03 October 2016, Lagos — Lukman Otunuga is a research analyst for FXTM, a brokerage firm based in Cyprus. In this interview, he shared some insights on the economy and also spoke on the trends and dynamics of the money market. He also argued that the chances of the Naira weakening more by December is very high if America’s Federal Reserve decides to raise interest rates.
Before the MPC meeting of recently, analysts like you must have made some projections, on whether they will cut the MPR or increase it. The decision of the MPC to stay course, did it meet your projections?
There are many talks about the MPC decision to keep the interest rate at 14% and first, as an analyst, I feel that they did the right thing in the sense that it was not long ago that they actually hiked the interest rate from 12 to 14%. Right now, what I feel the MPC is trying to do is just to stay on the sideline and watch the Nigerian economy before taking action.
If they had followed the comments the finance minister made about cutting rates, and had followed it, and cut it back to 12%, they would have created some instability which would have upset some investors. But then this is a double inflation as well because it is a battle between growth and inflation.
So of course, the high rates right now was causing concerns about the investment because of high debts to pay back but at the same time, price stability is probably what the CBN is trying to do, to cut the inflation rate which is 17.6% and also trying to stabilise the Naira.
The challenge before Nigeria now has to do with growth versus inflation. The finance minister said growth should be our priority. From the perspective of an international audience, which one do you think should be the focus now? Should we be pursuing growth, given the recession or should we be pursuing inflation especially when you realise that the quest for single digit inflation has practically failed despite all best measures?
Looking at things from a global perspective, what I think the CBN is trying to do is, they are trying to build trust in order to attract foreign investors. It is the main reason they have kept the rates at 14%. What they are trying to do is they are trying to achieve price stability, stabilise the naira and probably cut inflation and that bigger picture could probably attract foreign investors.
Now, talking about the foreign exchange market in Nigeria, the naira was floated in June, with the anticipation that the inflows from FPIs, but so far so good, nothing much has happened. How long will it take before we begin to see that much desired foreign portfolio investment?
Since the floatation, Nigeria has attracted over $1 billion investment. I know that is not much but that is still something. It still revolves around trust. Trust is something that takes the time to achieve and once the CBN can show transparency in their policy, probably that could be the first step to bringing foreign investment in the long term. I think it could take a few years, probably in 2017 or 2019, things should pick up.
In the global economy, whether FED will cut rates or not is the debate and when will they do it? Even in the US, there is so much apprehension and argument on whether the time is right and different comments coming from different FED members.
To what extent is Nigeria specifically going to be affected by whatever FED decides and when they do it?
This is something I have realised in Nigeria that even though the dollar is not the legal tender, Nigerians like the dollar more than the Naira. Nigeria is an import nation and unfortunately, the FED’s action on the interest is going to lead to lead to situations when Nigeria will be paying more to get less.
And this is how it will affect Nigeria. Remember, the sole problem that has caused the Naira to be so vulnerable is the whole combination of dollar resurgence and oil weakness. So, inevitably, even though there have been conflicting talks about the FEDS raising the US interest rates in 2016, it seems very likely that they will do it in December 2016. The reason why I am saying this is that they are not doing it because the US economy is showing signs of improvement; they are doing it just to save face and credibility.
Remember that last year, they said they were going to raise it four times this year, so, they cannot finish the year without doing anything. When that happens, I think the Naira could be left under more pressure by December when the dollar increases.
You also monitor the commodities market, what is our best hope with respect to crude oil?
Times have changed. The time when crude oil was trading over $100 per barrel is gone. But as bad as that sounds, I think that it is good it happened. Of course we know Nigeria is oil export nation and 95% of import revenue and 75% government revenue come from oil prices. So, when things were doing very well and oil prices were amazing, it gave a false illusion that Nigeria was actually doing quite good. But now everything has been unearthed and as oil prices have gone lower, we can actually see that oil is not the way to go. So, from my outlook, I still feel that oil will be under more pressure this year. With the OPEC meeting coming up, we saw what happened in Doha, unfortunately it’s a prisoner’s dilemma in OPEC. Everybody is greedy and selfish, nobody wants to cut production and everybody is gunning for market share and because of that is why oil prices are destined to always be low. Everybody will be lucky if oil is still trading at $45. I can see oil prices ranging between probably $45 and $30 as time moves on, especially if the September meeting concludes without anything. Based on this, Nigeria has seen what the problem is which is heavy reliance on oil.
The other problem we had was when the oil prices were good, why we’re not putting back the money on fixing critical infrastructure like the refineries. We were still importing the raw crude and importing the refined one. So it was a double loss. So, I think the steps taken will be diversification, which is what Nigeria needs to do. I know everyone is talking about diversification but it is a very long thing.
It is not going to happen overnight. It is not going to happen next month or even by the end of this year. It is going to take a few years. But Nigeria’s population is over 170million and we have fertile land. This is why agriculture is the main thing. If only we can learn to feed our people instead of importing potato from Ireland, pepper from Asia, once we concentrate on feeding our people and we have enough surplus to export, earn revenue from that and probably rebuild our foreign reserves that are currently at a shocking level of about $25 billion right now.
We are trying to raise money through Eurobond, how do you think the international community will respond to that?
It is all going back to the question of trust. To my knowledge, Ghana did the same Eurobond last year and was very successful. And this is because, there was trust. Unfortunately, with the events that happened in Nigeria especially with airlines unable to repatriate their funds and things like that, there is not that much trust. Trust is something that is easily lost and it takes time to gain it back. As a Nigerian, I hope it is successful but as of how things are now, if trust does not build up, we could be left empty handed.
*Babajide Komolafe & Jonah Nwokpoku – Vanguard