t surprising for us. I can’t imagine what will spur a consistent rally in the market. We are going to see some rally here and there. We are going to see some few days of market recovery, but on average this year is going to close on a negative territory. But it also presents buying opportunities for discerning investors. I believe sometimes towards the end of this year, November or December, the market is going to bottom out which will create opportunities for people who have the technical competence to identify good instruments and invest. I also believe that, and I have always emphasised that by the end of the first quarter, of next year the economic and political environment will be clearly defined and opportunity will emerge, and investors will scramble for Nigerian assets, including local investors. So, if you are courageous enough to go in towards the end of this year, I want to believe that such investor will reap the benefit after the election.
Going forward, what do we expect from your firm?
The unique thing about us is that we understand the economy, we always proffer forecast that is in most instances are realised and investors have the benefit of foresight and the octopus’ benefit of seeing and having a gaze into the future. The basic thing is that for us when you are creating a future cash flow of an entity and for us we direct our investors and always emphasise that you need to understand what you are doing and the economy is not what you can navigate half blinded, you need to latch onto an institution like cowry investment that has the competence to make the appropriate investment. We have customers that are very loyal to us because for the past 13 years of our existence, they have really made good money from our advice and they know the competence that we have and I believe the public knows that we have very deep knowledge base, that we have access to the right tools and we will advise our customers only on those instruments that we would put our money in.