Onaolapo: For Sustainable Borrowing, Fiscal Imbalances Must be Addressed
The Chief Executive Officer, Eczellon Capital, Diekola Onaolapo in this interview spoke extensively on Nigeria’s debt standing, state of the economy, investment landscape and other pertinent economic issues; Nume Ekeghe presents the excepts
Can you speak on the current investment landscape in Nigeria, the country’s economic trends?
Nigeria has always enjoyed fairly strong fundamentals among the developing economies. Its large-and-still growing, youthful population, market size and still-underexplored potential across various sectors, especially in non-oil sectors such as agriculture, transportation, information technology, manufacturing, healthcare and education, et cetera, should establish an undoubted attractiveness to investment, from both local and foreign interests.
That said, recent reports show that sentiments of foreign investment interests are, at best, mixed. According to the report of RMB – 2021 top 10 investment-attractive African countries, Nigeria out-rightly fell out of the (top 10) list, from its 2ndposition in 2014. Note-worthy, on same report, Egypt went from 6th to 1st in the same period, Rwanda – 9th to 4th, and Botswana, from not making the list in 2014 to 5th in 2021. The ranking, according the publisher, considers operating environments, fiscal scores and development plans, especially in a COVID-19 world, to measure investment attractiveness. Another ranking however – the Absa Africa Financial Markets Index (“AAFMI”) 2021 report – retained Nigeria as the 3rd most attractive country in Africa for foreign investment, citing evaluation across 6-pillars of market depth, access to foreign exchange, market transparency, tax and regulatory environment, capacity of local investors, macroeconomic opportunities, and enforceability of the standard master agreement. Away from such reports, and to gauge from real measures like FDI inflows, a recent NBS report shows that FDI and portfolio investment flows into the country fell by 13.9 per cent and 56.5 per cent respectively in two years. That should factor in Covid-19 pandemic in 2020, followed only by a tame economic recovery in 2021, which was also ravaged by the emergence of new variants. Against this backdrop however, Nigeria emerged as number 1 for Funding raised by start-ups in 2021, at $1.37billion (according new statistics platform,thebigdeal.substack.com), with South Africa and Egypt being 2nd and 3rd, with $838million and $588m respectively.
In all, trends in macroeconomic environment are key influencers of investment landscape and determinants of investment flows. For foreign investments, it is a balance of strong fundamentals versus inherent risks in the macro environment, including socio-political stability and currency dynamics. For local investment sentiments, you will consider cost and ease of doing business in terms of supporting infrastructure and regulations, and then access to financing and cost of capital. While the federal government should be commended in its efforts to improve business conditions, worrying macroeconomic indicators, policy uncertainties / contradictions and insecurity have, in recent times, eroded the overall favourable sentiments to the attractiveness of the Nigerian investment landscape. The managers of the economy will need to address these issues to return the country to a viable position to harness opportunities inherent in its potential.
On economic trend, following its exit from the COVID-19 propelled recession in Q4’ 2020, Nigeria’s economy has been on a path to recovery, a positive signal, especially to investors that exited the country in the heat of the pandemic. In 2021, the country has recorded consistent GDP growths from the first to the third quarter, with the most recent (Q3’2021) being a GDP growth rate of 4.03per cent. However, GDP growth alone is not enough to measure economic performance, other indices must be considered. You may also want to look at things like trends of in-country production, employment indices, inflation, and measures of general well-being of the citizenry, all which have great impact on the economy and investment landscape, in the medium to long term.
On production, the NBS released its report on trade and Nigeria’s trade deficit for the three quarters ending September 30, 2021 was N8.9 trillion. The country’s imports consistently outstrip exports, and that is export for which crude oil represented 66 per cent, 80 per cent and 78 per cent of exports in Q1, Q2 and Q3 respectively. We simply are not producing enough. The thing is, this is not rocket science. Insecurity is a great hindrance to production. Consider agriculture, in which case, farmers are unable to access farms due to banditry and such. This disruption alone upends the entire agriculture value chain, with far reaching untoward consequences to the national economy. Also issues around power still hold back sectors like manufacturing. Lastly, regulatory issues largely hamper businesses, in an environment where regulators and businesses view one another as opponents, as opposed to being collaborators. These have implications on issues like unemployment. And the numbers show this. For instance, out of the 122,049,400 economically active or working age population (15 – 64 years of age) as at Q4, 2020, NBS reported that only 46,488,079 are in employment.
