Monday, 23 February 2015

Our lives postponed

Electricity, unemployment, economy, education, security and such likes should ordinarily be at the centre stage but low levels of education across much of Nigeria, and a lack of "ideas" politics implies many voters in the postponed general elections will play along religious and ethnic lines.
Delayed voting is not a particularly new phenomenon in Nigeria but the decision to do so this time raised alarm bells because it was believed to have been impelled by the armed forces at the instance of the PDP-led government not minding the implication and costs.
Ironically, one would have thought that the challenger would be the party seeking postponement especially in the context of our environment where it is almost impossible for an incumbent to lose re-election. The general feeling has been that the elections were moved forward to allow the ruling party restrategise in the face of the momentum in former military ruler Muhammadu Buhari's campaign to unseat president Goodluck Jonathan.
Nigerians are now left praying that elections go ahead on March 28, even if their choices are bleak.
Postponement of the polls from St. Valentine's Day to March 28 has not been without a cost. The political uncertainty has further hurt an economy already hit by low global oil prices and led to warnings of a looming constitutional crisis. Individuals, families, businesses, the national economy all share in the burden of the shift.
Several weddings had been planned to hold on March 28. That date deliberately chosen hoping that all political tension associated with the elections would have cooled off. The band booked, invitations sent to guests and caterers hired to prepare a range of delicacies, but the all those had to be cancelled at least for now. If you ask me, I will suggest a new date should not be fixed until after the elections.
Many have also planned their travels. Some moved their families and shut down business in their places of residents returning to their country homes until after the election. For the fear of possible reprisals, there was mass movement from the northern part of the country to the South East especially. Now the travellers are stuck. Do they stay in the village or return to the north only to make the journey back to the village again in March?
For the middle class and the rich, several tickets have been booked to Dubai, USA, Canada and Europe - especially the UK. Many quickly changed their bookings.
Truth is a lot of lives and businesses are at some form of standstill. No one wants to commit his money into this economy for now. Not until the elections are over. If you doubt me, go to Apapa. The unusual free flow of traffic clearly tells the tale of low importation. The traders are not importing. They are not importing because their warehouses are still fully stocked. The warehouses are full because 'market is not moving'. People are not buying. Consumers are not spending. The economy is practically at a standstill. The worsening fate of the naira is not helping matters either. Volume of general cargo importation has already dropped by as much as 30%. Government's unpopular and ill-advised auto policy has compounded the woes for vehicle importation. The number of automobiles coming into the country has already dropped by half with the ports of neighbouring countries especially Cotonou Port reaping the bounties of our imprudence.
The naira hit a record low of 213 against the US dollar last week in the 'black market' leading to concern that an extended period of political limbo will have wider consequences. The depression of the national currency peaked with the Central Bank of Nigeria shutting the window of its six-year old Retail and Wholesale Dutch Auction Systems; selling the naira to the dollar at 198 - N30 above its N168 official rate.
CBN's move was seen as de facto devaluation, a development Muda Yusuf of the Lagos Chamber of Commerce and Industry said would result in the escalation of production costs for firms that hitherto accessed this forex window. His argument being that production costs for such firms would rise by about 20% - a cost that would eventually be transferred to the market.
The stock market has also been badly depressed by the political environment. A day after the postponement was announced; the Nigerian Stock Exchange All Share Index dropped 0.4 per cent, extending its decline this year to 14 per cent, the worst performance in the world after Ukraine.
The cost of the postponement transcends our shores. The rippling effect in the international community is emphasized by the return of several election monitors to their base. They had expended time and money to travel to Nigeria only to be told upon arrival that the election would no longer hold.
"Soon after our arrival, we were informed of the decision taken by the Chairman of INEC to postpone the elections by six weeks in the light of the security situation facing Nigeria," a bewildered Communications Officer of the Commonwealth Observer Group said on Wednesday.
Will Henley said the Group's personnel including support staff from the Commonwealth Secretariat had to depart to make arrangement for a future return.
Right now our lives have been postponed. We are a nation on pause. Everything waits till after the election - the 2015 budget, addressing declining government revenue and governance generally will take the backseat for now. But in all, the principal actors must remember that the future of Nigerian children is more important than their somewhat over-bloated egos.

