Chidoka: Policy Inconsistency Stifling Investments

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Managing Director of Kairos Capital, Mr. Sam Chidoka, in this interview says investors should be cautiously optimistic about 2021, even as he anticipates a rebound in the productive economy from the end of the second quarter of this year. He also touches on a wide range of issues including the 2021 budget and how the government can block revenue leakages. Obinna Chima brings the excerpts:

What are your expectations from the financial market and the economy in 2021?

For us at Kairos Capital, 2021 is cautiously optimistic. We had envisaged that 2020 was going to end in a negative Gross Domestic Growth (GDP) growth for the country and would have adverse effects on many companies, especially those in the productive economy and those also in the trading economy. That was based on the coronavirus pandemic. But 2021, the first quarter and most of the second quarter would most likely go same way with 2020. We are going to begin to see a rebound in the productive economy from the end of the second quarter 2021, leading to the third quarter, as more and more people are vaccinated and we have more ways of dealing with the pandemic.

That is because this is a health pandemic that has affected the economic base of the whole world at large. Now, for some industries, 2020 was a fantastic year. For example, if you are in delivery, 2020 was a good year for you; but if you are in aviation, 2020 was a bad; if you are in hospitality, 2020 was a bad year, but if you are in logistics and haulage, 2020 might have been a good year. If you are also in the business of lending, 2020 wasn’t actually bad because what happened was that when people lost their capital base, they went back to borrow more money. So, I would say that for 2021, we would be cautiously optimistic. All the lessons learnt in 2020, should be used in 2021 to keep businesses, households and individuals afloat.

For the capital market, in terms of new listing and capital raising, do you foresee an improvement this year compared with what we saw last year?

So, I will divide that into two: There is the equities side and the debt side. On the equities side, not so much is expected because what has happened is that when people make investments, they do so from monies that are not needed to run their lives. So, the extra income is what people invest. So, do people have the liquidity to make the investment today? Not a lot. So, if you are going to do an equity raising, it is probably going to be a struggle. But, on the debt side, a lot has happened. So, the Central Bank of Nigeria’s (CBN) policy has reduced interest rate across the yield curve.

And if you look at the last quarter of 2020, there were lots of debt issuances. So, that is going to continue this year. In the first quarter you are going to see much more debt issuances because today rates are very low and people are trying to take advantage of that. So, you are going to see that in the first and second quarters 2021. But, on the equities side, you are not going to see a lot of listings, initial public offerings and public offers, because valuations are still low. Intrinsic values of companies are still quite low regardless of the fact that the Nigerian Stock Exchange (NSE) did a 47 per cent return for 2020.

Following the outbreak of the pandemic, we saw the exit of foreign portfolio investors (FPIs), which was crucial in stabilising our forex market. What should be done to attract this class of investors once more?

So, what happened during the pandemic was flight to safety. As soon as it happened, what people did was to take their funds to places that they are very comfortable with. So, it wasn’t just about Nigeria, it happened across the world. But for Nigeria it was worse because of policy flip-flop. If you run a country and people are not certain that if they go to bed today, when they wake up tomorrow there wouldn’t have been a change in policy that would materially affect their business, then you are going to have a major issue. So, I actually prefer foreign direct investments (FDIs) as against FPIs. But what happens to most economies is that you get FPIs and then FDIs outflows. But if you want both to come back, whether FPIs or FDIs, you are going to put policies in place that people can bet on.

You know if people are taking money out of their economy to invest here, you are know they are taking a currency risk. So, if you take decisions that affects any of the forex windows, if people can’t come in and leave when they want to, definitely nobody will want to invest here. And remember, there is competition across the world; there is competition among frontier markets; developing markets and even more matured markets for investments. So, whilst Nigeria may think we are a beautiful bride, it depends on who is looking at the bride. We have Ghana just next door, putting their acts together and looking for investments. You have Ethiopia, you have Rwanda, India and other frontier markets who are putting their acts together and naturally flows would go to those countries. So, for Nigeria, I think that we need to be more consistent with policies and even policies have to change, we need to do stakeholders’ engagement.

What form of stakeholders’ engagement?
So, if you have people who have invested in your economy and you want to change a policy that will affect their investment, you need to engage the people to know whether you need to give them time to turnaround their investment or whether it is something you can do in the immediate term. There needs to be engagement with the people. You can’t ask people to put their money in your economy and when you want to take decisions that affect their investment, it is one-sided. It doesn’t work. If not, you can stay within your economy and just invest among yourselves. But you have to realise that no nation is an island. Money must be able to come in and leave the country.

