Mohammed Garuba is the Co-founder at CardinalStone Partners Limited. In this interview, he speaks about the five per cent increase in the Cash Reserve Requirement at the last Monetary Policy Committee meeting. Garuba, also urges the federal government to end its fuel subsidy policy, which he describes as a joke and a drain on the country’s scarce resources. Obinna Chima brings the excerpts:
Were you surprised about the outcome of the last Monetary Policy Committee (MPC) meeting?
No, I wasn’t surprised. I think something was expected as we didn’t see a devaluation in the horizon because it would have been premature. For me, it was a wise move because clearly one variable had to be adjusted. We had so much liquidity in the system and all sort of speculative tendencies were already coming to the fore. So, the Cash Reserve Requirement (CRR) was one of the smart tools the Central Bank of Nigeria (CBN) could have used in managing this liquidity. I don’t think five per cent increase was enough, it could have been a bit steeper. And why I said that is because there are not just enough investible instruments and the need to trigger growth has to be gradual. There are three categories of investors in the market, but the CBN has with this move concentrated on just the local investors who have focused on treasury bills as a secure form of investment for age since the rates have always been very favourable and treasury bills are readily good for this class of investors. You then have local fund managers spit between pension funds and mutual fund managers who manage money market funds. Money market funds are about N800 billion and now all of a sudden there are not enough instruments for them to invest. So, what will typically happen is confusion which is what is happening in the market right now and that is what the CBN was trying to mitigate. Yes, there is the foreign investor angle to all this, as they are taking their money in and out and now they have a different market. The Pension Fund Administrators (PFAs), to a large extent, is regulated investing. The tactical investors who are at liberty to make their investment decision on where to invest their money, right now could start speculating on the dollars and all sort of risky investments. So, one way the CBN can manage this extra liquidity, from the plethora of maturities OMO and treasury bills maturity is somehow act. And I think the CBN in its wisdom had to adjust the CRR. I see a net impact of between N600 billion and N1 trillion which would be sterilised from the system.
What that does is that most likely it is going to gradually take interest rate back up again to more reasonable levels. Bank were sitting on so much liquidity and had started rejecting monies as we saw deposit rates go as low as one per cent to two per cent. How does that make sense when same Central bank has pegged saving account interest rate at about 30 per cent of the Monetary Policy Rate (MPR). If MPR is 13.5 per cent, that means savings account for as low as N10,000 are to enjoy as much as four per cent. Then, why would N100 million deposit earn lower? So, banks were returning monies and the central bank knew there was an abnormality and confusion in the market. So, the market had over reacted much more than they expected. So, one smart thing was to temporarily take some money out so that rates would start to normalise. Where would you have N100 million for one-year deposit at 1.5 per cent, while those who have savings account were earning over four per cent? There is an abnormality with that. So, the CBN in trying to normalise the uncertainty in the money market had to something like this. I believe the CRR will continue to increase up to a point that equilibrium is achieved and banks start to lend, before they start releasing this money back into the system. What is money in the bank if they are not actually going to use it for the purpose of lending? What happens? The money sits in the bank. And if the banks don’t offer depositors anything interesting, apart from the PFAs who really cannot do anything, the individual investors could start doing anything with their money and individuals could start speculating on the dollars.
If I buy Eurobond today, I can make as much as six per cent and this is a dollar investment. So, why would naira be giving me returns of investment of about one per cent? So, the CBN had to do something. So, among their arsenals, this was one of the ways they felt it would work. We have never seen a situation where interest rate is as low as developed markets. See, clearly, that wasn’t normal. You plot Nigeria’s treasury bills rate with other frontier markets and you will see an abnormality. There is no correlation between Nigeria’s market and other markets. Banks were set up primarily to intermediate and that is what the CBN is trying to make them do, not to be buying treasury bills and bonds. So, banks are gradually being made to do their primary job. So, now we would start seeing economy-reflective financial performance. Banks were focused on deposits which they channel into treasury bills and you say you are a bank. Now, the central bank is more focused on banks playing their intermediation role.
But there is the argument by some analysts that the CBN sterilising these funds by way of raising the CRR contradicts its loan-to-deposit ratio (LDR) policy. What is your take on that?
The answer to that is Yes and No. Yes, in the sense that they are two different tools. They have imposed 65 per cent LDR, quite alright, but the banks are not meeting it.
… But some banks have met the 65 per cent minimum LDR?