Of this, 30,572,440 were full-time employed, i.e., working 40+ hours per week, while 15,915,639 were under-employed i.e., working between 20-29 hours per week. This implies, in a country of over 200 million, a dependency ratio of over 4:1, i.e. every employed person has about 4 persons depending on him / her for economic survival, even as food inflation increases and income has largely stagnated. This has serious implication on poverty, security and long-term economic growth and stability.
The good news is that certain economic sectors are thriving even through these challenges. Technology – especially FinTech and e-commerce, as mentioned earlier, have attracted investment interests. Entertainment industry continues to grow along with other sectors. We expect that policy makers will recognise the need to support the growth of these sectors, especially as they engage the youth, for all round economic gains. Other strategic sectors must also be supported to improve the efficiency of production and competitiveness of Nigerian products, especially in view of AfCFTA, which opens Nigerian businesses to competition from the enlarged, integrated regional market.
On the subject of foreign investment, there has notably been an increased divestment of foreign investors out of Nigeria, what should be done to reverse this trend?
As mentioned earlier, key concerns for foreign investment interests include socio-political stability, security, Foreign Exchange stability and regulations, especially with regards to respective sectors. The issue of security is obvious and we cannot discuss its importance enough, although current state of insecurity requires more than just economic analysts’ projections and recommendations.
The FX environment is an area, which requires more creative management, given the high mono-product (Crude Oil) dependency of Nigeria for its foreign exchange earnings. The relationship between crude oil prices and Nigeria’s economy became quite evident in the fallout of the 2016 oil price slump which sent the country to recession and reversed foreign investments from the country. As economic growth picked up tamely, even before Covid-19, FX issues remain a key indicator for foreign investments. One of indices considered by the AAFMI report mentioned earlier noted that Nigeria has continued to perform poorly in the area of access to foreign exchange and management thereof. While administrative controls were imposed, with some goods placed on import restrictions, market liquidity was also hampered, limiting foreign exchange repatriation and the supply of FX to certain windows. This will not encourage foreign investment inflows, especially given pandemic-times global macroeconomic imbalances.
With regards to the wave of divestments as you referenced, the oil sector is one sector that has witnessed series of divestments by foreign investors, notably Shell Petroleum Development Company and Total. The divestment decision has been largely attributed to factors both internal and external to the economy. These factors include, security and other local challenges faced by the oil producers, the global push for cleaner energy, various lawsuits and other legal issues faced by oil companies, and uncertain outlook in the oil and gas sector most especially around the implementation of Petroleum Industry Act.
Using the oil and gas sector as a case study, and based on my perspectives on catalysts of divestments from other sectors of the economy, reversing the trend of foreign divestments will require deep structural reforms by the government, especially around the three issues mentioned earlier. Investors need to be convinced that the exchange rate system provides a near-accurate translation for their investments which points to the need for the foreign exchange system to be unified in order to provide appropriate investment values for potential investors.
Furthermore, there is a need for not only the formulation but also, the implementation of business-supportive policies, which will transcend political administrations. In addition, infrastructure and security challenges should be properly addressed to further enhance ease of doing business for both domestic and foreign investors.
Speaking of FX, what are your thoughts on the recent decision by the Central Bank of Nigeria action in ending its weekly foreign exchange sales to Bureau De Change (BDC) operators in Nigeria and how it has affected the FX supply and pricing?
