The Regional Head, Financial Markets in Africa and the Middle East, Standard Chartered Bank, Mark Price and Head, Financial Markets Nigeria & Rates & Credit West Africa, Standard Chartered Bank, Ayodeji Adelagun, in this joint interview highlighted some of the challenges affecting the Nigerian economy and stressed the need for improved fiscal and monetary policy alignment. The representatives of the global bank also expressed the commitment of the financial institution to the Nigerian economy. Obinna Chima brings the excerpts:
What are your comments on Nigeria's Gross Domestic Product (GDP) growth and how well has the country weathered the pandemic storm?
Adelagun: GDP growth has risen to a healthy level in the last quarter, where it was about three and a half pe rcent on a "going forward" basis due to headwinds witnessed from electricity cost, logistic cost, and the contractionary policy. What contributed the most to our GDP is the non-oil sector, and that is tracking very well and continues to do so. It does look like that trajectory will continue. Therefore, we can comfortably say that Nigeria is more than able to weather the storm properly post the pandemic. However, we do need to see very strong support from both fiscal and monetary policies to ensure that we maintain this positive trend; especially with FX supply challenges increasing the risk to hinder industrial or manufacturer activity, which would probably begin to taper the economy. Despite that and looking at the big picture, it does look like we are out of it.
Price: I would add to that and say, as an outsider, it looks as though the country is doing very well, considering some of the challenges that they face. Elections are coming up with ample opportunities which may rise from potential reform. After that, the country is clearly well placed to grow even faster than the current GDP if some of those decisions are made. Perhaps they are on pause at the moment and because we are so close to the elections, we may have to wait to see them come through. But at least we start from a relatively strong performance especially when compared to other markets. So, it is very helpful that it can be even better going forward.
What are your views on rising the crude oil prices and how sustainable is this?
Price: I think it was something like $120 a barrel at one point. It is now close to about $85-$87 at the moment. When I look at our in-house research, we think that it is probably fairly priced now for quite a sustainable period - somewhere between $80-$100 a barrel, probably, for the next 18-plus months, which I think is good if that is the case because there is some certainty for revenue projections on the fiscal side from the government perspective here in Nigeria. It means that if there is spare capacity that can be brought online from a sort of cost-of-production capacity, there is enough time to do so and to benefit from that. But at the conference today, we've heard comments around the supply wastage and clearly the more the government can do to improve that situation, not only will they benefit from the higher oil prices, but they'll benefit from keeping all of the potential benefits from having such a strong surge.
What is the outlook and what are the likely benefits the country is expected to harness from this?
Price: I think it's a complex web at the moment between what the government receives in terms of royalties, in terms of the economic system of the conventions the government has, and what it taxes the companies. That is on the positive side. On the negative side, there is obviously the oil wastage. So, I'm not going to dwell upon the oil industry taxation side, but I do think that clearly the plans for the Dangote Refinery means more of the refined products staying on-shore or perhaps be sold off-shore at a much higher price. It's clearly of value to the country and that is something I look forward to seeing being completed as quickly as it could be so that the country does benefit from that.
Furthermore, I've already mentioned that the government is doing a lot to reduce crude oil wastage. The thing that I learnt about that is of interest to me is that wastage and the potential for increased production off-shore is there, and investing in that in a way that means that we can grow off-shore production in Nigeria. And clearly, if you can refine it yourselves, it means that it's a significant uplift that can be achieved. If the on-shore wastage is not easy to tackle, then switching focus to off-shore production seems like an obvious way to potentially improve that.
What are your thoughts about the country's ability to attract portfolio flows at this time and what does the country need to do to attract significant flows?
