The Director / Group Head, Investment Banking at Coronation Merchant Bank Limited, Mr. Abiodun Sanusi, in this interview advises the federal government to address challenges in the power sector, end its fuel subsidy policy and introduce private sector-friendly policies so as to stimulate economic growth in the country. Excerpts:
What is your assessment of the performance of the economy in the past nine months?
This is an election year and it is usually a slow year because a lot of focus was on the political landscape rather than the economy. As you know, in terms of economy it is about cumulative impact. If your first quarter is slow, your second quarter will be slow too. So, generally the economy has not grown. The population growth of Nigeria is three per cent per annum. Any growth below three per cent means we are decelerating on a per capita income basis. Although, we are growing but we are not growing as fast as our population growth, which is what we have witnessed in the past two years and what it means is that government policies have not fully impacted on the economy. But we are seeing a lot of progress being made now that the government has settled down; the ministers have been approved and assigned portfolio and also the 2020 budget is being prepared. So, we should see an increased growth in 2020. But so far, the economy has been flat. We have not grown up to the potential we are expected to grow.
The banks are also key players in growing the economy. Does this mean they are not effectively playing their part which some have said was responsible for the 60 per cent loan-to-deposit ratio that the CBN introduced?
If you look at the structure of our economy, you need to do a deep root analysis of the Gross Domestic Product (GDP). Agriculture contributes about 23 per cent; oil and gas 10 per cent and telecoms is about eight to 10 per cent.
Unlike what people think in terms of major economic activities, oil and gas is not contributing as much to the GDP. I think some private sector policies should be taken, especially in the power sector. The power sector has not lived up to expectations after the privatisation. Also, we need private sector-friendly policies to stimulate economic activities. That is needed grow the economy. Also, fuel subsidy is a drag on the economy. In other parts of the world, they subsidise production not consumption, thus the government needs to tackle issues like this in order for there to be adequate distribution of capital for them to be able to develop infrastructure.
Security has also been an issue as there have been reports of kidnapping on key trade routes which have affected production and business activities of farmers. The banks are mediators so they do the best they can and you need to also consider that none of the banks have delivered double digit growth rate. Technically a lot of policies need to be implemented to open up the economy. The revival of the telco industry was immense and we need to see that in the power sector, oil and gas downstream sector and other sectors, then you would see that the banks would support the economy because banks are interested in making profit. In addition, what is also limiting the banks is the high interest rate we have in Nigeria. The Central Bank of Nigeria is saddled with two things: stabilising the currency and reducing the interest rate. Stabilising the currency requires attracting foreign investments. As we speak, there are about $17 to $20 billion of foreign portfolio investments in Nigeria which is a huge volume of our reserves.
We need to keep that large volume of dollars in Nigeria, which requires us offering attractive interest rate to investors on a risk-adjusted basis, which is what the CBN is trying to do. Once you have a high interest rate regime at the risk-free level, it affects the entire economy because the bank buys their credit based on what the risk free rate is. If it is 15 per cent, definitely they would lend to corporates higher than that because of the credit risk premium they need to get for extending credit to the corporate sector. That is why it has been challenging for the banks to lend at single-digit rate. However, I also understand the challenges of the CBN as it needs to ensure it maintains forex stability.
So it has to be a collective effort with the government playing their part effectively without interfering in private sector transactions. We need to diversify our economy which means both the private sector and government need to implement policies that would reduce our consumption of imported products so that we demand less foreign currencies. We also need to focus on boosting our production rate.
Do you think CBN's directive on 60 per cent loan-to-deposit ratio will push up banks' non-performing loans?
