LAGOS, Federal Republic of Nigeria. “The vindication of Emefiele” By Paul Adegboyega / Guardian (Nigeria).
Early this year, when the Central Bank, under Godwin Emefiele, initiated a series of monetary policy interventions to manage the effects of the sharp plunge in global oil prices, critics, including the international financial community and some local economic experts and public analysts, were quick to fault his strategy. The policies were termed knee-jerk, unsustainable and not based on any clear-sighted vision or sound economic principles. For these critics, the only wise option was for the apex bank to allow the naira to find its supposedly ‘true value’ which could only be determined by immediate and steep devaluation. Emefiele opposed this proposal as injurious to the economy, given our economic vulnerabilities and challenges arising from the crash in global oil prices.
Today, eight months into the deepening oil price crisis, it is increasingly obvious, going by the assessments of reputable rating agencies and other indices, that despite obvious and expected challenges, the bold and much criticised measures instituted by the current leadership of the Central Bank have been able to effectively contain, to a significant degree, the potentially economy-destroying oil price shocks. The measures have pretty much kept things at an even keel. The efficiency and success of the measures are made even clearer when contrasted with the possibly devastating scenario that would have played out if the Central Bank Governor had budged to pressures to allow the naira to find its so called ‘true value.’
Early last month, one of the world’s leading providers of independent credit risk research and benchmarks across industries, asset classes and geographies, Standard & Poor’s, affirmed Nigeria’s credit rating at B+ with a stable outlook. Standard& Poor’s ratings are trusted to reflect the health of a country’s financial condition concerning the ability and willingness to meet financial obligations in full and on time.
What this means is that the Nigerian financial system, though challenged, is still relatively strong and has great potential for growth and investors can transact with minimal risk. The positive rating is an endorsement of the economic policies of President Muhammadu Buhari and Emefiele’s efforts to manage a very difficult global economic situation.
Another leading global provider of credit ratings, commentary and research, Fitch Ratings, also affirmed Nigeria’s long-term foreign and local currency Issuer Default Rating (IDRs) at ‘BB-’ and ‘BB’ respectively showing that the financial system in the country is pretty stable and the economic outlook remains positive contrary to the doomsday chorus of Emefiele’s critics. The ratings agency stated that though economic growth slowed sharply in 2015, it is set to rebound in 2016 and remains robust relative to its peers. They further stated that with uncertainty over economic policy expected to ease and continued dynamism within the private sector, real GDP growth is forecast to rebound to an average of five per cent over 2016 and 2017.
To say the obvious, the positive economic outlook of Nigeria as outlined by the two globally respected rating agencies is completely at variance with the negative view of the JP Morgan Index Team and their ilk. Their judgment is a more accurate reflection of the fundamental realities of the Nigerian economy and a deeper understanding of the dynamics of the Nigerian economy. On the other hand, JP Morgan’s interest and perception of economic realities is largely defined by its institutional priority – the protection and promotion of the profit making targets of its portfolio clients – a large proportion of which are portfolio investors who don’t have a long-term interest in Nigeria. Given this context, it is not surprising that their analysis tends to be shallow and narrow.
Apart from the positive ratings by Standard & Poor’s and Fitch Ratings, some other indices indicate that the policies of the Central Bank are working. For instance, the official exchange rate has over the past eight months remained stable at about N197 to the dollar while the black market rate, which had inched up as high as N245, has been falling and hovering within the N215-N220 range for months now. According to a Central Bank research, if the naira had been floated as recommended by JP Morgan and co, the official rate of the naira would have been about N250 and N280 to the dollar and up to N350 to the dollar at the black market.
The relatively stable exchange rates have kept the inflation rate within the single digit bracket (9.3% as at date), ensured that food and commodity prices are not higher than they currently are, thereby shielding Nigerians especially those in the lower socio-economic categories from coming under the full impact of the shock. Experts and economic analysts have stated that had the Central Bank succumbed to pressures and allowed a full devaluation of the naira, the pass through effect of the fall in the value of naira would have led to a sharp rise in inflation rate to between 13.5% and 15%. This would have taken the price of food and basic commodities far beyond the reach of ordinary Nigerians with the attendant misery and further deprivation.
Also, contrary to the heightened fear of an investor exodus from the capital market as a result of JP Morgan’s de-listing of Nigeria from its Government Bond Index on the basis of Emefiele’s refusal to devalue the naira, the doomsday prophecies have not come to pass. In fact, the signals have been quite positive in the circumstance. Shortly after the initial market panic that followed the announcement, the capital market re-bounced and has been on a bullish run.
According to a Thisday report of 20th September 2015, some investors who have confidence in the underlying fundamentals and strengths of the Nigerian economy immediately took advantage of the situation and swooped on highly discounted equities. As a result, the market gained N277 billion, rising from N10.148 trillion to N10.425 trillion within a two-week period – N42 billion in the first week when JP Morgan made the announcement and N225 billion in the following week. The report quoted some market operators as saying that despite the initial threat, discerning investors see a lot of value in the Nigerian equities market because the fundamentals remain very strong.
As at September 30, 2015, trading on the Lagos floor of the Nigerian Stock Exchange (NSE) remained bullish as the value of quoted securities appreciated significantly. At the end of trading, market capitalisation of equities increased by N135 billion to close at N10.73 trillion from N10.59 trillion it started the day’s business. In the same vein, the All-Share Index further appreciated 1.3 per cent to close at 31,217.77 points compared with 0.20 per cent gained the previous session which closed at 30,825.00 points.
Smart investors have also not allowed the oil-induced economic slowdown to blind them to the massive potentials that exist in the local manufacturing space. International leaders in the cereal industry, Kellogg’s, defied the economic slowdown and only recently announced plans for a $450 million joint venture with Singapore’s Tolaram Group to develop breakfast foods and snacks for the West African market, with the focus on Nigeria. According to Kellogs: “The size of the economy, its growth rate and changing demographics” are too strong to ignore.
In the same vein, multinational consumer groups, including Unilever and Diageo – owner of Guinness – are also increasing their investments in their Nigerian units in an effort to capture the country’s price-conscious shoppers and help boost their profits.
The bottom-line is that even though Emefiele from the start, took a lonely and unscripted path that was severally attacked and criticised, it is becoming clearer with the passage of time that it was a bold and innovative approach based on a sound, nuanced reading of the core challenges as well as the strengths of the economy, including the long-term imperative of building a strong foundation for the economy in a post-oil world. The focus of the Buhari administration on blocking leakages, fighting corruption, diversifying the economy by deliberately stimulating growth in key sectors has complemented this approach.
The Godwin Emefiele-led CBN is demonstrating that a formulaic adoption of wholesale devaluation is not a magical solution to our current economic challenges. It is also showing that bold and innovative approach anchored on a sound understanding of the economy and the best interests of the country can produce good results. We are certainly not out of the woods yet but there is a basis for optimism that the imminent appointment of a Finance Minister and the implementation of a fiscal plan to complement Emefiele’s bold efforts will lead to even better results.