Yes, some have met it, but generality of the banks has not met it. Like Fidelity Bank has crossed the 65 per cent long ago. Fidelity Bank has always enjoyed this. But majority of the others have not met it, they are not about to meet it and they would not meet it. So, what should the CBN do? Should it continue to wait for them to meet it? When the LDR policy was announced, there wasn’t any madness in interest rate and so the CBN was expecting something, but now they have done another policy that has materially brought interest rate down right now. We are no longer talking about banking right now, we are talking developmental finance. Sadly, it is not CBN’s primary purview, but since no one is taking the lead, the CBN has decided to take the lead. It has said it doesn’t want banks to keep buying treasury bills and bonds, but to lend. So, the CBN is saying there is just too much money in the system and as they are sterilised, the CRR would definitely come down. But, the CBN’s hands are tied. When the banks have fewer monies to manage, then banks would start looking for deposit all over again. Towards the end of last year, the banks were offering one per cent for N1 billion and some were even rejecting fund placement. So, if such was happening, do you think the CBN would fold its hands? Because they have dropped loans from 22 per cent to 15 per cent, the banks want to make super profit. They have gone to one per cent interest rate and very soon they would start charging people negative interest rate, just because they want to maintain margins and the CBN is saying those margins are abnormal profit. So how do you change abnormal profit to normal profit? It is by ensuring that you put policies in place, that would make many people do the right thing.
Don’t you think Nigerian banks are over-regulated?
Generally, financial services all over the world are over-regulated. That has been the case and it continues to get worse. One simple issue and everyone gets regulated. So, these complaint is around the world. From developed markets to developing markets, banks are over-regulated and it tells in their share prices as well. You don’t see any bank that has grown massively, like you will see in the real sector companies. There is no bank in Nigeria that has ever crossed N100 per share on the Nigerian Stock Exchange (NSE). FirstBank about 30 years ago was trading higher than Nestle. But look at where Nestle is today and you can continue to pick the names of some of the big banks. So, there is a lot that has happened in that space. Banks generally around the world are over-regulated. And in any regulated business, there is a limit to how much money you can make, because the regulator will continue to cap your ability to grow.
But if the banks are offering one per cent interest on N1 billion and a lot of Nigerians still dread the stock market because of the experience they had in the past, what instrument or sector should a prospective investor be looking at to invest his money?
Stock market is still one of the opportunities and individual investors have started coming back to the stock market, but the PFAs that make up majority of our local investors are not yet. And that is largely because they still believe governance is weak. The PFAs were holding investments in the defunct Oceanic Bank, Bank PHB, Skye Bank and others, and nobody refunded them their money. So, a lot of them are saying the risk premium is not worth it. If I can get five per cent in treasury bills, I will rather stay there, where my principal is guaranteed, than to take the risk of making 15 per cent in dividend yield in the stock market. So, we have seen a lot more individuals, out of desperation, instead of one per cent, they are ready to stay in double-digit dividend yield, GTBank, they are ready to stay in FirstBank and other strong dividend yielding banks, such as Fidelity Bank and the rest. So, we are seeing that gradually happen. But I think the primary aim of the central bank is not these short-term investments, it is for monies to move into real businesses and the real sector. That really is the aim. And so, how does the real sector grow? We have started seeing bonds. Why don’t they issue more corporate bonds, which they can use for capital expenditure? That really is the focus of government. So, it is not to take these monies and put in deposits.
But some would say there are environmental issues, such as the epileptic power supply, bad road, among others, that discourage investments in the real sector?
There are three core areas in production. There is energy, there is human capital and there are the processes. In Nigeria, we don’t have power, but we have human capital. So, if I know I can hire people cheap. I pay today, what you pay a worker who works one day in McDonalds in the United States for eight hours. Just eight hours of work in the US for one day, is what I pay a factory worker in Nigeria for one month. So, if I need to compete with a factory worker in the US, while they have energy cheap, I have energy expensive here, but I have compensated with human capital. Human capital and salaries make up about 50 per cent of production cost. But here in Nigeria it is lower because I have other things. So, if people continue to give these excuses, then you start wondering how come the Indians are coming here and they are doing very well? How come Olam has come here and it is doing very well in agriculture? The truth is that people have not gone in there and they don’t understand the factors. There are headwinds everywhere. Foreigners come here and they don’t want to leave and they do very well, even when operating with generators. How come they are producing and succeeding in your country; they are scaling up in your country and they are growing capacity. Go to the Agbara axis in Ogun State, and find out how many foreign companies are there. So, what really is happening? Nobody is trying to produce. A classic example of what is possible is Dangote. Dangote was a wealthy man until he tasted production and he has never gone back again. He was a trader. It is very easy to trade because you make quick money. But in production, the first year might not be good, but you grow in leaps and bounds. Dangote started very little with Benue Cement and has never looked back. Dangote is where he is today, because of production. Tony Elumelu, even as a billionaire, is going to make his mark in the real sector once the issue of cost-reflective tariff for the electricity sector is sorted out. He has done most of his investments, he has increased capacity, but just waiting for the right pricing. Jim Ovia will be a billionaire more when he tries to go into telecoms. He is doing ethanol today. So, the money has always been in the real sector. But there is easy money in other areas, which is why we are focused on them. I don’t think the production cost is abnormal, it is manageable.
