Razia Khan, Chief Economist, Africa at Standard Chartered Bank is a well known commentator on African markets, markets, advising the bankís clients on their Africa strategy and providing regular updates to African central banks, finance ministries and multilateral institutions. She holds a BSc (Hons) degree in economics and an MSc (Econ) in development, including monetary economics and international trade law from the London School of Economics. Razia is a member of the World Economic Forumís Global Agenda Council on population and on poverty and development. Last week, she spoke to BusinessDay in Durban on the sidelines of the World Economic Forum on Africa and offered her perspectives on the Nigerian market as the continentís largest economy struggles to exit its worst contraction in 25 years.
What do you think about the latest measures announced by the Central Bank of Nigeria?
There would have been a lot of hope if the new window had allowed for clear market determination of the exchange rate that is much better at clearing the backlog. You will never have a perfect market but it is still unclear at this moment if this new window delivers that.
No one of the banks feels at the moment that they really have the ability to trade away from the guidance provide the banks every morning.
The other point about this new window is that there is no inter bank trading at the moment and this window does not even attempt to restart trading on the inter bank window. Banks are still not permitted to trade among themselves unless in the instance where they are in danger of breaching their net open positions can they sell to another bank with the Central Bank position.
So the main purpose of this window is just to sell directly to those who need it. It is almost an order matching type market.
This falls far short of what is required to re-establish a traded interbank market and this is the big concern. If there had been a willingness to adopt some level of flexibility, why not do it within the confines of a regulated interbank market. Why go for what is really a very imperfect solution that does not really move Nigeria along adequately.
Then there is this confusion about NIFEX and NAFEX.
As one watching from abroad, how do you see the changes, what are investors saying?
If there isn’t a liquid traded spot market, is there really a need to offer futures in the hope that this will enhance returns for investors in Nigeria?
Foreign investors acknowledge that the returns in Nigeria already look reasonably attractive. The only thing that is stopping them from getting involved is concern over the ability to enter and exit the market. They need to know that there is a traded foreign exchange market preferably with no backlog of demands when they need to exit the market. Until that becomes clear you are not going to get any optimal response to any of the policies that have been put in place.
What Nigeria needs today is fairly simple, the new window looks it might have been a step in the right direction, but it falls far short in very many important respects and it is not delivering those enhanced inflows at the moment.
How are porfolio mangers responding to the changes?
One thing is clear, investors have really given Nigeria a lot of the benefit of the doubt. Even with the fixed exchanged rate system, a lot of investors were still investing the time and the efforts in terms of visiting Nigeria and looking at what was happening in the country and waiting to see what happens when Nigeria does open up properly. They are waiting for that moment when they have re-assurances on the FX regime.
So the investor interest in Nigeria is still very significant and it has not gone away. And credit to the country that that is still the case. But there is an impatience to see these issues tackled so that he country is finally open for business. We know about the investor interest in Nigeria. We saw this from the Eurobond debt issuance. Nigeria is still very well regarded because it has a low level of external debt and it is seen as able to borrow in a sustainable way going forward and so there is a lot of investor demand for Nigerian and there will be even more investor demand for Nigerian local currency debt except for the issue of the FX regime.
For the moment, however, FX investors, equity investors, fixed income investors off shore investors are treading rather cautiously. They are hopeful that eventually there will be change.
The fact that the CBN has been selling this much FX regularly to the market, dealing with that backlog of pent up FX demand is encouraging, the fact that the parallel market rate has appreciated has proven that the rates really over shot. All this is encouraging. Investors are watching the situation closely, but they are probably at the point yet where they believe that there is market determination of the exchange rate and the way to reinstate that confidence is to allow the inter bank market to trade again.
Don’t you believe that the economy is cranking back to life given the good PMI numbers we saw last week?
Standard Chartered has long had a more positive view than the typical forecasts out there. I think the IMF for instance is looking at 0.8% as a base growth but we are saying 2.8% is very likely.
And this really speaks to the extent of the contraction that we saw in the economy last year. Are we likely to see a double deep contraction in the oil sector being repeated in 2017. Already there are hopes that talks with the Niger Delta leaders and militants will be successful and that it is a matter of time before pipeline repairs allows for higher oil flow. So prices are higher and output is going to improve and that a lone will drive a significant difference in the base. For the non oil sector, the really important part of the economy, we need to take on board that there has really be a very shallow recession. That was not the sector that saw a double-digit recession in Q2, Q3, Q4. And this is why we think increased FX availability, better sentiments, passing of the budget, all of these factors will help economic momentum.
So that PMI numbers are already suggesting that some pick up in confidence is good. Bur PIM is just survey data. What we are waiting to see are the hard data on actual activity showing that the economy is recovering. Nonetheless because of the weak base we are confident that some sort of positive growth should be achieved.
If these are not good enough, so what is the problem from an investor’s perspective?
The challenge for Nigeria is to go beyond some sort of positive growth to something much more meaningful, something that looks and feels like real economic recovery with growth in employment, better availability of FX with a sense of investor confidence that next year is going to be better than the previous year for sure.
Nigerians have this innate confidence. They don’t give up and what we are seeing now is almost a healthy development for the country.
What held Nigeria back in the past? It was its government. When oil was selling at $100 a barrel, Nigeria was subject to the typical resource curse theory. So this is the time for the private sector to come out boldly into its own.
