In 2016, German bund yields have broken the once inconceivable zero mark to trade at negative yields. The on-going European Central Bank’s current Quantitative Easing policy that entails purchasing €80billion of European Union (EU) bonds monthly in a bid to jumpstart the weak economic fundamentals has largely contributed to this trend. Furthermore, with Brexit and its contagion effect on global economies, market watchers are pricing in as much as 80% unlikelihood on the US Federal Reserve to hike rates in 2016. Before Britain’s recent vote to leave the EU, market players believed the Fed would raise interest rates at least once in 2016. Since Brexit, though, those odds have plummeted to nearly zero. In some quarters, the probability of a rate cut is being put back on the cards.
Despite all this, why are foreign investors not falling over each other to get their hands on Nigerian securities which are currently offering yields as high as 15 to 17%? Reason: they are worried that both principal and earnings may get stuck in Nigeria and they may not be able to pull out their investments at maturity partly due to illiquidity and “excessive regulatory interference” in the Nigerian financial markets. Against this back drop, it should be clear to the CBN that even at yields much higher than current levels, the FDIs are unlikely to come in with significant volumes until the CBN and indeed the Federal Government truly begin to “dance” to their “high octane” tunes.
On the other hand, the government is also wary of the suffering of Nigerians as their purchasing power will have to reduce by as much as 91% (depreciation from N199/$ to N380/$) for this much needed flows to come in. But even then some hard questions need to be asked:
- What would be the expected volume?
- What % of total current account deposits would the flows represent?
- How long would these funds remain within our economy before another round of cyclical exits begin?
- Is it worth sacrificing 91% of your citizens’ purchasing power as there are no palliatives being put in place?
Frankly, the CBN and indeed the Federal Government seem to be between a rock and a hard case at the moment as they face some critical decisions for which they cannot be envied to make.
Some would suggest that there is a third and possibly easier way: borrow from foreign lending institutions. But then these institutions are not charitable bodies too. They have finance experts that will also do due diligence and consider certain economic fundamentals before advancing funds. For instance, these institutions would also like to know:
- What projects are you funding; recurrent or capital? Naturally, they would be reluctant to fund recurrent projects such as salary payments as these do not come with positive cash flows that would support repayment plans.
- Does your local currency face depreciation/devaluation threats? Naturally, these institutions would also prefer you devalue your local currency and sometimes may even make it a pre-condition to access their loans.
- What is your future earnings projection? Their experts would certainly express concerns over current crude oil price levels and outlook. They would surely note that Nigeria faces a subtle key product risk as crude oil/petroleum products contribute over 90% of the nation’s external revenue generation.
Based on the foregoing, one would then be compelled to ask, is borrowing actually an easy way out?
In summary, whilst acknowledging the gargantuan multi-faceted challenges the CBN is facing, the Bank must realign its priorities and focus on basic macro-economic fundamentals instead of seeking reactive short terms fixes for systemic problems currently being faced by the Nigerian economy. It is the opinion of the author that an accommodative policy, or at least a wait-and-see stance would be more apt at this point in time as there can be no sound economic argument for a policy of tightening. Whilst the argument for pursuing FDI’s may be justified, the cost must not outweigh the benefits to the domestic economy. The CBN must make concerted, constructive and direct effort towards supporting the real sector by identifying the challenges facing this sector and providing solutions accordingly. These solutions should border around providing cheap credit to boost the working capital needs of companies operating in this sector. The federal government on the other hand must provide fiscal support through infrastructure provisions, tax holidays, tax exemptions, duty reliefs and outright grants if possible. Finally, in the current fight against corruption, the federal government must realise that there is a thin line between “marketing” and “de-marketing” our beloved country in its search for foreign assistance. Alfred Armand Montepert once wrote: “Expect problems and eat them for breakfast”. I say “It is certainly not easy to fare where the eagles dare, but fare we must.”
O.H. (26.07.2016)