Monday, 16 February 2015

How to survive these turbulent times

A very good friend of mine and fellow alumnus of the Lagos Business School recently wrote an article on the Nigerian economy which he shared amongst a small group. I believe this article is worth sharing with our readers due to its invaluable insight. My friend works with one of the banks and does not want his identity revealed hence I am constrained not to mention his name here. His piece goes thus:
With respect to the economy and how it affected the middle to upper class particularly in 2014, what dominated the debate in 2014 was the plunge in the price of crude oil and the possible impact it was going to have on macro economic stability. Towards the end of the year, the CBN responded with a cocktail of monetary policy tightening initiatives which do not need elaboration now. 
A wholesome view of the year 2015 presents an overall difficult year, which will be very tough in quarters 1 and 2 as a result of elections and post-election litigations both of which will slow government down. Without government spending within these quarters, tough times loom. Quarter 3 will see the newly elected governments at the federal and state levels begin to spend even though a lot of government vaults will be empty because of the drop in government revenues arising from the crude oil price plunge. Currently, over 20 states are struggling to pay salaries which is really very symptomatic of how dysfunctional our federal system is. Quarter 4 will likely witness growth.
The CBN is in a long drawn battle to defend the naira. I have always been of the opinion that the naira is over-defended. This is more to do with my belief that defending the currency too much is not sustainable than the fact that I have anything to gain from a weaker naira. Generally speaking, defending a currency too much weakens the position of exporters and this is another reason why we should not defend the naira too much since we seek an export-led growth.
To make matters worse, while one may argue that the measures being taken to stabilise the currency are okay in themselves, the way they have been ordered and implemented leaves a lot to be desired. To this effect, it has done an almost equal job of defending the currency and making the market nervous. When the market is nervous, it speculates.
Just to share a bit of my first hand experience with this whole scenario. From my functional desk in the office, the volume of credit to Nigerian banks is shrinking because this whole situation has dampened the appetite of foreign banks. This arises mostly out of CBN's disorderly handling of RDAs allocations. When bid results are published, you hardly see any systematic basis for allocation. Across products, particular banks win their bids while some others don't. Across customer segments, particular banks win their bids while others don't. This sets off the following sequence: 
1.     The banks go to the CBN because they have maturing obligations in the form of matured letters of credit or import bills to settle
2.     They lose their bids without any suggestion of the real reason why and what they need to.
3.     The bank resorts to a cocktail of options to settle these obligations including short term foreign currency (FCY) borrowings, refinancing extension requests etc but may or may not succeed in settling this obligation and when it fails, it defaults.
4.     The rate of default at the industry level rises and therefore lenders mark down credit ratings which show up in either of three ways - increase in interest rates, decrease in bank credit limits and shrinking of supplier credit terms.
5.     Ultimately, this leads some people to opt for cash-backed letters of credit (LCs) at the point of issuance or where they even cross over to the black market and pay for their goods in advance.
6.     When they cash back LCs at inception, their cost goes up and they transfer it to you and I. 
7.     Then they cross over to the black market, they under-invoice, take a hit on FX but cut down duty payable to government  - government revenue takes another plunge and on we go.
8.     The wheel keeps turning.
Back to the naira saga; one of the indications of the fact that the naira is not near its fair rate of exchange to the dollar is the widening gap between the official and the parallel market. This gap represents a huge arbitrage opportunity which many will continue to chase. Without any deep analysis, it is easy to imagine that the naira will still be devalued. A 5 percent devaluation is possible in my view and that will take the naira to a mid-point of $/N176.4 which will effectively leave the official exchange rate at $/N178.66. This can happen as early as March 2015, which will be the next MPC meeting, and after the elections. In fact, baring a rebound of crude oil price to somewhere near $70pb, our dear naira may trade at circa $/N200 before the end of 2015.
What to do?
       Make all your savings in FCY. Every naira you have which you do not have immediate need for should be converted and held in FCY.
       If you have kids in school overseas or in schools in Nigeria where you pay school fees in FCY, negotiate a discount from the school now and pay in advance even if it is part. For those overseas, you can buy interbank funds with minimal documentation.
       Rein in spending; there will be a massive price correction in the price of finished goods in the market. Therefore the price of goods will rise as inflation is set to rise. If you have liquidity, you can stock essential goods. They will definitely cost more in a few months.
       If you trade and have a wide war chest, import (even buy locally) now and stock if your underlying margins can absorb your additional working capital cost till such a time in the near future when you can sell at higher prices.  
This will not last forever. We surely will get out of it before the end of the year. We'll possibly see growth in quarter 4 of 2015. The good side of the bad story is that the naira has performed better now than in other commodity price crashes in the past.

You may recall that in 2008/2009, it was so bad that the CBN just shut down the market when the price was $/N117 and by the time we returned from the Christmas holiday, it went as high as $/N180ish before it settled at $/N142 thereabout. We are here because while we are not there yet, non-oil sector has fuelled economic growth in Nigeria in about the last 10 years. Therefore one can argue that the susceptibility of the currency to crude oil price shocks is lower than it has ever been.

