2021: What will be the Fate of Naira?
As the deadlier variant of the coronavirus signals the emergence of the second wave of the COVID-19 pandemic, the world’s oil markets brace for a harsh year 2021; with Europe slipping into another COVID-19-driven lockdown.From all indication, this dreadful wave is already showing signs of causing another shutdown of the global economy, which brought oil prices to its knees early last year. Consequently, a prolonged reign of this pandemic could lead to the worst fears of the Organisation of the Petroleum Exporting Countries (OPEC) – oil glut, in 2021. With an over 70per cent of its forex dependency on oil, this does not look good for liquidity in the foreign exchange market in Nigeria, especially as the country is losing its European oil market share to the US. Happening so early in the year, it has become imperative; to nervously take a peep into a crystal glass, to examine the level of the pressure the naira will be subjected to, in 2021. Chris Paul reports
Naira, the national currency, was the focus of a discussion oganised by Arbiterz Media Company, in collaboration with Cordros Capital recently. Titled: The Naira in 2021: Optimizing Choices for Growth, and moderated by CNBC Africa Anchor, Wole Famurewa, the zoom conference featured Global Chief Economist, Renaissance Capital, Charles Robertson; Financial Derivatives Company, Bismarck Rewane; Head, SSA Equity Sales, Stanbic IBTC, Akinbamidele Akintola; DG, LCCI, Muda Yusuf; Lead Wealth Advisor, Artios Capital, Abiola Adekoya; President, Association of Bureau De Change Operators of Nigeria (ABCON), Aminu Gwadabe.
Speaking to the theme of the programme and the role population plays in the management of liquidity, the keynote speaker, Charles Robertson, said, the underlying problem Nigeria has, is “lack of savings”. The more children you have, the fewer saving you have. Lower fertility countries such as Morocco, where it is an average of two kids per woman have lots of savings, big banking systems, and low interest rates. However, high fertility countries such as Nigeria, Congo, Angola and Burundi, are where you have high interest rates, not too much birth controls and many unorthodox policies.”
Robertson emphasised that a major solution was to have cheap currency, disclosing that this was the measure the Asian countries applied in the 70s, 80s and 90s, when they had high fertility rates. According to the Renaissance Capital Global Economist, “higher fertility countries such as Kenya, Angola had double digit interest rates, while lower fertility countries in Africa or Asia, had low interest rates.”
But for him, even though he believes the naira is overvalued, he does not see the Central Bank of Nigeria (CBN) allowing the naira to slide down to an exchange rate of N500 to $1; “Or, to N600, that Angola of Kazakhstan would imply…” Robertson predicted that the naira may end up at N429 per dollar by year end.
Bismarck Rewane said Nigeria’s broad macro-economic thrust from 2017-2019 was based on what he called economic patriotism, import substitution and defending the naira “on the belief that inflation was a function of exchange rate passage way to applied disruption rather than all the factors put together.”
“Wrongfully, they have now made it a binary choice; you either do this or you do that. Quite frankly, there are many contributory factors. I believe policy making mentality in Nigeria is changing towards the one of being compliant, one of not being a maverick country and getting away from the idea that capitalism and economic reform are agenda of exploitation of the Nigerian economy,” he added.
Rewane was confident that Nigeria would be more compliant and accepting economic reforms agenda from relevant global economic bodies. Examples of that included the removal of fuel subsidies last year. He sees Nigeria benefitting from the policy decisions “we made in 2019/2020 in terms of subsidy removals, subsidy reduction, in terms of cost reflective tariffs. In terms of accepting that investment multiplier is key to growth rather than any other strategy at this time.”
Indeed, Rewane, who said a strong naira might not necessarily mean a strong economy, however, believe a strong economy will necessarily lead to a strong naira. He, therefore, predicted that, “we may see a more market-determined naira.”
