Olabinjo: Economic Diversification Must Be Prioritised Now

Ola Olabinjo

The Managing Director/Chief Officer, Skystone Capital and Investment Limited, a financial intermediation services firm, Mr. Ola Olabinjo, in this interview speaks on the state of the financial sector, the economy and what should be done to stimulate economic growth. Goddy Egene brings the excerpts:

There are apprehensions about the performance of the economy due to Covid-19 pandemic. What is your economic outlook for the year and 2021?

To be fair these apprehensions are not unfounded. The effects of the decline in crude oil prices occasioned by the disagreement between the Organisation of the Petroleum Exporting Countries (OPEC) and Russia and the unexpected outbreak of the coronavirus pandemic(Covid-19) were, in my opinion, too much for our economy to deal with. So, with disruptions in global supply chain, reduction of our OPEC quota and various lockdown measures adversely affecting businesses and economic activities all over the world, one is not surprised that the International Monetary Fund (IMF) projects a negative global growth of 4.9 per cent for full year (FY) 2020. In terms of performance of the domestic economy, the economy contracted by -6.10 per cent in second quarter (Q2), 2020 gross domestic product (GDP) on the back of unprecedented restrictions of movements, supply shocks, loss of jobs and reduced income levels which effectively ended a 3-year positive real growth rates recorded since the 2016/17 recession. I must add that with government’s 2020 budget at 7.0 per cent of GDP at the beginning of the year, we witnessed series of budget revision to align with current realities which puts oil benchmark at $28/bbl from $57/bbl and crude production reducing from 2.18mmbpd to c. 1.50mmbpd as well as a currency devaluation thus leading to a 0.65 per cent decline in projected net 2020 government revenues. I think a key takeaway is that even with these challenges our performance was not as bad as most analysts had posited. For example, if you take a look at the performance of major economies in the world, GDP fell dramatically; the United Kingdom contracted by -20.4 per cent, France by -13.8 per cent, Canada by -12.4 per cent, in the United States, GDP contracted to -9.5 per cent, in Japan, we saw a GDP contraction of -7.8 per cent and neared home in South Africa, GDP fell by -17.1 per cent. In terms of outlook however, I am optimistic that with the raft of fiscal measures put in place by the federal government, various interventions and monetary policy rate adjustments announced by the CBN to activate economic activities, the gradual ease of the lockdown measures and more importantly a better coordination between the fiscal and monetary authorities, Nigerians should begin to see some ramp up in economic activities. Whilst it might be difficult to project into the future, I believe that the worst is behind us and in alignment with global projections, we should begin to come out of the economic doldrums by Q4, 2021.

How do you think the financial sector would fare given the various headwinds and threat of economic recession?

I think without a doubt COVID – 19 affected the financial sector and particularly the fortunes of the banking industry. If you look at the results released, you will notice that the industry has had its own fair share of macro-economic headwinds, which has resulted in declining margins and in some cases write-offs of impaired loans. Following from this, banks that are significantly exposed to the oil and gas, manufacturing, real estate, hospitality, construction, and general commerce sectors will be hard hit as these headwinds pose significant threats to customers’ ability to repay their loans and by extension affecting asset quality. In addition, the devaluation of the currency is expected to bloat industry’s foreign currency loan book, which, again, are mostly from oil and gas, manufacturing, and general commerce customers. With these, I think going into full year 2020, we should see weaken capitalisation ratios on the back of a general increase in the level of delinquent loans. I must, however, commend the CBN for being proactive in approving forbearance and restructuring of credit facilities across the financial services sectors which includes microfinance banks, finance companies and mortgage banks. I believe this was very well thought through, without which, we would have witnessed a major bloodbath in the financial services sector. I think this will further mitigate the impact of the pandemic on the financial services sector whilst the economy is going through a recovery path. In my view, banks that have adopted and invested in technology as we have seen from some of the big banks, will be able to offset losses from traditional income line i.e. fixed income securities with income from e-business and related lines which also brings about a significant reduction in operating expense. So I think in general, I do not expect to see a woeful performance across the sector, the pandemic more than anything, has provided an opportunity for operators to revisit their digital transformation initiatives now more than ever which will bring about a reduction in operating expense profile and enhance their ability to survive in an increasingly digital society.

What do you think can be done by our economic managers to reduce the impact of the covid-19 pandemic and low oil prices on the economy?

Anyone that critically analyses the economy will know that we have reached a time where a permanent solution to the structural issues disallowing our economy from thriving must be discussed. I think it is time that diversification of the economy must be treated as a national priority. Look, the numbers are generally bleak. Unemployment rate climbed to 27.1 per cent, and if you add underemployment, we should be talking in the region of 50 per cent, rural-urban migration is on the increase thus putting pressure on an already weak infrastructure base, households’ incomes are thinning-out in the face of rising inflation. There are about six areas I believe policy makers must concentrate on to create jobs, deepen our export base, promote made in Nigeria products, educate our people, and stimulate local industries. First, we must steer the economy away from traditional foreign exchange sources such as crude oil, Diaspora remittances etc. that we do not have control over and widen our foreign exchange receipt base via institutionalising targeted actions aimed at opening up industries/sectors that have the capacity to generate foreign exchange. Secondly, policy makers must control the narratives and educate the masses on the rationale of all reforms initiatives particularly the ongoing petroleum subsidy and power reforms so that social critics who do not fully understand the essence of these reforms be allowed to use it as a political tool. Government must own the initiatives and communicate with citizens on the importance of these reforms as they strive to re-direct freed-up capital to critical sectors such as education, healthcare as well as infrastructure renewal.

