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Naira Devaluation Will Restore Economy — Ajaegbu

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Chidi Ajaegbu, the Chief Executive Officer, Heritage Capital Markets Limited, and the immediate past President, Institute of Chartered Accountants of Nigeria, speaks with OLAWUNMI OJO of Punch News on how government could reverse the dwindling fortunes of the capital market

The Nigerian capital market is said to be second only to that of South Africa. But the market is crumbling. What is responsible for this and how can the trend be reversed?

In an economy, there are a lot of variables that drive the valuations in the capital market or the asset pricing in other sectors. The market does not work in isolation of the economic policies of government; it takes a cue from how policies of the government impacts on people’s standard of living.

Looking at the last 12 months, especially in the last quarter and considering the seamless transition of power between the incumbent and the immediate past administrations, we felt the market would build on that to sustain a rally. Unfortunately, the decline in the crude oil price and the obvious challenges the economy has had over a period of time created a lot of issues in terms of valuation of the naira.

 Therefore, a lot of foreign investors are wary of the value of the naira. Nobody wants to come in at N199 to one dollar only for you to devalue tomorrow by as much as 50 per cent. It means such investors would have lost 50 per cent of whatever value of money they are bringing in. So, what they have done is to exit the market and then wait to see the Federal Government’s response to the issue of over-valuation of the naira.
The very adamant posture of the government does not apply to economics. Economics does not obey order. We must recognise that for us to attract foreign investors, we have to devalue. There are no two ways about it; we do not have the resources to fund the naira at the level it is today. We have to tell President Muhammadu Buhari without equivocation that it is not an ego thing but something necessary that must be done to attract foreigh investors.
How does Nigeria begin to rebuild confidence in the market?

Foreign investors in the market are in a hurry to exit, which has led to a lot of glut. And when there is excessive supply, it impacts on the price. Price begins to go south. So, the inability of the market to sustain any rally is because the foreign investors who constitute about 70 per cent of the market are no longer participating in it from the demand side. They are dumping stocks and trying to get away as quickly as possible, probably so as not to be caught with the issue of devaluation. Once that happens, no matter what your returns are in the market, you are going to take a direct hit of whatever percentage devaluation government comes up with.

We also need to deal with the perception issue. For instance, the reputation risk the government is going through with the very punitive MTN fine has far-reaching implications. Nobody is saying MTN should not obey the laws. But the company probably employs over a 100,000 people. And if it has committed an infraction, yes it should be sanctioned. But how do you ask a company to pay a fine equivalent to its 15 years profit after tax. You want to liquidate the company? As a foreign investor, would I want to come into the country under this kind of hostile environment? Even when you imprison people, it is a correctional thing; it is not meant to be terminal. There is need for consistency in our policy positions.

What I have seen is that we are fighting corruption on the one the hand but the rule of law that should drive the culture of excellence and atract investors is being trampled upon. If a court of competent jurisdiction grants somebody a bail, it is wrong for government to generally disregard such decisions. As such, you send negative signals to investors that you decide what court order to obey and which not to obey.

Aside from this, I think the anti-corruption crusade is being given more bite and it is good for us. But to take the capital market out of the bearish cycle where it is now, we need to first devalue our currency and then institute a rule of law that is functional.

The President says he is not convinced on the need for devaluation, especially by his economic team? Are they not seeing things from your perspective?

They are political appointees and there is a limit to how far they can drive a contrary position to the President’s. Even a non-finance or economics student will know that devaluation is the thing to do.

In any case, we would not have a choice; it is not about convincing the President. We would devalue this year. The President would be forced to devalue. What he probably does not understand is that the more aversed he is to devaluation, the more the economy will suffer. We do not have resources to fund the naira at the level we are funding it. The world knows that; if the President does not, it is unfortunate. The President’s grasp of economic issues is limited because of his background but that is why he has economic advisers and ministers. He has to listen them; he must have an open mind.

Some experts have opined that even if Nigeria devalues, it would in no way add to its reserves. What, in your view, would be the advantages of devaluation?

You would be paying probably less for a lot of imported goods. You would attract foreign investors as they return with money that would give them more naira. The multiplier effects could actually reflate and drive the economy to where it should be.

What do we stand to gain by remaining where we are now and doing nothing about it? I am not calling for a total devaluation. But by now, the economic team should be giving us scenarios that if we devalue by certain percentages – 25, 50 or 75, so and so would be the policy implications. They should simulate those scenarios for the President to have options to choose from. And then, they should also let him know that if we do not devalue, so and so are the implications. The President could then study the opinions, call for independent third party opinions from one or two economists he respects, and compare the opinions. But that he is not convinced? That should not be the attitude.

