In this interview with MARK ITSIBOR, Nigeria’s first Professor of Capital Market, Uche Uwaleke says any delay in assenting to the 2019 Appropriation Bill and its implementation could reverse the modest gains recorded thus far.
What is your view of the performance of the Nigerian economy in 2018?
I would say it was a mixed bag really. On balance however, it was an improvement over that of 2017. For an economy that is still recovering from the effects of five quarters of negative GDP growth in a row, a growth rate of 1.8 per cent (year on year) in the third quarter of 2018 after recording 1.5 per cent in the previous quarter is something to write home about. These positives had a lot to do with accretion to foreign reserves, improved liquidity in the foreign exchange market and associated exchange rate stability. Overall, the economy recorded marginal improvement when it is considered that it has once again returned to a positive growth path.
Where do you see the economy headed in 2019? What are the likely macroeconomic indicators that will shape the year globally?
I see the economy heading north in 2019 with further improvement in real GDP growth rate. The factors that will influence the final outcome include the crude oil price and output, monetary policy of the United States’ Federal Reserve, US-China trade relations as well as the outcome of the general elections in Nigeria and implementation of the capital component of the 2019 budget.
I am optimistic that foreign investors will return to Nigeria this year in response to a slowdown in interest rate normalization in the United States and in search of undervalued securities in Nigeria. So, the stock market will most likely rebound especially after the general elections which I expect to be free and fair judging from assurances by the INEC. With OPEC and allies sticking to output cut agreement and oil price not disappointing, the return of foreign investors will have the salutary effect of shoring up our external reserves to a level sufficient for the CBN to continue to defend the naira and stabilize exchange rate. The current US-China trade truce will be positive for global economy especially with regard to demand for commodities including crude oil.
I expect inflation rate to come down to single digit in 2019 following expected improvements in electricity and transport infrastructure. I equally foresee the CBN relaxing monetary policy later in the year on the back of lower inflation rate and tailwinds in the global economy. Overall, I see the economy gaining traction in 2019 especially if the 2019 budget implementation kicks-in in good time.
Talking about the 2019 budget, do you think that key projections of $60 per barrel and 2.3 million barrels per day oil production will be realistic considering the fact that oil price has dropped from its peak of $80 witnessed not too long ago?
It is not difficult to see why those oil benchmarks were adopted. A few months ago when the Medium Term Expenditure Framework was still in the works, those fundamental assumptions seemed realistic. As a matter of fact, international crude oil price averaged US$75 per barrel in the third quarter of 2018 according to the Ministry of Petroleum Resources. So, it made sense to use US$60 per barrel at the time. But, that was then. The stark reality today is that the international crude oil market has become highly volatile.
Against this backdrop, what has become clear is that the $60 per barrel oil price benchmark for the 2019 budget is rather ambitious. An overly high benchmark that fails to crystallize will make the 2019 budget very difficult to implement. When this happens, it is usually the capital component that is sacrificed which will weigh on key targets including the 2019 GDP growth forecast of 3.01 per cent. Therefore, it is necessary to review downwards the $60 per barrel oil price benchmark for the 2019 fiscal year and avoid engaging in acts that could necessitate spending cuts in the middle of implementation that will severely hurt the current efforts at economic recovery. So, I suggest we use something lower say $55 per barrel while turning to Internally Generated Revenue to make up for the shortfall; if crude oil price turns out to be higher; the better for us. At least it gives us the opportunity to build fiscal buffers. Regarding the output projection, I think the country has the capacity to do 2.3 million barrels per day given the relative peace in the Niger Delta region.
What do you think are the major challenges to a possible delay in the passage of the 2019 budget beyond February 16th, when the Presidential election will take place?
The political temperature may heat up after the elections to the detriment of the 2019 budget. The mere thought of this scenario playing out is scary not least because the frenzy of political activities might spell doom for the passage and implementation of the 2019 budget. The negative impact of budget delays cannot be overstressed especially on an economy that exited recession only a few months ago. It creates avoidable fiscal uncertainties which compel investors to sit on the fence. Clearly, the delay in the approval and implementation of the 2018 budget especially the capital component contributed in slowing down the pace of economic recovery and dampening investors’ confidence.