I must however commend government for taking these bold steps, though at a difficult time, but certainly a right step in a right direction. Thirdly, we must channel efforts at deepening our tax collection mechanism, our current Tax to GDP ratio of 6.1 per cent is one of the lowest in the world and personally, I think the answer lies in effective collections and not reduction or even an increase. Fourthly, adjustment of the exchange rate to reflect current realities is equally germane. I reckon it is time we unify extant foreign exchange windows and do away with the current arrangement because I believe this confuses everyone including portfolio investors. Fifthly, I enjoin policymakers to find innovative ways to unlock dead capital, by this, I mean government should embark on the privatisation of own assets, consolidate where possible and invite private sector participation to operate and manage these assets whilst continued efforts must go into instituting an environment that allows for a level playing ground. Sixthly, so my view is that infrastructure planning must be purposeful, what I am saying in essence is that when we plan for example, a railway project, we must make economic development a critical center piece. Advanced economies no longer develop rail infrastructure projects only for transportation sake, these types of projects must come with the economic advantage of opening new cities, moving agricultural produce and perhaps strategic linkages to our seaports. The newly Federal Government’s inaugurated National Steering Committee that will prepare a new National Development Plan 2021-2025 and Nigeria Agenda 2050 Plan must focus on prioritising strategies to reduce our reliance on a sole commodity for our economic survival, propose initiatives that will unleash an agricultural revolution as well as introduce policies to usher-in much needed private sector investments and solutions to tackle our deep-rooted challenges.

In the midst of these challenges, how can investments be mobilised from individuals and corporates?

The level at which the coronavirus spreads exponentially damaged consumption patterns, purchasing power and services, and even investment decisions among investors. With savings rate at an all-time low, I think we must do all we can to further unlock supply side opportunities. You see, traditionally, focus have always been on the demand-side management, so I think we have reached a time when new investible products with twin objectives of returning real positive returns as well as contribution to the economy must be prioritised. With a plethora of issues requiring private sector investments (locally and international), policy makers need to do more in areas of developing products that will help tackle investment and funding issues related to critical sectors such as housing development, infrastructure, education, healthcare etc. I have no doubt that with the relevant products, and consistent education within the investor base, investment capital can be better harnessed from diverse sources. When you look at the subscription levels of previous Sukuk issued in the country, you will note that it has always been oversubscribed and I think a key reasons for this is that a lot of people know that proceeds from such instruments cannot be diverted and that funds will be applied judiciously for purpose sought. So, in essence, investible instruments with above inflation returns that also supports national development plans is critical to mobilising capital from an already bearish investor base.

Looking at the capital market, for instance, how would you assess the year-to-date performance of the market and what is your projection for the rest of the year?

The uncertainties from COVID-19 will likely remain with us for a foreseeable future. The Nigerian capital markets had no choice but to remain hyper-vigilant and rewrite their business continuity playbooks. While it was very reassuring to see prompt fiscal and monetary policy responses from our regulators, clarity on how these actions will stabilise and accelerate capital markets to normalcy is still slowly emerging. I think activities in the equities market have generally remained normal due to the low yield environment, inability to foreign portfolio investment (FPI) to outflow capital, amongst few other developments. In the debt capital market, we saw corporates tap the funding during the period in a bid to take advantage of the low interest rate environment, via issuance of commercial papers and bonds to refinance some of their rather expensive debts, so, again there have been activities on that side. I think technology is also playing a significant role in moderating the effect which has largely helped securities exchanges continue with their operations. In terms of outlook, I believe the capital markets will continue to remain a critical ecosystem to tap capital for economic growth. We expect to see further activities on the back of the continued negative real returns on fixed income securities, business combination activities expected to be driven by the insurance industry, attractive valuations as most stocks still trade below intrinsic values.

Companies just released their Q2 results. Based on the corporate results and the existing economic headwinds, how do you see the outlook for the second half of the year in terms of corporate performance?

Don’t forget that the historic lockdown experienced in first half (H1) 2020 crippled demand and disrupted supply chains. In terms of where we are, and as we begin to implement a full ease of lock down measures and in particular lifting of restrictions on domestic and international flights, one expects galvanization of corporate performances going into FY 2020 as pockets of business activities begin to resume. Again, from a monetary standpoint, what we have seen is a posture to continue to implement economic policies that is broadly expansionary which will, again, hasten recovery, so as a whole, I do not expect businesses and corporate performances to reach pre-covid levels just yet, but I envision improved business performances from badly hit sectors such as aviation, hospitality, education and general commerce etc. So for me, I’ll remain cautiously optimistic for my H2 2020 corporate performance outlook.