Monday, 9 February 2015

Automotive policy and the rest of us

Professor Pat Utomi needs no introduction. He is one man I greatly admire. He has made a very strong impact on me and I believe on other young Nigerian entrepreneurs. His level of acumen and candour are legendary. If anyone qualifies to speak on the Federal Government's auto policy, it is the political Economist, Professor of Entrepreneurship and former Chief Operating Officer of the defunct Volkswagen of Nigeria (VWN). So in this column today, I bring you the views of the quintessential Utomi undiluted. Published on July 18, 2014, he titled it Automotive policy and the rest of us. Enjoy:
It was a little surreal to learn of a new automotive policy that had just been proposed for Nigeria. A close mimic of the import substitution industrialization strategy made famous by Latin American Economist Raul Prebisch from his time as Executive Secretary of the Economic Commission for Latin America (ECLA) and First Director-General of the United Nations Conference on Trade and Development (UNCTAD).
The logic is simple. To create jobs through industrialization the import list is taken up and some items deleted with substitution coming from local production. That local production may begin with CKD assembly in which on- costs may be quite high and uncompetitive. To make up, high tariffs or import bans are imposed to 'protect' local industry.
The trouble has been with the infant industry burden on local consumers as many infant industries fail to become competitive.
When Nigeria began industrializing the Nobel Laureate in Economics Arthur Lewis was promoting the ISI idea in his work in the Gold Coast (now Ghana). It was natural that ISI strategy affect policy choice in Nigeria. When National planning during the Gowon era identified the automotive sector as having great potential to stimulate production in several sectors, an ISI strategy took firm root.
To get things going Nigeria signed agreements with several automakers to set up plants to begin with CKD assembly and backward integrate. The result was the setting up of plants in Kano by Fiat Iveco, Bauchi for Steyr, Lagos to host Volkswagen, Kaduna, Peugeot and Enugu, Daimler Benz. Ilorin was to host Nissan.
On account of the agreements, import bans and tariffs went up to allow market demand build up. Nissan sold lots of Datsuns as part of that advantage. About 1977 the Datsun 180k was one of the most widely sold cars in Nigeria. When it came time to implement, Nissan begged off.
Peugeot, VWN etc, watched the policy environment unable to advance the goals of sustainable motor manufacturing. The contradictions were obvious. The Productivity Prices and Incomes Board (The Price Control Agency) stipulated prices which relative to costs meant giving away shareholders funds until the end could be seen. This produced ridiculous outcomes in sales of used cars. As prices for used cars could not be fixed you generated used cars and auctioned them and people bid twice the price of a new car that was hardly available, for a used car. The reason I never remember my car number is we used cars for weeks just to generate used cars.
When I went to work for VWN I declared the ISI model for automobile manufacture an anachronism. The nature of scale economies was such that the number of automakers in the world would shrink to a few, and the entry barriers were such that Nigeria competiveness was of little hope, and more importantly backward integration, otherwise known as local content; had failed very badly. The component manufacturers that established in Nigeria like Fichtel and Sachs were closing shop, etc.
My suggestion then was that we take advantage of the partners here, VW, Peugeot SA of France, Daimler Benz etc, to become suppliers into worldwide production of the firms in which our factor endowment gave us competitive advantage to become global leaders in its production. My favorite endowment was Rubber, of which we had at a time the best yield per hectare in the world. In my view, if we became the leading supplier of one or two rubber components produced most efficiently at the highest quality for supply into global value chains.
One of those who gave my views a good listen shortly after I joined VWN was Oxford University economist Paul Collier. Ironically he was, two decades later, commissioned by UNIDO to study China's rapid ascent in manufacturing and what Africa could learn from it. It was no surprise that what Collier learnt from the study was that the Chinese did what I was prescribing for Nigeria in the 1980s. His favorite example was one local government that produced nearly three quarters of all the buttons worn in the world. Had we become 80 percent producer of one rubber component used in motor cars world wide it would create hundreds of thousands of quality jobs and earn us more foreign exchange than crude oil.
To know this and see the same old game being played in ISI logic with the same Nissan that was a no- show a generation before is to feel deep sadness.

As we celebrate the hard work of a super salesman, Chief Michael Ade Ojo it is appropriate to make the point that sometimes you have to trade. Britain was renown, as a nation of shopkeepers. We all now go to Dubai trading. We can trade where that is strength and manufacture where we are competitive. Sony cofounder Akio Morita came to be known as the paramount salesman of the 20th century. Chief Ade Ojo is in many ways our Akio Morita. CVL is proud to hold him up as example of hard work, entrepreneurship and salesmanship. Even more importantly he is a role model in giving back to the community.