Unlike Robertson’s forecast for the Nigerian currency, the FDC CEO sees the naira landing on N409/410 to $1. But with the speculative or fear premium based on the fact that policy could change, he calculated that “if you add that 20per cent to N410, you may then arrive at N470-N480…”
According to him on today’s fair value based on demand and supply, the naira could be going for N410. However, unpredictable policies could well push the battered naira to the realm of N470 to N480. The economic expert warned that should government continue in the line of unpredictability in policy making, the naira will remain of the N470-480. But if the government does not waiver in accepting and sustaining the reforms, N409/410, he said, “will be the sweet zone for the naira.”
There is also the adjustment of rate and the issue of rates-determination. What is being required today is that you adjust the rate to cover the gap. Perhaps that was the concept that was applied to arrive at N410 from N390.
But then, the managers of the economy have to accept the flexibility of the rate, which moves upwards or downwards and once that Praxis is accepted, according to Rewane.
“Once market knows that the price of petrol and Diesel can move then can now adjust the rate to their own mentality, knowing that the exchange rate is not fixed,” he said.
Concluding his opening thoughts on the topic, he said government must accept the flexibility of the rate and “stop rationing foreign exchange … “
In other words, the CBN should quit flip-flopping on the rates and management of forex.
Akintola aligned with Robertson in the area of the exchange rate. “I don’t believe, the government will move it beyond N420 or N430.” For him, the rationale behind such policy move could include trying to manage the possibility of naira devaluation of leading higher price of petrol and also considering the issues the country has been having recently with electricity tariff. “The implication of massive devaluation could lead to a fiscal backlash for the government,” he said.
The Stanbic IBTC Equity Salesman was not optimistic that government would want to move the exchange rate beyond the N420-N430 mark. According to him, Nigeria’s economy would enter the Egyptian mode, “where the flows that come into the equity market are more driven by locals as opposed to international players.” This, he pointed out, is because “we need to believe in our own market before the world believes in our market.”
He believed this year may likely not see any significant equity inflows until there are some clarities in the capital atmosphere of the economy.
On this score, Akintola gets it because a critical examination of the Nigerian Nollywood concept would reveal a situation, whereby Nigerians embraced this latter day local movie industry with all its flaws and that gave the business the bounce that played onto the global stage for it to be competing with the likes of Hollywood and Bollywood as the world’s third largest movie industry.
Relative to Akintola’s thoughts concerning the Nigerian economy, Rewane’s technocratic position is immediately apocalyptic to the fragile socio-economic fabric of the nation at this point in her history. With insecurity, hunger and poverty ravaging the Nigerian people, it is doubtful that they will take kindly to an unhinged upward movement of the price of petrol and electricity tariffs.
When Rewane said the IMF, World Bank, Paris Club and the rest of the international finance bodies will become more assertive in ensuring Nigeria apply the reforms they are forcing down the throat of the nation’s economy, it gives an impression that Rewane believes these bodies have the medicine that will give Nigeria’s economy the good health it requires to make the life of Nigerians better.
In all his talk about succeeding in getting government to remove subsidy and reduce subsidy on Electricity tariff, Rewane did not mention the need for the government to get the refineries working or apply substantial energy to ensure adequate, efficient and effective in-country refining capacity.
On the capital market side and considering that the market closed at about 50 per cent in 2020, Adekoya said, players were beginning to express concern that “our prices rally was a bit too hard and they don’t want to get caught up at the height of the market.”
“So, they are more cautious than before as they look at something relatively more attractive that they can invest their money,” he added. That is why the mood in the market now has taken the posture of “watch and see at the moment.”
Concerning the currency, investors are now tilting towards wealth preservation, according to Adekoya, as their thinking has shifted to “putting some of their assets, that are in naira, into foreign currency; hedge a bit better and diversify their portfolios a bit more. She further stated that last year witnessed a huge number of local investors eyeing foreign market as reflected in the countless number of calls she got last year “ asking me what can I do? I want to buy foreign stocks, how can I dip my toes in…”
Some of Adekoya’s clients are heavy on property with not as much dollar weight as she would have wanted, but their naira assets ring in the range of 60 per cent and above; and their cash holding was quite significant “about 30 per cent or more. Not a lot of them have any significant dollar asset because for them, property has always been a good matrix for preserving their wealth.” But she believes a lot of them are beginning to question it and looking at the type of properties they have; many of them do not have rental properties and that has now become the direction they are looking at, currently.
