By Chinenye Anuforo and Chinwendu Obienyi
The Federal Government has been called upon to unveil appropriate policies that would pull the country out of its economic woes.The Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, in a chat with Daily Sun recently noted that at abnormal period like this, the government needs to introduce abnormal policies to stimulate recovery. “If you look at a country like Britain, the benchmark rate is 0.25 per cent and inflation is trading towards 2 per cent, same applies to America, the key thing is that when you want to stimulate your economic recovery, inflation becomes of secondary importance and what matters is the need to restore economic activities.”
He said, “One is hoping that if the government can carve out appropriate policies, we should begin to see a recovery sometime in 2017.”
In the interview with Daily Sun Chukwu stresses the importance of adopting accurate policies to drive the economy.
Excerpts:
Market review
Well, the market has suffered, throughout 2016 we have seen a negative return of about 10 per cent the year-to-date return on the index and principally because the economy is going through severe difficulties. We have seen an economy that has gone into recession, we saw a contraction of about 0.36 per cent in the first quarter of the year, 2.06 per cent second quarter of the year and 2.44 per cent in the third quarter of the year and as you also know the capital market mirrors the larger economy, so if the economy is contracting, it will be an abnormality for the capital market to be gaining. So, what we are seeing is a reflection of the larger economy.
Advice to investors exiting the market
Well in the market, there are different types of products and when we talk about capital market, you should also know that it has the fixed income and equities market. The fixed income market today is giving good returns so my advice to investors is to shift their investment portfolios away from equities to instrument that have more stable returns and those are the fixed income instruments. There are bonds trading on the market so I think investors need to move away more from the equities to the fixed income market at this point in time. If you buy in to bonds, you can get reasonable return at the current yield level.
How soon can we see a recovery in the economy?
Well, this is a difficult question for anyone to answer. The recovery in the market we are going to see will also to an extent determine by how quickly the economy goes into rebound. We have seen a worsening of the contraction in the economy. One is hoping that if the government can carve out accurate policies, we should begin to see a recovery sometime in 2017. It is only when we see a macroeconomic recovery that one can be sure of a sustained recovery in the equities market. So, I think the recovery of the capital market will be tied to the general economy.
Restoring investor confidence
Restoring investor confidence is going to depend on some factors, a lot of them at the macroeconomic level. We need to stabilize the exchange rate, we need to improve the flow of flow of dollar liquidity in the economy. Secondly at the local investor level, you need to adjust the yield on Federal Government trading bills. At yield of 18.6 or 18.7 per cent on fixed return of coupon on trading bills, the return on fixed income instrument makes it unattractive to investors in equities, so I expect the CBN and Debt management office to bring down the yield on trading bills instrument. Then we also really need to inject in the local economy, that will become reduction in the form of cash reserves. I expect the policy management authorities to bring down the cash reserve ratio below the current 22.5 per cent, those factors are necessary to restore local currency liquidity, restore local currency investors confidence and preference for equities instrument and resolve foreign portfolio investors confidence in the economy.
How to deepen local participation
Well you see local participation can be deepened by creating the right awareness but I think the problem we have now is not just about awareness, the greatest challenge we have is that there is no naira liquidity and again credit flow is very low and even the little available space known is not going into speculative instrument like the equities trade group. So, cost of borrowing is high, availability of credit is low and there is little local currency liquidity even at the disposal of HNIs and then added to that there is the fact that yield on local currency income instrument is so attractive that investors are under waiting their portfolios in equities and awaiting them in fixed income instrument.
What FGcan do to attract FDI
The first thing is to restore dollar liquidity, foreign currency liquidity and that can only be done in a short term by borrowing. But beyond borrowing, the government must also involve a medium to long term planning to ensure continuous flow of dollar into the economy and that will come in the form of concession plan for some of the critical assets such that you can actually have a continuous pipeline of foreign investment beyond the foreign portfolio investors, that is very critical to restore the investor’s confidence. Again, we must also go back to restoring the trust and confidence of the written agencies on the economy, we use to have JP Morgan rating emerging market index, Nigeria instrument used to be qualified for JP Morgan emerging market and Barclays emerging market instrument, I mean our bonds use to qualify for that, now they no longer do, and then we have also seen progressive decline in our sovereign risk rating in the likes of Fiotch Rating and we need to ensure that we reverse those deteriorations in the perception of the country such that investors will now see us in the positive light.
Special fund for capital market
I am always wary of government’s intervention in market dynamics and the simple reason is that government intervention creates distortions and should the government hold reasonable percentage of equities, the investors will be wary that the liquidity prices are not reflecting their interest on the equities board. So, the government come out at any point in time to sell their holding, they will destabilise the market and those sales may not be necessarily driven by market forces. So, my approach will be that Government should create the right enabling environment and let private sector be the key participants in the market instead of government being an intervener in the market, let the intervener come in form of market related economic policies.
