16 February 2015

Postponement of election has led to investor paralysis —Rewane

Bismarck Rewane is the Managing Director/Chief Executive of Financial Derivatives Company Limited. He is one of the leading economic analysts in the country. In this interview, he proffered solutions to the continued depreciation of the naira, and also commented on how investors are reacting to the tension generated by the postponement of the election. He also offered some advice to the eventual winner of the election, while highlighting opportunities in the stock market for investors.
The CBN is trying to avoid further devaluation, is it the right thing to do or is it achievable?

I don’t think the CBN is trying to avoid devaluation. I think what they are trying to do is to time it and do it appropriately but we don’t have the luxury of timing anymore. We have to do the right thing now. And the right thing to do is to actually reduce the amount of uncertainty, and therefore the nervousness, the jittery and the panic. We have moved from a situation where we had the luxury to pick our choices to where our choices are now picking us.

And the question is that we now need to bite the bullet. When you bite the bullet, the market will correct it. That is, if you move the currency to as much as a fair value, then the amount of naira available to everybody to buy the dollars will be reduced and naturally the naira will appreciate in the long run. But in the short run, there will be devaluation and everybody will absorb it and when they absorb it, we will now have to deal with how to make the forward adjustment which is an appreciation of the naira that will come after devaluation.

I know that in the past you predicted that this is what the value of the naira is supposed to be like, given the current situation, what will be your estimate of what the naira exchange rate should be?

I think from the beginning, 15 to 20 percent devaluation is more than adequate. So anything around N195/$ and N200/$ will give you fair value and the currency will still be fragile but it will begin to strengthen after that.

In a developing and mono-product economy like Nigeria’s, what should be the priority of monetary policy? Is it inflation targeting and currency defence or economic growth and employment?

No, monetary policy has limited things to do with growth. Monetary policy is about stability. It is short term oriented. The fiscal policy is that which has to deal with growth where you have to deal with taxes, revenues, investment and expenditure and all the other things, including incentives. So the ministry of finance, the ministry of economic development and ministry of investment would deal with that.

The monetary policy authorities look at inflation, currency, the economic value and the reserves and use the monetary policy to make sure that they control inflation, money supply and exchange rates. That is what we call the holy trinity of monetary policy. So the Central Bank has nothing directly to do with growth but it helps and reinforces fiscal policy.

Therefore monetary policy looks at monetary conditions and uses monetary policy on a countercyclical basis to slow down our economy when it is overheated or to engineer and accommodate our economy when it is contracting, to make it grow again or to make it more accommodative.

There is this idea that the Central bank should be targeting more of growth instead of inflation.

Maybe that is a new thought but there is what is called leading and lagging indicators. We look at growth to see whether monetary policy is being counterproductive. Growth is an output measure while monetary policy issues are financial measures and you can measure it in naira, dollar or interest rate terms. But GDP growth is output, if you produce 200 tubers of yam, 200,000 barrels of oil that is the output that you measure.

So, if the monetary policy is accommodative, it will naturally lead to an increase in growth but that does not make monetary policy to be in charge of fiscal policy activity. There are certain circumstances where the fiscalist, who are in charge with stimulus, stimulating an economy or curtailing with austerity, that is a different set of responsibility and activity whilst the inflation targeting is a monetary policy framework where you have the nominal anchor.

The nominal anchor is the interest rate but at times, you have the dual anchor, the interest rate and exchange rate and they are used to bring down inflation if you think that inflation has gone out of the range. And that is a different set of skills, different set of variables and a different mindset, totally different when you are chasing growth on one hand and to an extent development. Development is institutional and physical infrastructure.

I want us to distinguish this. But you see, because we are in a confused state, we are comingling so many things by trying to comingle fiscal issues with monetary issues. But the problem with comingling issues is that your vision gets blurred, you are not focused. You begin to chase many things with a conflicting agenda.

How has the election, the preparation, the campaign and the postponement impacted the financial market?

