Agusto: Financing SMEs Now Riskier

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The Founder, Agusto & Co, Mr. Bode Agusto, in this interactive session at the end of a webinar, spoke about how the COVID-19 will impact the Nigerian economy and businesses in 2020. Obinna Chima presents the excerpts:

What are the key sources and application of funds that government needs to execute in order to ensure that we get out of this crisis with limited economic damage?

First of all, I believe that this is the season when the two big arms of government need to be working together. The monetary policy that is controlling money supply, inflation, exchange rate, that is, the Central Bank of Nigeria and the government which controls the spending, they need to work together. So, in terms of sources of foreign to Nigeria that are important. The biggest one for me is workers’ remittances. And I believe that government must continue to do things to encourage diaspora people bringing monies to Nigeria, to put such monies through official channels.

If the difference between the official exchange rate and the parallel market rate is very huge, the incentive would encourage people to be sending their monies through the parallel market and not through official channels. That would significantly deplete the amount of foreign exchange that we are likely to have to heal the economy. The second one that we have are people who earn dollars and who have naira expenses as well. A good example is the oil and gas companies in Nigeria. They export their oil and they earn dollars. But they have local currency expenses. For example, the salaries and wages of their workers.

So, they would always need to change dollars to naira. Of course, the government can pressure them and force them to take below market exchange rate. But, then, they may decide to be bringing their monies in trickles, in anticipation of a better exchange rate. So, we need to find ways of managing these people. Then, with respect to application of foreign exchange, this is a season where we are going to be seeing rationing of foreign exchange. But as long as we direct it towards the important sectors and do things in a fair manner, then we would be able to influence things positively.

But I would like to sound a word of caution with respect to what we do as government. That is that, there would be damage, whether we like it or not. But the objective is to limit the damage and the timing of our intervention can be very important. I would liken this, to a war situation and people are bombing factories and places, we should then ask ourselves if that would be the right time to be throwing monies into factories? No. We should wait a little bit and see how this is going to pan out before we begin to intervene. There are few places where we can intervene right away to make sure that people stay alive and are fed. Damage to businesses would occur, but let us make sure that we dimension the extent of the damage and we can prescribe the right medicine for the damage.

MSMEs in Nigeria are bleeding. How can we lessen their pain?
One way to lessen their pain is to look at their cost of financing and improve their access to financing as well. But then, I will wait a little bit and see how things would pan out. We also need to look at each business critically. The economics of these business, does it make sense? Can this business thrive if it has resources? If my answer is yes, that the business can thrive, then I would support the business. But if my answer is no, I would enjoin the business to protect its assets, try and realise the assets and invest it in businesses that can thrive. But how can government support them? One way is towards helping them with the rate at which they borrow money and their access to money.

But simply instructing banks to reduce their interest rate is further eroding the profitability of banks and weakening banks. It is in my view that this is the season when government should step forward and bear some of the risks as well. For example, they can decide that a fair interest rate must be higher than the rate of inflation. Otherwise, the banks would be losing money. So, if you say a fair interest rate is 14 per cent, and we want the businesses just to bear only seven per cent, as government, I would bear the difference.

So, the businesses would pay seven per cent and I as government would pay the remaining seven per cent to the banks. That is to ensure that the banks also stay alive. That is because the banks are important to the economy and when there is a banking crisis, it is the government that goes to carry the can at the end of the day. So, let us try to do things to protect the banks.

What would be the effect of the current global pandemic on Nigeria’s pension industry and what do you think should be done to mitigate the impact?

I would like to highlight that our pension assets are at risk. Why do I think our pension assets are at risk? That is because if you look at the nature of those assets, they are totaling about N10 trillion now and two-third of it are in government securities and the Pension Fund Administrators (PFAs) have been barred from the Open Market Operations (OMO) market and can only invest in the Nigerian Treasury Bills market and earn three per cent return. That means, in substance, they are subsidising the federal government, because the three per cent return in significantly below the rate of inflation. So, we are gradually eroding the purchasing power of our pensioners. This must not be allowed to continue for some considerable future period, otherwise, we are going to significantly impair pension assets. So, that is the risk that I see. The government should allow fair prices in the market.