How CBN’s high MPR is hurting equities
The issues about the return in fixed income instrument should not just necessarily be tied only to the monetary policy rate of 14 per cent. The key thing is that the government or if the Central Bank decides can still sell treasury bills at 15 per cent despite the fact that monetary policy rate is 14 per cent, the problem is that they are trying to ensure that there is an effective positive return on fixed income instruments above the inflation rate of 18.3 per cent. So, the challenge for me is that at abnormal periods like this, is when you need to introduce abnormal policies. If you look at a country like Britain, the benchmark rate is 0.25 per cent and inflation is trading towards 2 per cent, same applies to America, the key thing is that when you want to stimulate your economic recoveries, inflation becomes of secondary importance and what matters is the need required to restore economic activities.
The yield we are seeing today has achieved minimal benefit in terms of attracting foreign portfolios because foreign portfolios has actually been looking for stability in efex market, they are looking for a free market in the forex market, so they are not necessarily going to come in because our fixed income is quite high, so the key is that it is not just a matter of the monetary policy rate, I think the Central Bank needs to look at the cash reserve ratio. The cash reserve ratio is what sucks out liquidity out of the system and takes the dire liquidity to the CBN at no cost but there is a direct cost to the bank which weakens their capacity to lend and also increase the cost of lending. And I think that is what we should be looking at and on a secondary note maybe we should also look at the current trading single account (TSA) and look at more efficient ways of managing the Federal Government cash positions without stabilizing the entire money in the Central Bank so that money will become productive. The key thing is that we need to bring back money into the economy, the policies on rates are things we should review on ongoing basis.
How to improve entrepreneurs’ access to credit rate
The key thing to know is that the economy is in recession partly because of the historical structure that we have and also partly because of policy choices we have made. One of which I strongly recommend we review is the high yield of Federal Government debt instrument because government debt instrument is risk free. Rational investors will rather leave their money in treasury bills that gives a yield of about 22 per cent than to go into risky productive engagements. Again the entire liquidity is flowing back to the Federal Government, beyond that the return and risk metrics favours putting the money in non-government debt instrument and those are factors that are hobbling in real sector production activities. It does not make a rational meaning for anybody who has 100 million to go and try to create wealth or value by going to production activities, there is a chance of losing that money when you can as well put that money in Federal Government trading bills and end with 2 million in a year, so if we want to restore economic growth, we need to review our policies with respect to yield on fixed income instrument because the expected environment where rational people will put their money in risky assets when they can as well put their money in risk free access.
The Federal Government intends to borrow $29 billion, what is your reaction to this?
Certainly the federal government needs to borrow to stabilize the efex market so as to place stability in the economy and also to inject liquidity in some infrastructures. But beyond borrowing, I used to think we need to complement whatever little amount we are going to borrow with public private partnership arrangement where some of the assets where the government wants buy yield can be granted to the private sector to build. That way the private sector will assess money from outside the country, will still in flow the dollar we need, and that in flow will be for long term in terms of foreign direct investment. So we need to have a mix of borrowing, asset sale, concessioning and other sources of foreign capital inflow and again if we must borrow, we must make sure that we have the capacity to pay back what we are borrowing and also re-fence the funds we are borrowing to specific economic assets that have the capacity to capitalize growth and ultimately repay the loans.
Capital raising in 2017
Nothing can be ruled out completely but I think that if we have to use current environment to access what will happen next year, I think we might see very few capital raising. Companies come to raise capital ion equities market if there is vibrancy in the secondary market. You cannot have a vibrant market if you do not have a secondary market. It is the appropriate pricing of equities in the secondary market that motivates issuers to come to the market and raise capital and it is also when there is buoyancy in the secondary market that the investor will want to buy capital market instrument hoping that when the listing occurs, they will make capital gains. So, if it is the expectation that the price may actually go down further, then investors will now be interested and if the economy market prices are not reflective of the underlying value of the company, the issuer or director will not approve for fresh issue into the public. Until, those things are corrected, I do not see a lot companies coming to the market to raise money.
$1 trillion capitalisation mark for NSE
It is very simple, that policy decision plan was made when the economy was growing to about 6.5 per cent and the capital market was brewing in tandem with the general economy. Now the economy is in recession so it is not strange that the plans that were built on certain premise which has unravelled cannot be achieved. The basic assumptions of the plan to attain the $1 trillion capitalization of the NSE is seem no longer attainable today, there were plans to bring in a number of sectors to the market, the power sector, telecoms, the power sector is struggling, telecoms growing at about 9 per cent is now 1 per cent, the agric sector is growing about 3 per cent, manufacturing sector had a negative growth so the sectors on which the assumptions was made that $1 trillion will come to the capital market, are struggling for life and it is not strange that the capitalization could not be achieved unless the conditions on which they were premised are restored.