Political Science is a study of struggle for power while politics is a struggle for power. In both cases, it creates its own uncertainties. Uncertainties are the by-products of risks. Risk has a price. And the price of risk ends up in what we call volatility. So, the higher the uncertainty, the higher the risk, and the higher the risk, the higher the volatility and the higher the volatility, the higher the premium that you pay for this volatility

. So anything that increases risks, increases volatility, and anything that increases volatility, increases the price of the product which in this case could be currency or the interest rate. So a certain level of risk is required. So that level of risk which is acceptable risk, when you cross a threshold where it becomes difficult and the premium begins to get higher.

So what has happened because of election uncertainty, that is one, the postponement even heightened the uncertainty, which has increased the risk and increased the volatility and increased the price which Nigeria is paying for these unknowns. So like somebody said, the known unknowns are now more than the unknown unknowns which leads to INVESTOR PARALYSIS.

So what we now need to do is to increase the known unknowns, so that they are higher than the unknown unknowns and that will give us a positive quotient which naturally will reduce the risk. So what are the unknown unknowns? We don’t know whether there will be an election? We don’t know what is going to happen in the North East? We don’t know whether the election will be postponed again.

We don’t know whether there will be an interim government, we don’t know whether there will be an annulment. You see, what you see, is what you get, but what you don’t see is what gets you. So until the unknown unknowns are less than the known unknowns, w begin to get worried and my natural reaction is to run away.

So in the face of where we have gotten ourselves to, what do you think Businesses should do?

Nothing! But you see, people just vote in favour of their fears, once I am afraid, I run. So if you douse my fears, I won’t run. For instance, if you see a man standing on the road with blood all over him and with a cutlass in his hands, do you want to find out if it is a human blood? I don’t think so.

At your presentation recently, you said that for the past three years, the FDI has been on a continuous decline, beyond the election, what do you think must have been responsible for this?

First of all, oil prices are coming down, you didn’t pass the Petroleum Industry Bill (PIB), and there are so many things. Inflows come as a result of so many things. Some of them are global. In this case, the global inflows to emerging markets have increased, ours have reduced. So if you are of good behaviour, people will come. If you are a good musician, there will be a lot of people in your audience, but when you see the audience start reducing, one year, two years, three years, then maybe you have to change your song.

Irrespective of the outcome of the elections, do you see the stock market closing with significant gains?

No! I think the market will go down until after the elections. And then it starts to recover. It will not be positive but it would have recovered towards the end of the year and starts recovering by the beginning of next year.

Given the current challenges facing the nation’s economy, what will be your policy recommendations to whoever wins the elections?

It is to accept the reality that Nigeria is an oil poor country, not an oil rich state. Oil poor because we produce, 12, 000 barrels for every one million people, compared to 295, 000 barrels per every one million people in Saudi Arabia. We cannot call ourselves an oil rich country. Therefore we have to manage our resources more efficiently. We have to reduce leakage and we have to be strategic. What do I mean? We cannot do everything that we wish to do.

We have to prioritise on those things that will make impacts. What are those things? Road and rail transportation, oil and gas, education, health, and then refinery, ports and all the rest. So basically, we have to emphasise those things that have a multiplier effect. And we have to give up a number of things. We have to dis-equilibrate our economy and make adjustments we can on factor prices.

We have to shift subsidies from intermediate target to final targets. That is, rather than subsidise universities, we subsidise the students. You create university autonomy so that universities charge the correct fees, but then the students will get scholarship from their states.

Despite the challenges in the economy, definitely there must be some opportunities for investors, what are these opportunities and how can they take advantage of it?

There are big opportunities on things that are not import dependent like stocks, insurance, fast moving consumer goods, food processing, logistics stocks, etc. So anything that is not too import dependent, or company that is not over borrowed provides opportunities for investors.

What is happening in the economy now was predicted by several analysts, including you, about three years ago, why did the authorities ignore these predictions?

You see the policy maker and the Nigerian public are in denial. For example, when you have a son and someone from outside comes and says, it’s like this your son has a malaria and the child denies it. It is because he does not want to be given an injection. That is where Nigeria is, they don’t want the injection.

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