Monday, January 26, 2015 1.22PM / Opeyemi Agbaje* RTC, Thisday 210115
Chief Executive Officer, RTC Advisory Services Limited, Mr. Opeyemi Agbaje told Finance correspondents that falling oil prices have placed Nigeria in a situation where policy makers have to restructure the economy. Obinna Chima, who was there presents the excerpts:
What is the economic outlook of Nigeria?
Nigeria is in an era of forced economic restructuring. This is the type of restructuring whereby you don’t have any choice, but to it. Analysts and columnists have over the years been advising on most of these things, but now we don’t need to advise anybody. Whether government likes it or not, we will have to deal with the issue of the Nigerian economy. We would have to diversify the economy, reduce the size of government and increase investment in alternative sectors whether we like it or not. The oil price is still falling and we don’t know where the exchange rate is heading to. But the reality is that whoever wins the election by February 14, 2015; and whoever comes into office by May, will have to deal with serious economic issues.
The implication of higher exchange rate, higher interest rate, lower GDP growth, is lower consumption and lower purchases of goods and services. So, there are also possibilities of labour issues because both in private and public sector, there may be an inclination towards job losses. So, the outlook is going to be difficult. It is going to be a challenging outlook for managers both in the private sector and in government. For the private sector, this is the era, because I don’t think it is a year, an era of two or three years, in which managers will actually earn their pay because they are going to now have to do their jobs. There is significant uncertainty across variables. Now, there is nothing that can be taken for granted.?
People have to plan for interest rate, sales volume, exchange rate, political scenario and every other thing. There is a high level of uncertainty. My description of where Nigeria is in 2015 is multiple crossroads. So, we are at a junction in which there different roads. In this difficult economic and potential volatile politics, look at the scenario regarding youths, unemployment, terror, poverty, miseducation, ill-educated and people in large number lacking competence and skills. So, it is a potential explosive combination of political risk, economic uncertainty and a seeming social crisis. It is not the place a country wants to be in 2015. Essentially, this is an era that would challenge the acumen of managers in the private sector and in the government.
So, what are the opportunities you see in the economy for discerning investors?
There is a gloomy picture, yes, but we must understand that there are significant opportunities in Nigeria. If you look at the structure of Nigeria’s GDP, you will see that huge opportunities abound because oil is about 12 per cent. In terms of the structure of domestic production, we have done a good job of diversification, but the problem is that in terms of the structure of exports and government revenue, we have not done enough. So, exports are still exclusively oil of about 90 per cent and government’s revenue comes from that sale of oil. So clearly, two things would happen, we would have to diversify exports and domestically, government would have to diversify its income which means to increase focus on taxation.
From the point of businesses like I said earlier, there are still sectors that hold promise for significant growth. Look at the e-commerce space, look at Konga and Jumia and the growth that is going on in that sector. Look at real estate which is now eight per cent of the economy, and look at entertainment, movie and broadcasting, which is the fastest growing sector in the Nigerian economy. Look at some success in manufacturing around food, beverages and tobacco and cement, which has significant growth rate, look at hospitality, hotels, construction, all of which are growing above 12 per cent per annum, look at the power sector.
The implication by the time new investments begin to happen after the current investors sort out their indebtedness. Those people borrowed heavily to buy power assets, so they will spend the next 18 months restructuring their finances, exchanging the shorter debts they quickly borrowed to pay with longer term debts so that they can breadth. Until they do that, they won’t be in a position to make new investments in power generation.
So, it would happen. Look at the solid minerals sectors which we had ignored because of oil, but which holds significant opportunities. First, period of difficulties as we all found in our private lives are not gloomy periods. They are periods of opportunities, investments, hard work and in making the necessary investment decisions. So, periods of adversity are not negative periods. In fact I am happy and like I said earlier, this will compel Nigeria to do the right things.
What price do you think should be used to benchmark the 2015 budget?
I find some of the current narratives very ironical because there are three things Nigeria should have done and tried to do. Just like in the bible and what Joseph did in the seven years of plenty, he saved monies. That was what Joseph did 2,000 years ago. He didn’t go to Harvard Business School to know that he had to build large warehouses to store all the wheat, maize, so that when the seven years of plenty ends, they would be selling to all nations and be wealthy. It was not a rocket science. The Nigerian government tried to do that through a Sovereign Wealth Fund. President Goodluck Jonathan passed the law and they only made $1 billion transfer to that fund.
Why? Because some state governments went to court and they are still in court. Second point is the National Assembly. Every year since 2011 Ngozi Okonjo-Iweala would propose a small budget benchmark, and they will raise it up. You can’t eat your cake and have it. I personally know the number of people I tried to persuade on the value of saving, if your income depends on commodities. The federal government always proposed a conservative benchmark and the National Assembly always jerked it up. I blame the government for the lack of strong will and leadership. Once you have knowledge and you understand where you are going, you should be willing to stand on your ground. So, i pity Ngozi Okonjo-Iweala because these are not auspicious times. So, when the announced $65 per barrel, I laughed initially and I said $60 should be appropriate.
Now, it has dropped to $47. So, to me, it is no longer about the benchmark, it is about the dynamism of our response. At some day, you will have to pick and benchmark and write the budget but you will have a scenario for different plans. So, it is now about how dynamic and proactive we respond to the circumstance we find ourselves and begin to draw scenarios for other sources of funding. That is the real debate that we should be having now.
But with the way the federal government is responding to the situation, it appears as if they were not prepared for what is happening?
I don’t think they prepared. I think they had the right ideas, but I don’t think they have the will to enforce those ideas and I think they operated in a context in which Nigeria have low buffers. But to be fair to this administration, much of our buffers were depleted in the short Yar’Adua regime. But we did not do anything to remedy it and we have had about four years since then. The other point to make, which is an important point is that the significant depletion of our reserves was done at the Central Bank of Nigeria, through an unwise exchange rate subsidy that we did for three years. We called for a one-time devaluation that was inevitable then, which should have preserved our reserves a little bit by moving to $165 to a dollar at an earlier period. The International Monetary Fund (IMF) told us, by the former CBN governor told off the IMF. But the good thing about economics is that you can’t eat your cake and have it.
So what should be the response of monetary policy?
Well, monetary policy has taken the first major step. We are in a significantly better position because we have a flexible exchange rate. We had no choice other than to devalue the naira. There is inclination towards more borrowing and in some cases it can be unavoidable, but we should be wary of a situation in which we would return to the debt crisis of the 1980s.
What is the way out of the economic challenges?
I think diversifying our exports is the long term solution. We have achieved significant diversification in terms of local production and consumption, but we are not competitive in exports. South Africa’s exports revenue is driven by South African companies such as MTN, DSTV, South African Breweries, and a lot of other companies, it is not the sale of commodity.
So, the challenge for the Nigerian economy is for government to create policies and incentives that will allow our private sector to become exporters. If our export revenue was earned by thousands of Nigerian companies exporting their services, we would not collapse anytime the price of oil falls. We also need to start refining our oil domestically and exporting it. We should be one of the biggest exporters of refined petroleum products in the world.
* Opeyemi Agbaje is the Chief Executive Officer, RTC Advisory Services Limited