Adelagun: We have seen a significant slowdown in portfolio flows in the past 12-18 months and the reason is simple: most investors would like to come in and exit when they want to, but that ease is not happening at the moment. So, we know for a fact that for about 24 months, investors were waiting to repatriate their funds and they couldn't. If you take that and look at the fact that Nigeria is not insulated from what is happening. The Foreign Direct Investment that would ordinarily have come in is also being used elsewhere. As such, what needs to be done as a country is to get to a situation where we have ease of entry and exit. That would be the first step. Once that is done, backed by a few other things happening, the government would be able to have better flows coming into its reserves. Then we would begin to be able to accommodate any exit from this country. There will be a time lag between now and when investors will come despite the ample improvements and reforms, as investors were battered. So, it has to be that they can see that it's sustainable. But when we begin to have that free and fair market condition where flows can come and go and investors will begin to get interested, let's hope that the global backdrop would be good then.
In a nutshell, attracting investors is a combination of multiple variables and as soon as that begins to clear up, we can be hopeful that investors will come in. Of course, there is the need for us to continue to give, at the minimum, double-digit interest rates for them to look inwards.
Price: I'll just add to that and say if you look at all of the asset classes around the globe: debt markets, development market equities - basically the only asset that has appreciated this year is the US dollar currency itself. All the investible assets have depreciated or underperformed this year, and therefore, as Deji said, it's not so much about Nigeria, it is rather the global scene. Most investors have either retreated to cash or have things that are difficult to sell. So, I think globally there has been a pullback from high-yield-and-risk investments and that hopefully will turn at some point, and then it's more about, as Deji said, 'What can I do or be doing in this interim period to attract investors when they become more interested in taking the risk again?' As you've probably seen with what's happened certainly over the last few weeks across equity markets, currency markets, etc, there is a lot of risk aversion happening at the moment, globally. It's not Nigeria-specific.
What are the underlying reasons behind the acute dollar illiquidity in the local forex markets?
Adelagun: We are all aware of the reduction in the supply of forex from the central bank. We all agree that the country is going through difficult times, so it's not necessarily a problem of the central bank, so long as we're not creating these portfolios on demand. Furthermore, crude oil wastage means that the Central Bank of Nigeria (CBN) isn't getting as much dollar flows into its reserves from which it can then make sales to meet the in-country demand. The reason is simple: until we get there and flows improve, we can't do much, but we must applaud the central bank thus far. They have introduced a few solutions and several measure that supported the stability of the currency. So, this scarcity, I believe, will continue until there are improved flows, which will be a holistic solution that comes from the government. We depend too much on imported goods and services at a time where manufacturing is heavily relying on imported dollars. So, that demand is increasing and supply is decreasing. It's a simple demand-and-supply formula and once that improves, things will get better.
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Price: Clearly, at the moment, the prices of some of those goods and services operate at a different level from the official rates and whatever the central bank can do to close that gap would be of benefit. Therefore, in the case of people that have sat on dollars in bank accounts, off-shore, etc., that can attract the dollars back to the country or release the dollars that are trapped because people have more comfort that the official rate is where goods and services are actually transacting. Clearly, removing that artificial (deterrence) would be helpful to the country. The more that the central bank can do on top of the already great work it has already done, the more the country will benefit.
Given the macro-economic situation with forex liquidity being one of major business concerns of most corporates in Nigeria, what is the outlook of management in taking on further forex exposures in Nigeria? Is there a cap?
Adelagun: We like to say that we're here for good. We've been in this market for very long and we understand the peculiarity of Nigeria. Standard Chartered Bank Nigeria is here for good. We will continue to support the good efforts of Nigeria. We do take the cases one by one to assess them and we have a very robust presence. And so long as we are here, we will continue to support the country's efforts.
Price: At a regional level, I completely agree with Deji. It's an important market for us. It's our second largest across Africa and the Middle East. We are fully committed to the country and we have a robust risk appetite towards the country. As such, we are keen on ensuring that our efforts are well placed and are going to the right clients that help power the economy. So, we remain committed, we are here for good, and we look forward to continuing to support Nigeria going forward. This is an important market for us and we look forward to continuing the engagement going forward.