So, policy flip-flops is one of the major things affecting us as a nation. Insecurity is affecting us as a nation as well because sometimes these FPIs are looking to invest in your equities and the equities of those companies, if there is insecurity at the places where they are doing business, then the returns don’t add up anymore. So, you have insecurity that is affecting you as a nation and more so, if you add the fact that as a country, anytime we are facing an election, two years before that election, everything is about the election. So, there is a political risk and we may start seeing that from next year. So, these are some of the things we need to take into cognisance in taking decisions.

What is your assessment of the components of the federal government’s 2021 budget?
Again, I think that budgeting in Nigeria is done because we have to it. If we have to be realistic, I can’t remember the last time we were able to fund our budget. We have been operating on a deficit budget cycle for a long time and it progressively got worst. If you look at our budget, you will find out that we do 100 per cent recurrent because we have to pay salaries and overheads, and debt service 100 per cent performance because you have to pay your debt. But, if you look at the capital side, you will see something like 40 per cent performance, which in normal parlance is F9. So, I think that once again, we have come up with a budget that we cannot fund. Something happened recently that is good for us and I am hoping that we can use it to our advantage – oil is trading around $57 per barrel, it is good for us because we would make more money. But I am hoping that the money we are making now, we would realise that we have to use it to shore up our deficit. Again, we keep on borrowing and the more we borrow, the more our debt service keeps rising. At some time in the first quarter 2020, we were doing 91 per cent debt service-to-revenue. So, if we continue in that light, it becomes difficult to implement the budget.

Nigeria is one country where we do not discuss budget cuts. So, on the recurrent side, there are salaries, what about other overheads? When are we going to have a conversation about what makes up the other overheads and how much we can cut on those overheads? Why do we keep on spending money like we have money, when we actually don’t have money? Why are we financing the lifestyle of people in government and leadership positions, from local government, states and federal government, financing lifestyles? These are important conversations we need to start having as a nation. So, for our budgeting, we have come back to the January to December cycle, which is good; we have budgeted with $40 per barrel, which is also good. But are we able to raise the money that is required to fund the budget? No. Are we going to borrow most of it? Yes. What would that do to us? Uptick on our debt service. Is that good for us? No.

Some have argued that the government should stop further borrowing, what do you think is the alternative to raising resources to fund the budget and in terms of diversifying the country’s revenue base, what practical steps will you advise the government to take towards achieving that?

Just to be clear, I am not one of those that says the government shouldn’t borrow. I am saying that if we need to borrow, we should be sure that we have done all that we need to do first before we borrow. So, what do I mean by that? Let’s say you have N100, but what you require is N150. So, how have you judiciously spent the N100 before we start talking about how you will get the balance of N50? Secondly, if you are borrowing to invest in a sector that would spur economic activities, that is good. But today, we are borrowing to even pay salaries and overheads. If you look at the 2019 and 2020 budget, you will see that total government revenue was not up to our recurrent expenditure. What that simply meant was that we borrowed to fund salaries and overheads. For me, that is not acceptable. If you want to borrow, you borrow for capital projects and they should be projects that can pay back the debt.

So, imagine that the government borrows to set up a rail line, when the rail line is launched you hear something like for the next four month, it is going to be free for people to ride on. That is just politics. This was a rail that was built with borrowed money, why give it out for free? I actually think that when you borrow to fund capital projects, when execute the projects, by all means we should privatise or commercialise those projects so that the cash-flow can come and we can use it in servicing debts going forward. For the other part of the question, I don’t belong to the school of thought of diversification of the economy. To a large extent, in my view, our economy is already diversified. You judge the diversification of the economy through the participation of different constituent part of the economy to the GDP. So, if you look at it in that light, you will see that our economy is already diversified.

People think that oil contributes a lot to our GDP, but it does not. Oil is about eight or nine of our GDP, while services is about 40 per cent; agriculture is another 20 per cent or thereabout. So, to a large extent, our economy is diversified. What was not diversified was our revenue base. There was a time oil was 90 per cent of revenue, then it came down to 70 per cent. The Minister of Finance has assured us that in 2021, oil will only be 30 per cent of revenue. So, if we can get to a place where oil is 30 per cent of revenue, that means we have also diversified our revenue base. Now, all of these are steps in the right direction. That means that even if the price of oil crashes tomorrow, you only lose 30 per cent of your revenue and 70 per cent which would come from taxation and other sources would continue to drive the economy. The truth is that we don’t have enough people in the tax net and we are not collecting enough taxes. The leakages in the economy are much. And also, purchasing power in the country is weak.