My understanding is that the BDCs were originally created to serve the retail end of forex demand, where they were meant to serve individual demand not greater than $5,000. The BDCs, however, according to the CBN, have allegedly been catering to wholesale demand beyond regulatory limits and in many cases, engaging in transactions deemed illegal, such as obtaining dollars from the CBN to fund supply at the Parallel market at premium rates, a practice which further widens the gap between the official and parallel market. It is against this backdrop and the need to achieve a unified exchange rate that, we believe, the CBN acted by ending its weekly supply to the BDCs.
That said, the wisdom of the CBN in taking this step and its effect on the market, especially in the short term, is still being debated, given the influence of the BDCs in the parallel market from which the temperature of the FX is typically measured. Since the days following the CBN’s action, the Naira has steadily depreciated, despite the designation of teller points in Deposit Money Banks to serve retail demand. The inability of the designated teller points to serve retail demand shows that the CBN is yet to achieve its objective with this strategy as evidenced by the expanding variance between the official and the parallel market.
It is yet to be seen if the CBN will not be forced to revert to the BDCs, albeit probably with a different regulatory and control approach, in order to ensure that permissible retail demands are met.
Do you think the decision is a good one especially in trying to lure back FDIs?
You probably won’t say FDI inflows are particularly directly impacted by that decision. That said; following the decision, there has ultimately been a widening of the gap between the official and parallel rate, which tends to distort the valuation of the Naira. This invariably will further signal potential Foreign Direct Investors.
That said; the intent of the CBN is to achieve a true value for the Naira as against the market-making activities of some BDCs. If the CBN’s action is backed with other initiatives that facilitate this objective, the confidence of potential investors may be bolstered in the medium to long term.
What do you think is the appropriate pricing of the naira?
A look at the spread between the parallel market exchange rate and the official exchange rate of the dollar to naira, which has widened from NGN69.75 in December 2020 to NGN156 as at December 9, 2021, indicates a dearth in the supply of dollars in the face of keen demand, as well as some speculative pressure. Therefore, one may say that the true value of the Naira lies some premium above the current rate as is being managed by the CBN.
It is difficult to assign a specific price to the naira. A true value cannot be determined when valuation is managed and not determined by forces of demand and supply.
On the federal government’s plan to issue Eurobond, do you think the environment is ripe given the current situation in the global economy?
The Nigerian Eurobond market has seen a number of corporate and government issuances. In 2021, there have been many Sub-Saharan African (“SSA”) Eurobond issuances as countries seek to raise funds to finance their economic growth and development imperatives, particularly in response to the covid-19 pandemic and its impact on their economic activities.
Eurobonds are typically leveraged to plug the country’s fiscal budget deficit and support faster economic recovery. . Typically, they are cheaper and more flexible than local currency issues, if FX and other cross-border risks are not priced in. However, Nigeria’s current Eurobond sale comes when the country is grappling with a 98 per cent Debt Service-to-Revenue ratio, according to stats from some authorities on the economy and its imminent sale will further strain the country’s revenues if the funds are not deployed to projects that are revenue-generating or self-financing in nature. It also exposes the country to foreign exchange volatilities may make it costlier, although you would expect appropriates hedges will be included in the overall issue structure.
What are your thoughts on Nigeria debt profile, are we headed to a debt trap?
It should be noted that a nation’s debt profile should not be looked at in terms of its size alone. Debt is part of the tools governments use to finance important development programmes and initiatives. The largest economy in the world – the USA – is also the largest national debtor. If debt funds are deployed towards the execution of economically impactful revenue-generating projects or projects in capital formation, debt becomes an attractive fiscal tool for the government to achieve sustainable growth. However, the challenge in the Nigerian situation is that, historically, debt raised seems to finance not capital expenditure, but debt-servicing and recurring expenditure. This creates a vicious cycle, where debt will perpetually be raised to service debts.
Currently, Nigeria’s total external debt stock is N35.465 trillion as of June 30 and its Debt Service-to-Revenue ratio has been put at 98 per cent, which shows that virtually all of its revenues are spent on debt service. This debt profile is definitely unsustainable, as debt obligations may not be met based on current generated revenues, except revenue is significantly increased. However, how will revenue be increased if investments are not made into projects and capital formation initiative that will grow the economy and increase revenue to the government?