Is there anything stakeholders and the Nigerian Stock Exchange can do to change the fortunes of the capital market?

It is totally out of their control. They have done all they can – giving zero-tolerance to market infraction, with which they have built confidence.

That is not enough to drive a bullish rally in the market and sustain it. It is a free market – free entry, free exit; you can not stop people from selling their stocks if they want to, except you want to close down temporarily like they do in the far-east. But you cannot suggest that here. As a matter of fact, when you do that, you are sending wrong signals. In China, Hong Kong and all of those places, what they do is that their government intervenes by mopping up excess supplies in the market. Government would buy it up to stabilise the market.

As we speak, the capital market has lost over 20 per cent this year alone in terms of total capitalisation, yet there is no government intervention or pronouncement. Meanwhile, the capital market is the single most important indicator of how your economy is doing. It determines a lot of things. So, ministers should be very sensitive and proactive in what is happening in the market. For government not to be saying anything when the market is almost collapsing totally shows the level of appreciation of the market in government circle.

But do you see the market rebounding anytime soon, perhaps this year?

Not immediately. Perhaps, towards the end of the year. But that again would depend on if the crude oil price picks up and we begin to see that Nigeria can effectively sustain and fund the foreign exchange element of our economy. May be that could attract foreign investors. Without investors coming back, the market cannot rebound.

We also anticipate that earnings this year would be impacted on – banks, oil companies and virtually all the sectors. We would start seeing the result. There is no way major banks and oil companies would not take hits because the decline in growth of the GDP would reflect in their performance.

Government has been fixing the foreign exchange rate. But some experts opine that it should be determined by free market forces. What’s your view on this?

No, that would be too dangerous for Nigeria because we are not producing anything. Government is right by fixing it but they need to be more flexible, not too rigid. Nigeria cannot allow her currency to float. Even China, with over $2 trillion in reserves, cannot. You would open your economy and currency to attacks by set economy or individuals. Look at Russia spending 40 per cent of their reserves to defend their currency, it was not necessary. Yet, they lost massively.

Foreign investors are said to dominate the market at a ratio of 70 to 30 per cent of indigenous investors. How can the nation improve local participation?

Indigenous investors lost confidence after the crisis of 2008/09, many of them lost a lot of money. The foreign investors are far more discerning than the locals, that is why they are still in the market.

However, what the Exchange has done since then is to try and rebuild confidence of local investors in the market by introducing zero-tolerance for infractions, transparency in transactions and all of that. But even at that, it has taken our people longer time to get over the losses they incurred. Until you are able to deal with that psychological thing, you cannot have them come back the way they came pre-2008.

On the whole, government must devalue the currency, change their posture and be more flexible with policy positions, while the Central Bank of Nigeria needs to work on a lot of things.

People are being careful now because of the renewed anti-crime crusade but I think government is wasting too much time on it. We hear there are recoveries but we have not seen facts and figures; government should be more open on how much is being returned and how the funds are being applied. You may not necessarily disclose names but let us know how much is being recovered.

 

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Finance

Union Bank Secures US$40 Million Facility from IFC Global Trade Finance

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Union Bank Secures US$40 Million Facility from IFC Global Trade Finance

Union Bank of Nigeria Plc said it has secured a US$40,000,000 finance guarantee facility from the IFC, a member of the World Bank Group.

In a note to the Nigerian Stock Exchange, the lender said the facility would help boost access to finance for local businesses and enable increased international trade for Nigeria.

It explained that the facility “will support Union Bank to establish working partnerships with nearly 300 major international banks within the GTFP network, thereby broadening access to finance and reducing cash collateral requirements for Nigerian businesses.

“The facility will enable the continued flow of trade credit into the Nigerian market at a time when imports are critical, and the country’s exports can generate much-needed foreign exchange.

Under the IFC’s Global Trade Finance Program (GTFP) terms of the agreement, GTFP offers benefiting banks partial or full guarantees covering payment risk on Union Bank’s trade-related transactions.

Accordingly, these guarantees are transaction-specific and may vary depending on underlying instruments like letters of credit, trade-related promissory notes, guarantees, bonds, and advance payment guarantees.”