With the COVID-19 and significant drop in crude oil prices, would banks still be willing to grant loans to SMEs?
My view is that SMEs are going to be riskier. Then, banks have to manage those risks. And when a business becomes riskier, you either say you are not going to lend to them or that you want to lend at a higher interest rate. This can be managed. The government can help to de-risk the SMEs, to lower their risks. That is what I think we should be doing. By giving SMEs grants, which would help them to de-leverage. Government can also buy partial risk on the credit or bear a portion of the interest. Those are options.

Whether we like it or not, the government should step in and help. Why? That is because banks in Nigeria are owned by investors, not government. If banks were owned by government, then the government can unilaterally reduce the interest rate, lend to specific sectors and tell them what to do. But, once a bank is owned by private sector, they have to be managed in the interest of shareholders and we need to have the right balance there as well. Yes, depositors’ interest is important, yes, the growth of the economy is important, but we need to strike the right balance so that we don’t ask the shareholders to bear all the losses. The government needs to step in and do something as well.

Do you foresee the risk of default in terms of coupon payment on bonds?

The issuer of the bond will give me an idea of how to respond to this question. That is, was the instrument issued by the federal or state government or by companies and what currency was it issued in? So, first of all, if you are talking about government securities that the FGN issues, the government will continue to meet its obligations as at when they fall due in my view, be it in local currency or in foreign currency. Because really and truly, even in foreign currency, Nigeria is not as highly leveraged as its peers such as Angola, Ghana or Kenya.

So, the federal government would continue to meet its obligation. What about sub-national governments? For sub-national governments, I will like them to pledge some of their revenue as security before I can invest at sub-national level, because the risk of default is high. What about corporates, I will look at businesses, the industry and the economics of the industry. Is the industry viable? Do people make money in the industry and what is the position of the borrower? Is the firm in a strong or weak position in the industry? I would generally go for strong industries.

Do you think Nigeria will be able to get the money it is requesting from the IMF?

My view is that we are likely to encounter difficulties unless we address the issue in a proactive manner. What are the concerns and issues that the IMF is likely to raise if they want to loan us money? They are going to talk about subsidies on petrol, electricity tariff, they are going to talk about exchange rate, even though we have started seeing some convergence. Also, they are going to talk about different rates in the treasury bills market, reducing the size of government, they are going to talk about improving non-oil tax revenue, they are going to talk about trade barriers, even though on that one you can ask them to look towards America, which is a bigger offender. But then, these are things that are of concern to everybody including the government. If government can craft its response to all these things and how it is going to address them and come up with what can be described as its home-grown way of addressing these issues, then we have a greater likelihood of success. But for them to go to the IMF and think there won’t be conditions for the loan request, then we are deceiving ourselves.

What can the banks do to sustain the cost of doing business and even make profit?

Forget about profit. This is the time when you protect your equity, I would say. Profit should not be the priority because the banks are going to get hit. The banks are going to make less profit because the impairment charge is going to be higher. And the banks are going to have pressure from the regulator to lend at lower rates. They are not going to make much money. What they are going to do is to look at their cost and to protect the quality of their loan book, so that the size of the impairment charge is not going to be bigger.

What opportunities do you see for the agriculture sector with this crisis?

This is an era where we are seeing that the so-called leaders of the world are saying every man for himself, God for us all. We have to look inward. People talk about agriculture a lot. For me, if you don’t add value to your agricultural products, you are not going to get any significant benefit. Translate it to the food we eat and the things we need to power other sectors, if we don’t add value to agriculture, it is unlikely that the economy is going to see any significant benefit. We are also seeing other areas that are important. We must be able to power our industries. We must have a reliable rail system that can move people around.

What suggestion do you have for entrepreneurs in the building industry?

The construction industry will be hit big time in my view. But then, like everything, when we need to adjust, we would adjust. If the amount of money that people are committing to capital expenditure is reduced, would they spend money on maintaining their assets? If I cannot build, but can I do some maintenance work for them that would earn me small money to cover my cost and protect my equity, such that when the good time comes again, I would be able to trade. The key thing in any business is the need to conserve capital in ant business that we are in. That is because the biggest threat that entrepreneurs face is erosion of capital.

If our capital is eroded, we are not going to be able to trade when the good time comes. So, whatever steps we are taking should be focused on that principal objective – how am I going to conserve my capital. And in terms of capital, think of money as well as people. There are some industries where their people are so critical. Therefore, you need to take good care of them. For example, people are talking about the premier league players, that their salaries should be reduced. But we must understand that they are the core assets.