It depends on the stance the banks take. There are two position on this matter. One of them is, if I am falling short of the loan to deposit ratio which most banks are, I would increase loans which is, convert my investments in treasury bills and bonds to high risk; which means areas that you considered risky. In that instance, there is more possibility that the loan ratio would increase. The other strategy is, if I am happy with my risk asset and I do not want to increase, I would shed my deposit rate which we have started seeing. Banks have started shedding their deposit by reducing the deposit rates they give to institutional investors, the pensions and the likes. However, they cannot control the retail deposit because the citizens need to keep their money in the bank. But deposits from treasury bills, institutional investors, corporates, the banks can reject such. So, you can reduce your risk asset which can likely increase your non-performing loan ratio if you loan to sectors or assets that are good.
If you are sceptical of the risk, you can reduce your deposit to reduce your loans and you still maintain your non-performing loan ratio. But the overall impact is that banks want to give out more loans due to this policy. We have also started seeing instances whereby companies that are struggling to pay back their loans banks have started restructuring their loans because the banks want to keep the loans rather than write them off, which is good for the economy. A lot of manufacturing companies suffered interest rates at 23 per cent before the end of recession that affected a lot of the profitability and capability to payback their loans and default rate increased. With this policy, banks have started to create a restructuring and create a longer-term loan that those businesses deserve. So, overall there is a huge positive gain in this 60 per cent loan-to-deposit ratio, which means more loans would be given at longer maturity tenor.
Looking at the insurance sector recapitalisation and the performance of the capital market, do you think investors would react to this positively?
In terms of insurance consolidation there are two things, either the insurance companies raise capital through right issues or through an M&A. Our view is that M&A would dominate more than capital raising and insurance players would reduce from 59 to 25. If M&A dominates and the number of players reduces to 25, we are going to see more follow on offerings and more initial public offerings in the capital market. With the follow on offerings it can also be a catalyst to what we have seen in the capital market in the past four years. So, the insurance consolidation is going to have a positive impact on the capital market. When there is consolidation, we would have bigger players and investors would be more confident to invest. As we speak, there are lots of pension funds that have not been invested in the insurance sector.
How is Coronation Merchant Bank strategising to take advantage of these investment opportunities that may emanate from this?
Coronation Merchant Bank is an investment bank; one of our key service offering is investment banking, we offer both capital raising services and M&A advisory. We are seeing it as an opportunity to awaken a sector that has been flat over the years. So, we are already positioning to advice a lot of insurance companies on M&A, either through acquisition, merger, or reverse takeover and we have started working with a lot of insurance companies in the industry, to give them our best advisory banking services, so that at the time this consultation happens and the deadline closes in June 2020. A lot of our team members were in the middle of the banking consolidation in 2004, so we are going to bring our experience and knowledge from the banking consolidation ensuring that we deliver our services so that this consolidation becomes a success.
Earlier you talked about the need for the country to consume what it produces. Considering the CBN's plan to stop forex for importation and also the talk about the plan to ban forex for food importation, do you think that is the way to go are as country?
There are many ways to achieve many things. So, in my opinion there is no best way to achieve any policy, what matters is the effective implementation of those policies. For example; looking at the strategy that was done in the cement industry, the strategy was to force import substitution through investment rather than through banning. The government worked with key industry players, offering a lot of palliatives and a lot of support, such as, tax waivers in order to increase investment in that sector. In addition, they give a deadline concerning when we would stop the banning of bag cement importation into Nigeria. With the work the did for Nigeria to become an exporter of cement today, which is an approach that has worked, this approach of the government banning the supply of forex for food importation into Nigeria has to be supported with investment and infrastructure development as well.
That is because if not, it can lead to short-term scarcity of food or even worse. I think the combination of providing investment support for the food sector like it was done in the cement industry, would be key in ensuring the sustainable growth of the economy, whilst reducing our food importation and boosting exportation.
Also, I think the focus should be more on gearing policies towards investment such as, creating a productive investment climate, providing a lot of tax waivers, intervention loans on core food production and also giving timeline on the bans of food products. For example, if you are going to ban the importation of tomato or rice. So, stakeholders need to be given a timeline they would be able to adapt with so that their production capacities would be enhanced and we won't be faced with scarcity and inflation.