Group Managing Director, Afrinvest (West Africa) Limited, Mr Ike Chioke, spoke with journalists on the sidelines of the company’s mid-year investment parley in Lagos. SAM DIALA was there. Excerpts:
Your mid-year review is entitled ‘Turning Point’. Can you explain this?
It is called ‘Turning Point’ because we have seen some factors in the global and domestic economies that make us to want to inform the investing public and our clients that they need to be a bit more vigilant about how to manage their investments. We have seen global inflation on the increase and rates dropping over the last six and half months. We have seen that the rates tightening by global central banks have come to a point where they are pulling back with the objective of reining in inflation.
Can we look more at the domestic impacts?
Closer to home, we have seen in Nigeria the advent of a new government unifying the exchange rates. That has implications for the economy. We have seen the Naira devalued by about 40 percent, but that is a plus on the domestic side. For the state governments we could see a 40 percent improvement in their FAAC account. At the same time, by removing the fuel subsidy, we estimate that the Federal Government will save N2 trillion – from removing fuel subsidies alone this year. And by unifying the exchange rates we see something like saving N350 billion reduction from the debt service environment. Those are the positive factors.
The other side of it is inflation. There is additional inflationary pressure that follows the removal of the fuel subsidy. So, Nigerians have to pay more – two or three times, depending on where they live. There is still one more subsidy to remove, that is the electricity subsidy and we see that pushing inflation further to 23 or 24 percent. That will be towards the end of the third quarter of the year, before we see inflation being reined in.
Most of these will depend on the policy direction of the new Nigerian government. This will also depend on when the cabinet will be in place. The new government is yet to come out with its list of ministers. Once the cabinet is in place, they will articulate their own policies – where they are going, how they want to get there; especially, how they plan to use these savings (from the subsidies removal) to impact on the lives of the lot of Nigerians, mainly very poor Nigerians.
How do we go about the palliatives?
All the savings should not be spent on palliatives. As you know, palliatives are not a permanent solution; it is like rubbing a Mentholatum on a wound. It will not work. You need to get to fix the root causes of the problem – and some of the root causes are structural. These include poor infrastructure, massive insecurity across the country. There should be continuous focus on human capital development, education, healthcare and empowering our youth.
As an investment advisory firm, how is Afrinvest navigating existing macroeconomic challenges?
If you are a client of Afrinvest, we will give you a different version of the interpretation which articulates some of the factors. If we look at the fixed income market, we see a lot of volatility. Volatility is a good thing if you are an active trader. In the equity market, we have already seen quite a significant correction in the market up to over 20 percent from the beginning of June since the coming of the new government. We believe there is room for more growth but you have to be selective because there are windows for profit-taking that put pressure on the market.
Can we look a bit more at the Nigerian stock market?
Generally speaking, Nigerian stocks are quite under-valued, relative to their peers in the emerging markets, such as South Africa, Morocco and Egypt. So, there is still a bit of upside as we watch the momentum. Some investors are sitting on the sideline waiting for the government to settle down and also watching out for the forex policy that is going to be put in place. You know people do not want to bring the dollar into the market unless they are sure of the way out.
We still have a significant level of forex illiquidity on the outside which is what is putting pressure on the parallel market that is now trading up to N800 to a dollar . We think this is the time for investors to come to Advisers like Afrinvest and understand in more details these factors and investment opportunities in the domestic market, whether you are in fixed income or equities, or whether you are going to the foreign platforms like the Eurobond, or looking at the New York Stock Exchange or the London Stock Exchange.
Do we expect a drop in inflation any time soon? What are the implications on the overall economy?
We are not expecting a drop in inflation any time soon. The fuel subsidy removal is already putting additional pressure on inflation with severe impact on the economy and that will continue the year round. The devaluation of the Naira has its own impact.
Are these in line with your 2023 Banking Sector Report?
Yes. As we explained in our annual Banking Sector Report for 2023, which we entitled ‘Brace for Impact’, the policy direction of the new government will really impact on the economy and on the lives of the people. We produced that report in 2022 which we entitled ‘Brace for Impact’. We felt that with a new government in 2023, whoever won the election needed to do away with some of the inconsistent policy instruments that Nigeria had been using for sometime.
Will doing away with the old ways entail some discomfort for the people?
Sure. By discarding some of those policy instruments, it is going to cause some initial difficulties. For instance, the multiple exchange system was disingenuous, a very bad policy for both domestic and international investors. Then the fuel subsidy, a policy that had gone haywire; it wasn’t working. There are still many areas of the economy where we find inefficiencies and there is not a level-playing field for all participants in the sectors.
As the government begins to unwind that, it is going to create a temporary difficulty, that is why we entitled that report ‘Brace for Impact’. Everything we articulated in that report is now coming into fruition.
You can now see the pressure on inflation. You can see the forex rate running away and the CBN (Central Bank of Nigeria) has come back to find how to control it so it does not have to go beyond where the equilibrium should be. We have seen investment notes from international banks like JP Morgan suggesting that the equilibrium should be around N650 and other houses are saying N600, and now we are well above N700.
So a lot of work is needed in the economy?
There is still a lot of work to be done. Generally speaking, I think what we are now seeing is a Nigeria that is preparing to become better on a long term basis. It is like someone who wants to improve his lot, he has to go to school, suffer, do the exams, and hopefully get a better job in the future. That is what Nigeria is preparing for. For quite too long we have been doing the palliative measures, without taking a long term view. But now, we are beginning to review the foundation approach. As soon as we do that it is obvious that things are going to become better.
The widening gap between the parallel and official markets is showing up again. Are you not worried that this could take us back to where we were?
If you focus on the parallel market, you will lose the long-term view of how to run the economy. I am not in CBN, but watching their actions from the sideline, I can see they are going to deal with the matter.
The first place to start is, what kind of policies can we introduce that will encourage Nigerians that already have dollars to bring back those dollars into the system?
Some of the policies the CBN has introduced in recent weeks were not for international investors but for Nigerians. Some Nigerians who saw the wide disparity between the parallel and official market rates began to dollarize their income. At the end of every month, some people take whatever they have earned to buy dollars and put it into their domiciliary accounts.
Now, when you have a more stable government with well-articulated policies, you will see most of those domestic investors bring their dollars, change it into Naira even in the parallel market, and begin to invest in the economy. That is the first point.
And the priority is more on foreign investment?
Now, from the CBN point of view, the best kind of external inflow we need is foreign direct investment. It is easy to do a policy instrument that will attract foreign portfolio investment. For instance, CBN can open their OMO (Open Market Operation) instruments, and direct it to certain investors who will bring 100 million, 200 million or half a billion dollars overnight, that is a short term palliative.
We should not use palliative measures to solve long-term problems. We need foreign direct investors. Even if you have a temporary three or six months window of dislocation in the parallel market, I don’t think that is something to panic about. Ultimately, the government has a lot of intelligent people in the system who will design a policy targeted at attracting foreign direct investors, particularly in the oil and gas industry.
Other sectors of the economy like agriculture, telecommunications, media, supporting Hollywood and all sorts of entertainment industry that Nigeria has, are areas to focus on. Tourism is one area that we have not touched on. But, in all these, one thing is important: insecurity. We must first deal with insecurity across the country. Otherwise the cry for foreign direct investment will achieve nothing.
About the Author
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