Emeka Emuwa, Chief Executive Officer of Union Bank, said, “Union Bank is pleased to join the IFC’s Global Trade Finance Program. This is a significant achievement as we continue to expand our trade financing offerings to our
customers. Even in these peculiar times, we remain focused on contributing to economic growth by developing tailored solutions that help our customers harness the teeming opportunities that still exist in the Nigerian market.

Eme Essien Lore, IFC’s Country Manager for Nigeria, said, “Keeping trade moving is essential to growth and job creation, especially during the challenging economic times we are living through today. We welcome Union Bank to IFC’s Global Trade Finance Program and value a partnership that will make a positive impact on Nigeria’s economy.

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Apapa Customs Command Generate N367.6bn in Nine Months

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Nigeria Customs Service

Customs Command Apapa Realises N367.6bn Between January and September

The Nigeria Customs Service, Apapa Command, said it generated N367.6 billion in the nine-month ended September 2020.

Mohammed Abba-Kura, the Customs Area Controller, disclosed this while speaking with newsmen in Lagos.

He said a total of 328 containers of goods worth N19.5 billion were seized during the period. This, he said represents an increase of 37 containers when compared to the same period of 2019.

Speaking further, Abba-Kura said the N367.6 billion realised in the first nine months of the year, represented a 17 percent or N54.1 billion increase from N313.5 billion it collected during the same period of 2019.

The Apapa Command generated N14.3 billion as revenue in the third quarter from customers’ duty and other charges.

He said “The difference recorded was made possible as a result of resilience of officers in ensuring that importers and agents are made to do proper declarations, adhere strictly to import/export guidelines in tandem with extant laws.”

Commenting on the seizures, Abba-Kura said, “These items were seized mainly because of various forms of infractions which range from false declarations, non-adherence to import/export guidelines and failure to comply with other extant regulations as enshrined in the Customs and Excise Management Act.

“In the area of export trade, the period under review recorded exportation of goods worth N26,273,706,822 exported from the country.”

“These exported goods include mineral resources, steel bars, agricultural products among others with a total tonnage of 378,447 million tonnes free on board value of $85.8m. Similarly, the volume of export from January to September 2020 stood at N78.6bn with FOB $257,003,965.”

He added that the compliance level rose to about 60 percent during the period, highlighting the reason for the surge in the number of seizures made.

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Finance

Nigeria’s Foreign Reserves Dip Further to $35.69 Billion

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Global debt

Nigeria’s External Reserves Decline by $50.84 Million to $35.69 Billion

Nigeria’s foreign reserves declined by $50.84 million in eleven days to $35.69 billion, according to the latest data from the Central Bank of Nigeria (CBN).

In the data released on the apex bank website, the nation’s foreign reserves stood at $35.75 billion as of October 2, 2020 but depreciated to $35.69 billion on October 13, 2020.

The foreign reserves plunged from $44.25 billion posted on August 19, 2019 to $41.85 billion as of September 30, 2019 before sustaining the downward trend to $36.30 billion on June 19, 2020 despite the Central Bank of Nigeria devaluing the Naira twice to prevent huge capital flight that trailed COVID-19 outbreak.

Weak oil prices amid low demand for the commodity compounded Nigeria’s woes as the central bank continues to struggle to sustain foreign exchange intervention and ease dollar scarcity in a nation that depends on imports for most of its consumption.

However, the plunge in revenue generation alongside low foreign direct investment due to the weak economic outlook and low investment sentiment, negatively impacted the attractiveness of Nigerian assets.

The apex bank, in its monthly report released for May, said “Nigeria’s international reserves decreased marginally from $36.43bn at end-April to $36.19bn at end-May 2020.

“The net decrease in reserves was due to the sales of foreign exchange at the Secondary Market Intervention Sales and Investor and Exporter windows as well as payments to external creditors.

“Thus, the level of import cover for goods and services, decreased from 4.0 months in April to 3.9 months in May 2020, but remained above the IMF threshold of 3.0 months.

“A comparative analysis of reserves per capita in May 2020 showed that Nigeria’s reserves per capita was $176.58, compared to $889.73 for South Africa, $491.10 for Angola, $218.94 for Egypt and $24.10 for Ghana.

It explained that “Sequel to the COVID-19 pandemic, the viability of the external sector in 2020 is expected to deteriorate, given the present worsening current account balance and depletion of external reserves driven, largely, by decelerating export receipts, particularly oil.

“Specifically, the degree of external reserves accumulation is expected to decelerate, as outflows are expected to outweigh inflows.

“As a result, external reserves are expected to lie between $29.9bn and $34.3bn at end-December 2020 (predicated on current declining oil price between $20 and $40).”

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