The difficult economic environment, compounded by the COVID-19 pandemic, has further weakened financial power of investors to invest. What will be your advice to investors at the moment?

My advice to investors is to first and foremost prioritise safety before returns (that is return of capital over return on capital), as we are largely in uncertain and unpredictable times. With negative real returns, I know this is an exceedingly difficult time for passive investors who do not think it’s necessary to put their monies to add economic value to the country. Without a doubt, I will recommend a total change in investment mindset and encourage investors to take a second look and re-direct their investments to the real sector. Some critical sectors such as manufacturing, pharmaceuticals, food processing etc. which typically posts anywhere between 20 – 40 per cent returns are veritable investment outlets that provides real positive returns that compensates for diminution in previous investments. So, like I have said earlier, investments must be tied to economic value.

The depth of the nation’s stock market has been an issue for concerns among stakeholders, how do you think the market can be deepened?

You see capital markets influences economic growth through several channels such as liquidity, risk diversification, provision of information, corporate governance, and savings mobilisation. You are correct, as at December 2019, the equities market as a percentage of GDP stood at roughly 9.0 per cent whilst the debt capital market (non-sovereign) as a percentage of the GDP stood at less than 1.0 per cent. What this effectively means is that if you compare to benchmark jurisdictions such as Malaysia, Ghana or South Africa, you will reckon there is significant room for improvements to re-position the capital markets as the right ecosystem to access long-term capital needed to drive infrastructure renewal as part of economic growth initiative. To achieve this, I think a lot more coordinated efforts amongst capital market operators must go into educating our domestic investor base (individuals, asset managers etc.), we must also expand the pool of investible capital ( that is deepen Pension contributions and unlock opportunities for increased participation of insurance companies in the capital markets), we must develop a bouquet of investible products relevant to our economic development and do all we can to reduce the costs and time for issuing securities, particularly debt securities. Let me also add that efforts must also go into ensuring sufficient liquidity and posit that deliberate policy incentives to attract multinationals in the telecommunications and oil and gas sectors to list their securities must be in place and be encouraged.

How is Skystone Capital and Investment contributing to the deepening of the financial market?

We are a CBN-licensed and regulated business entity empowered to provide complementary services/solutions to commercial banks. Traditionally, we are well suited to provide financial intermediations services such as invoice discounting/finance, asset finance as well provide corporate advisory services to mid to large sized organisations in Nigeria. For us, we are extremely grateful for the opportunity to effectively serve our target market, the missing middle – Small and Medium Enterprises (SMEs). We think our solutions are very well tailored across typical pain points for most of the businesses we serve which have not had the privilege to be appropriately served by commercial banks over the years. Asides financial intermediation, which by extension supports job creation and stimulation of economic activities, we have taken steps to activate an in-house advisory franchise where we created an ecosystem of resource persons who support and handhold our partners on improved practices in critical such as finance, HR, business planning, tax compliance, corporate governance etc. So, we like to see ourselves as a one-stop shop to commercial businesses, who, over the years, require the support of partners who can help provide a bouquet of solutions across diverse pain points. I believe our interventions have helped to improve business practices to retain jobs and improve their ability to service financial obligations and by extension their ability to remain a going concern. I must also add that an often overlooked area for most SMEs is in acquiring and institutionalising knowledge within the business. With this becoming apparent with our clients, we launched a series of capacity building/training workstreams for staff of clients who enjoy trainings in areas of book keeping, corporate governance, conflict of interests, leadership, etc. so our belief is that our offerings are value adding mostly aimed at unlocking and deepening economic value.

What has been your experience since you became MD/CEO of Skystone Capital and Investment?

Coming from a corporate and investment banking background, I must say that it has been a very revealing journey as I am confronted with the many challenges facing most SMEs, who by our assessments are very critical to economic growth and employment generation in the country. When I talk of challenges, I am referring to the many issues around multiple taxes, difficulty in attracting and retaining staff, inability to separate the business for the promoters, in a nutshell, I have had to lead my team to solve some pressing challenges at the business (micro) level, when what we need in actual fact, is a comprehensive set of solutions that will revolutionise the state of SME play in Nigeria which will see many of them cross from the SME threshold to large business and possibly list on the Nigerian bourse. So personally, it is been a mixed experience for me, I am indeed very grateful for the dynamism of the Board of Directors, management team and our tenacious staff who together have been very supportive in implementing on various pillars of our strategic blueprint.

What are your growth plans for the company in the next five years?

On a corporate development standpoint, we hope to further consolidate our early gains around deepening and improving our governance and management practices, launch a talent development and retention program, improve our technology spend to bring about scale and explore value accretive partnerships that will allow us move closer to our mid-term objectives. On our core mandate, financial intermediation standpoint, we hope to launch products that are ESG compliant in line with global developments, we believe over the near term horizon (2022) that a significant portion of our loan book should constitute up to 25 per cent green-related assets. We also hope that our relationships with the domestic development finance institutions will be deepened so as to allow us jointly deliver on our mandates.