High debt levels of a country like Nigeria will threaten the development of a country as funds, which should have been deployed to the execution of developmental projects are being used to service debts, or it may have to enact policies dictated by its foreign lenders, but which may not be favourable to its internal stakeholders. For sustainable borrowing, various fiscal imbalances in the economy must be addressed such that efficient utilization of resources in engendered before borrowing is accessed.
What are your thoughts on the e-Naira? What is it really? Do you think it would disrupt bank profitability and what other impact would it have on banks?
The e-Naira is a CBN-issued digital currency that provides a unique form of money denominated in Naira serving as both a medium of exchange and a store of value. According to the CBN, over 80 per cent of the world is currently exploring it and its full-scale use by Nigerians and businesses should ideally assist the Central Bank in monitoring the impact of monetary policies. The CBN, through the use of e-Naira will be able to track spending, as eNaira transactions can be directly traced by it. Furthermore, administrative costs such as cost of printing and managing the country’s currency should be largely reduced if the e-Naira is wholesomely adopted.
On its disruption of bank’s profitability, that is still out to be seen. Yes, e-Naira will adopt the free peer-to-peer/peer-to-merchant approach, and ordinarily Nigerian banks non-interest revenue might be affected as an increased adoption of the e-Naira based on the existing model may see banks making reduced revenues from transfer charges.
Your firm recently turned 10 years, how has the journey been, give us some insights to some of your major wins as well as the challenges you have faced these years?
It has certainly been an interesting 10 years. It is proper definition of a rollercoaster ride. We came into the market as a firm propelled by a purpose and a vision. Our Purpose is to aid the manifestation of the African potential and our mission is to use finance expertise to facilitate the same. To use finance as a tool which creates opportunities to advance our African story. Our story is one of Africa, which generally seems left behind, but which growth, development and maturity will be accelerated when professional advisory and financing expertise aid and work with leaders in government and corporate private sector, to deliver desired progress to the African communities. As a firm, and a team, we are fortunate to have had opportunities to use our expertise in this very spirit.
We have assisted governments and private sector corporates to generate ideas towards delivery of their mandates to respective stakeholders and provide the financing means to implement those ideas. We are particularly interested in projects and deals of impact and value and that somehow shift the African story positively forward. We have led transactions and project initiatives across public and corporate private sector in Nigeria and other select markets in the African continent, including Kenya, Tanzania, Cameroun, Ghana, Liberia and Senegal, delivering some award-winning deals in structuring and arranging finance for governments and corporates.
We have arranged capital market issues – debt and equities – for governments and private entities, mergers and acquisition, and structured project finance in energy and power generation, oil and gas, real estate, telecommunications, manufacturing and financial services, and have also been involved in lead roles on various PPP and public sector projects, including power sector privatization, transportation (road and airport concessions), and the establishment of industrial parks.
What can we expect from your firm going forward?
Our Firm, like every going concern in a post pandemic world, is currently engaged in strategy review and imagination of approach to our business, service delivery and the dynamics of our markets and operating environment. In all, however, we will continue to strive to be a sustainable professional service and business enterprise, continuously delivering value to stakeholders, maintain focus on our core expertise to deliver solutions and establish pedigree of performance on our client engagements for which we maintain passionate focus on landmark initiatives and projects that shift the African story positively forward.
We will consolidate our established expertise in the sectors and to clientele in and with which we have worked. We are currently working with some governments and their private sector partners in delivering some landmark infrastructural projects that will come live imminently. We, however, are also keenly studying developments in sectors such as technology, FinTech and e-commerce and have created a team dedicated to this space. We see increased opportunities in the Tech Space and are determined to support the emerging players in the space, especially the young Tech Startups who are increasingly attracting interests from foreign investment interests. This is to provide such with professional guidance not only on obtaining the right valuation for their business, but for appropriate positioning of their firms.