Adekoya emphasised that “short term rentals is what they are looking at now as long-term rentals are no longer as profitable as they used to be in the past. So, a lot of them are looking at short-term rentals since they bring a lot more yield in certain areas.”
Baring his thoughts on the reason why the market rallied at 50 per cent in 2020, Akintola said, “it was not because people woke up and suddenly became Nigeria Equity crazy. It was a case of we had so much cash and there was nowhere to put it.”
On the morning of the programme when he found himself checking the market performance last year, Akintola found that as at September 20, 2020, only about 5 per cent of a certain part of the market was doing great, while an all-time high, would be as high as 12per cent.
“However, when you look at the market with array of stocks, I think there are probably ten investable names. Names I will be personally excited to put my portfolio; so, I feel there is probably some sort of latent money in the background that can potentially chase equity,” he said.
President, Association of Bureau De Change Operators of Nigeria (ABCON), Aminu Gwadabe, affirmed that the naira has been facing “a war of attrition.” He is not happy that the foreign exchange inflow his association had anxiously awaited may not be forthcoming this year. For Gwadabe, a fixed exchange rate regime always provides unscrupulous people to divert forex “the official way to take this currency into the official market.” Most of the forex transactions in the market are ‘dry transactions’ as foreign currencies are ferreted out of the Nigerian markets to foreign countries.
According to the ABCON President, between the official and parallel markets, currency valuation in Egyptian currency is about 16per cent, while Ghana’s ranges between 26per cent and 30per cent.
His worry is government’s subsidy on inflows. A situation where over $100 billion would leave the country with little or no string puts pressure on the forex market in the country. And that is why the ABCON President would prefer a policy that will ensure forex is not allowed to flow out of the country just like that. In other words, Gwadabe is saying that instead of allowing you to take your forex out of the economy just like that, you would have to be mandated to take it out through export of Nigerian goods which you would sell in your country or wherever you can to make your money.
Speaking on how businesses will be navigating 2021 and his view on the state of the naira, the Director General of the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, said the business community in Nigeria face two major challenges as far as the currency situation is concerned.
“First is the issue of the depreciation of the currency. You know how import-dependent the economy is; ranging from the manufacturing to the service sector to the consumer and so forth are highly import-dependent,” he said. And so, any time these stakeholders experience a sharp depreciation in the currency, it causes lots of shocks in the industry, spiking cost of production, operations. According to the LCCI DG, “when you are in a market where purchasing power is also weak, you are forced to transfer this cost.” This unfortunate situation affects profit margins and ultimately impacts the sustainability of businesses.
It is a major, but inevitable challenge that is made worse by the fact that businesses do not have much control, in terms of the currency and international pricing.
Liquidity crisis in the foreign exchange market is the other daunting challenge businesses face in the country, which, according to Yusuf, is so bad. “When you make a major demand for forex, either to import equipment or to import raw materials, and you are given 10per cent or 20per cent of what you have requested, what are you going to do with that?!”
For the DG, it has deteriorated to the point where, the companies do not mind paying any amount just to access the import component of their operations, “but they just can’t get it because of the liquidity crisis in the foreign exchange market.”
The LCCI DG’s illustrative view of the state of the liquidity crisis the Nigerian economy faces, is a frightening prediction of what the turbulence that will hit the liquidity market and unrelenting clobbering the naira will be treated to in the days and weeks ahead.
In other words, it is not about whether the nation’s liquidity market will be out of the woods this year; it is more about praying that it is not buried with the woods, by a pandemic that is scourging everything and everyone in its way.