Managing director and chief executive of Cowry Assets Management Limited, Johnson Chukwu, in this interview with BUKOLA IDOWU, spoke on the Nigerian economy, taking a look into the near future as the country heads into election.
What are your thoughts on the state of the Nigerian economy?
The economy is in a state of slow recovery. We have seen the first quarter of this year report with a gross domestic product (GDP) growth rate of 1.95 per cent. The economy slowed down slightly below the 1.95 per cent. If it had been better than the first quarter of this year, it would be surprising to me.
The basic factors that may have led to a slowdown in the GDP growth rate are the displacement of farmers in the north east added to the long term existing displacement in the North central and then we have also seen an uptick in the armed bandits in the north west which have also displaced farmers in states like Zamfara, Sokoto and Katsina state.
So if you add all these together, you would realise that the sector which accounts for about 23 per cent of our GDP is slightly going to see a slower growth in the second quarter than what you had in the first quarter. The second contributory factor to the economy which is the oil and gas sector which accounts to between 13 to 15 per cent of the GDP may have seen a slowdown in terms of crude production. In January 2018, crude production was about 1.8 million barrels per day (bpd) but when we got to second quarter of this year which was from the month of April to June, we saw consistent decline in crude production to as low as 1.5 million bpd.
So that reduction in crude production may have affected the contribution of the oil and gas sector in the economic activities. And these two sectors almost account to 84 per cent of the GDP. So should you see a slowdown in agriculture and oil and gas sector, you are likely going to see a slower growth.
Foreign inflows into the country dropped in the second quarter, what do you think is responsible for the slow growth capital inflow?
As you are aware, we are now in an election season so we have seen instances where foreign portfolio investors are kind of pulling out or pulling back from the Nigerian economy principally because of heightened political risks. The second factor could be the normalisation of interest rates in the United States (US) but I do not think it is a major factor but it could be a contributing factor. This is because today we are still seeing yields in the bond market at close to 15 per cent.
Interest rate in the US has not gone as high as five per cent so investors can still borrow in the US to invest here. So if you have an emerging market that is giving you yields at close to 15 per cent and interest rates in advanced economy is still less than five per cent it simply means there is still an opportunity for arbitrage.
And also given our outlook on the foreign exchange rate is positive in the sense that crude prices is still high and it is not expected in the foreseeable future that Naira would be devalued further so foreign investors should not be worried about naira devaluation. In an environment where you steady exchange rate and arbitrage opportunities then then the compelling reason of exiting would not be that there is no income or money to be made but rather the future of the political environment which looks very clouded and they cannot guess the direction the policies are moving. That for me is a major reason why we are seeing a pullback of foreign investors.
How soon do we expect to see a turnaround of this trend?
The turnaround would come at the end of the first quarter of next year depending on how the elections go. Should the election go smoothly and there are no major agitations after the elections, then foreign investors would come back significantly. Their concern like I said earlier is more political so once the political risk is overcome I believe many of them would comeback.
Our assets like I mentioned earlier are still giving good yields. Looking at the equities, you would see that a lot of stocks are trading below their intrinsic worth and some of them are trading their net asset value which means there is opportunity for income capital gain on those stocks.
On the fixed end, even the treasury bills of short term 91 day bonds in the primary market are still doing 10.3 per cent yield, and given that our exchange rate in the near future is still going to be stable so the yield environment is still attractive both in the fixed income segment of the market and equities segment of the market. So if we tidy ourselves through the political season and we have a smooth election that doesn’t lead to major agitations or post-election violence and all the parties accept the outcome of the elections, I believe the investors would come back.
Comparing our MPR rate with other emerging markets, do you think it is in the right rate now?
The way I would look at it is that managing the economy is a very delicate balancing act. Today, given that we are having outflows of foreign investors, the central bank needs to keep rates high so as to sustain the interest of the few who are ready to ignore the risks in favour of the yield. So the central bank in as much as they know the economy is growing slowly, is not in the position to lower the monetary policy rate and inject more liquidity into the economy that could bring pressure on the demand for forex and could possibly the decline trend we have seen in inflation.
I believe that after the election, the priorities of the government would change and at that point, it would be more of growing the economy. We have seen inflation drop to 11.14 per cent in July and for the monetary policy rate it is low enough to justify a reduction in monetary policy rate (MPR). But given that we are in a period were you expect a lot of liquidity injection from budget disbursement and at the same time exit of foreign investors, the central bank or the monetary policy authority cannot do that at this point in time. Even if they do, banks are not going to lend because banks are not going to lend in an environment that is very politically charged.
So after the election, the government would have to redefine its economic priorities. Either growing the economy to maintain stability and I want to believe that at that point, the priorities should be on growing the economy to create jobs and expand economic opportunities for Nigerians.
You mentioned that banks are not likely to lend in a politically charged environment, and loan books of banks have consistently been on the decline, are you saying we are going to see a continuation of this trend?
I want to believe we are going to see a further decline in the loan portfolio of banks in this fiscal year up to the first quarter of next year and subsequently if we have a very calm political environment, banks will resume lending. The key thing about lending is that nobody wants to give out their financial resources at such periods when you are not sure of how the environment is going to remain. It is just a natural defense mechanism that financial institutions adopt.
I want to believe that it will continue till the end of this year even as we approach the election period, business leaders will also roll back their investment and business activities. I believe we are going into a period of comical relief, where many of us will be sitting in our offices from morning till night watching people dancing and campaigning.
At such period not many people want to put their financial resources in long term instruments, you see that the beneficiaries will be short term instruments like money market, treasury bills while we all wait till the election and the election outcome will also determine the direction of the country and where opportunities will emerge.
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