Generally, what are your expectations from the economy this year?
I think 2020 has mixed feelings. In terms of Gross Domestic Product (GDP), we still would not grow and I will not blame government materially for that. But I think the building blocks for success are gradually being put in place. Government’s primary job is to create an enabling environment and more and more we are seeing a lot of that. Government’s deficit is going to be fixed, we would see a much different year from what we have seen in the past. Customs is improving in their collections. They are ramping up revenue and the Value Added Tax (VAT) has increased, so they are going to get more money, even though most of the money would be shared between states and local governments. But, that means they would be able to meet salary payments. Generally, the fiscal side is being corrected. We are seeing a lot of initiatives and they are creating the right environment for growth. We expect the planned borrowing by the federal government to trigger a lot of growth, because it is project-tied. Part of our problem today is foreign exchange, so why continue to take naira borrowings. Also, if the NLNG project goes on, I think this year would be wonderful for this country and a lot more jobs would be created. Just recently, the Minister of Agriculture said 10,000 tractors would be brought in and with that we are gradually inching towards mechanised farming. So, imagine what 10,000 tractors would do. That means efficiency is going to improve in that sector and all these would have ripple effects on GDP growth. Agriculture as a GDP factor for example, has been growing at over three per cent, but has not really caught up with population growth. Agriculture GDP has to catch up with population growth, to ensure that you are feeding your citizens. And gradually, that is what the government is doing. We all know how huge the food component of inflation is. If you start growing agriculture to about five per cent, such that you are producing more than enough food, that surpasses your population growth, then that is when food prices would come down. So, there is a lot we see happening, which I think is positive for the country.
What is your outlook for the stock market?
I think the stock market will go up this year, largely because there would be some support. Banks’ stocks would not do very well because of the over-regulation. The real sector would definitely do well. Investors are getting frustrated, they can’t even get primary bills to buy, even though they have money. And because you have that second class I defined earlier, the Fund Managers, they must buy treasury bills whether they like it or nor.
The president has appointed some eminent Nigerians into his Economic Advisory Council. If you were to be among them, what are those immediate policies you will advise the president to introduce?
One of the things I am against is subsidy. Fuel subsidy has to be removed. But subsidy has to be removed with a clear plan. What is subsidy and what is the president’s view about subsidy? It is to help the poor. But you know what? Today, he is subsidising the rich. Many of us have about three or four cars, because petrol is cheap. So, I would tell the president to remove the subsidy, but we have to create a solution for it. If for instance, I am using between N500 billion and N1 trillion to subsidise yearly, why not create a mass transit bus system for the country, run by Nigerians, managed by Nigerians, that is similar to the BRT model. I don’t need more than N100 billion to do this. If you invest N100 billion in mass transit, you employ thousands of Nigerians who are going to drive those buses, that would charge cheaper, even cheaper than the BRT. You know what, those buses would still be profitable. I don’t need more than N100 billion to create massive jobs. This will really help the poor. Why is it that during festive seasons, transportation cost would triple, even when petrol prices have not gone up? So, who is making all the super profit? That is because people have always expected scarcity in December. And to ensure that this mass transit initiative does not fail, it can be done through Public-Private Partnership (PPP), key performance index (KPIs) are set and the private sector allowed to drive this. I bet you, if it is properly designed, people would stop using their cars across the country. You can use your app to plan your trips and you know when each bus is leaving. For instance, you know the bus that is leaving Lagos to Umuahia and you know the time your connecting bus is leaving Umuahia. All the buses would be run by Nigerians, the mechanics are going to be supervised by Nigerians and with that you would have created jobs and at same time you stop subsidy. That really is one initiative and I have worked it out. It is one thing I believe the Economic Advisory team can drive. Fuel subsidy is a joke, it is not necessary and there has been no clarity about it. The president is so passionate about it; he feels that is the solution to help the poor, but most of the benefits are going to the rich. One way to really help these people is to create jobs. You can use the subsidy savings to set up this mass transport initiative; you create jobs in the major parks and you rent out stores for people to be selling. With this, you would have created efficiency in your road transport system and reduce the number of cars on the roads. This saves us foreign exchange. So, there are also other initiatives I can advise the president on, but I will not want to put it on print at the moment.
Finally, what should clients and stakeholders expect from CardinalStone this year?
There is a lot we are doing. We are diversifying our base. We are going into real estate and we are giving smart investments around forex and how clients can optimise value in forex. And then for money market investment, we would be launching two client-focused funds this year, to cater to clients’ specific investment objectives.