So, what I think we need to continue to do is to have a conversation on how to pull people out of poverty, in practical terms and not by tokenism. You can’t pull people out of poverty by giving them N5, 000. When you give them N5, 000, what typically happens is t that they use it to solve their immediate problem and they come back to square one. It’s been done before – China pulled 100 million people out of poverty in the past few years. So, we need to go and check what they did and copy part of it that works for our economy. We really need to pull people out of poverty, because the more you pull people out of poverty, the more they have disposable income, the more they can invest in the economy, the more they can pay taxes and the more government’s revenue can grow. So, I think we should concentrate more on pulling people out of poverty, which is what our basic problem is. But you cannot pull people out of poverty where there is insecurity. So, you have to solve the insecurity problem, then you can begin to aggressively tackle poverty.

Some days ago, the Chairman of FIRS disclosed the amount the leakages in the system. How do you think we can prevent such leakages going forward so as to shore up the country’s revenue?

When you see Nigeria not doing something that is obvious, it means that maybe there is lack of political will or maybe because some people are benefitting from it. Now, as at today, we have data that we can use to increase tax collections. We have the Bank Verification Numbers (BVN), so you can track peoples’ accounts. Now, you are asking people to get their National Identification Number (NIN) and add it to their phone number, for security reasons. You have the Tax Identification Number (TIN) for corporates and individuals; you have driver’s licence and all the data you have collected and you have international passports and all the data you have collected for it. So, the first thing you need to do is to merge the data and mine the data for tax purpose.

That is what they do in other countries. So, you cannot claim not to be able to pay tax because government can look into the account and see how much has gone through the account. You cannot claim not to pay tax if government can look at your assets and see the assets that you have. I think that this silo mentality of data is what is affecting us. We need to bring the data together. Once we bring the data together, you can find anybody, you can trace the person and then bring them to the tax net and for people to pay the right taxes. I think that is the solution because the data is already available, but sometimes every government institution is collecting data, same data and you are asking yourself, why they can’t share resources.

In 2020, the pandemic disrupted the operations of a lot of organisations, can you tell about Kairos Capital, your activities last year and how you were able to navigate the challenges posed by COVID-19?

Kairos is an investment banking institution or an Issuing House, which is the licence we have from the Securities and Exchange Commission (SEC). We do investment advisory, corporate finance, we raise funds for clients, whether it is debt or equity, business advisory, mergers and acquisitions and we fund all these strata of investment banking. In 2020, we were not unaffected by the pandemic because what happened was that companies had to first of all find ways of surviving and adapting to the pandemic and the negative effects it brought on the financial system before thinking about what they needed to do.

So, that affected our business. So, one of the things we also did was that we had to adapt and we had to find new product lines that speak to solving the needs that we saw in the economy. So, once the pandemic hit, what it did was that it caused strategic re-alignment in companies where they had to begin to refocus – where should I be investing? What should I be investing in? When should I be investing? And to take those decisions, companies required the advice of firms like Kairos Capital. So, we had the opportunity of positioning ourselves to be able to advise them on the best way to reposition their business, to tweak their business and to provide access to revenue streams that didn’t exist pre-Covid.

Another part of our business that we had to find way of doing was being able to work from anywhere because with social distancing we couldn’t come to the office and we had to find ways of providing our staff all the requirement, we made sure that we provided for our clients the output they expected. We quickly transitioned seamlessly to being able to meet the needs of our clients from wherever we are and that was one lesson we learnt in 2020.

The last thing o will like to talk about is that we saw a lot of uptick in activities in the debt capital market towards the end of the year and at Kairos we are positioned as one of the leading advisers in the debt capital market space. So, for that reason we participated in some of the transactions that happened in the market towards the end of 2020. We have the network and ecosystem that enables us to achieve the desired end for our clients. So, all in all, for us, 2020 was a learning curve for us, for our clients and we adapted quickly and we have repositioned and we are now in a situation where we believe that 2021, we should launch further to positively affect the businesses of our clients.

Finally, what are we expecting from Kairos Capital this year and what is your projection for the firm in the next five years?

For 2021, we hope to continue with the pace that we set for ourselves in 2020. In 2020, we sought to position ourselves as a critical adviser across different spheres – whether it is debt, equities, M&As and right now we have shown that we have the capacity and ability to advise along these lines. So, in 2021, what we want to do is to further showcase to the market our ability to advice along those lines, our ability to raise funds locally and internationally, our ability to be strategic in our thinking and provide solutions to the burning needs of our clients. One other thing that we hope to do in 2021 is to co-compete.

No man is an island, we believe that we can work together in advising clients. We can be on the sell side and the competitor can be on the buy side. In five years, we want to create a company that is a dominant adviser in the market. We want to be in a position whereby when you list the first five advisers of choice in the market, Kairos would be on that list. We want to be a position whereby we can provide other services that are ancillary to our business. So, you are going to see us begin to roll out businesses that would aide our advisory business. So, in the next five years, we would be a dominant player in the advisory space.