Notwithstanding the improved outlook for the economy in 2019, any delay in assenting to the 2019 Appropriation Bill and its implementation could reverse the modest gains recorded thus far. Therefore, in order to sustain the momentum of recovery and further restore confidence in the Nigerian economy, the National Assembly, despite political activities, should hit the ground running with regard to interrogating and passing the 2019 Appropriation Bill as time is of the essence.
Now let us turn to the issue of financing the budget deficit. Do you think increasing debt accumulation by the government is a major problem? If yes, how?
Quite frankly, borrowing to finance the budget deficit is something we cannot run away from, at least for now, since the government is still working to diversify revenue sources. Having said that, I appreciate why concerns are mounting regarding the size of the country’s debt stock currently in excess of N22 trillion. Although this figure, which represents about 20 per cent of GDP, is still far below the 56 per cent World Bank’s debt sustainability threshold for countries in Nigeria’s peer group, the real challenge has to do with the high cost of servicing the debt which gulps nearly 70 per cent of government revenues.
I must emphasize here that fiscal discipline is required at all levels of government to deal with the public debt challenge. Alternative funding sources should be explored including privatisation through the Nigerian Stock Exchange to engender inclusive growth as well as through Public-Private Partnership (PPP) arrangements. State governments should be made to implement the 22-Point Fiscal Sustainability Plan (FSP) developed by the Ministry of Finance aimed in part at managing debt sustainably at the sub-national level. It goes without saying that linking borrowing plans more to debt service ceilings while sticking to the “golden rule” of debt management that requires governments to borrow only to fund investments that produce high returns is the right path to sustainable debt levels.
The Nigerian banking industry has being experiencing some challenges. What advice would you give the regulatory authorities on how to contain the risks and boost confidence?
You are quite right. The banking industry is grappling with a number of challenges among which is weakening capitalization that puts increasing pressure on their credit profiles, sluggish credit growth on account of weak growth in GDP and a lower risk appetite, tight forex liquidity and asset quality deterioration not unconnected with oil-related impaired loans. It goes without saying that the quantum of Non Performing Loans especially in some Tier-2 banks poses a major threat to their corporate survival. To be fair, I think the CBN has done a lot to boost confidence in the banking industry.
For banks where related-party lending and over-exposure to a single sector of the economy have been the order of the day, the CBN should continue to rise up to the challenge by demanding good corporate governance as well as ensuring through the Audit Committees that adequate systems are put in place to monitor such risks and minimize their adverse impact on the quality of the loan portfolio. Also, the CBN and the NDIC should intensify their stress tests to detect early bank warning signs on systemic risks, and offer ways to deal with such risks including through recapitalization, mergers and acquisitions. It is in this light that I find commendable the recent merger plan between Access Bank and Diamond Bank which the CBN no doubt encouraged. Indeed, the CBN has a responsibility to ensure that the banking industry and by extension the financial system is stable and safe for all stakeholders.
As a Professor of Capital Market, what specific initiatives do you think SEC should introduce to boost investor confidence and ensure growth of the market?
You must be asking this question against the backdrop of the dismal performance of the stock market last year having lost nearly 18 per cent of its value. However, I must point out that it was due more to external factors and not peculiar to Nigeria.
As the lead Consultant to SEC with respect to the inclusion of capital market studies in the curriculum of both Junior and Senior Secondary Schools in Nigeria, I can tell you authoritatively that the Commission has gone very far in that regard in conjunction with the Nigerian Educational Research and Development Council. So, I expect SEC to sustain the tempo by vigorously pursuing some other initiatives contained in the ten-year Capital Market Master Plan which include putting in place a National Savings Strategy, promoting capital market participation in the listing of government-owned firms as well as granting incentives for companies in priority sectors to get listed.
Still talking about capital market growth, FINTECH appears to be gaining popularity especially in developed markets. How can SEC encourage the application of FinTech in the Nigerian capital market?
Indeed, digital technology has been a source of structural change for global financial markets and in several instances disrupting the financial market ecosystem However, the value addition that can be achieved through partnerships with Fintech firms will help promote a well-functioning financial system. Without any doubt, the application of Fintech to the Nigerian capital market will not only offer opportunities for better integration with the wider economy but will also promote global benchmarking.