Monthly Archives: September 2016

So you want to sell the golden goose. And tomorrow?

By Rafiq Raji, PhD

It is all coming together now. The Nigerian president, Muhammadu Buhari, wants emergency economic powers. His officials have advised him to sell some national assets to raise cash for stimulating the economy. Assets sale, they call it. We Nigerians are a creative lot. Privatization it used to be called once. But then that involves a myriad of longwinding processes, approvals, due-diligence, and so on. A lot of hassle for a government eager to lift the economy out of an ongoing recession. Laws are crafted precisely for a situation like this. With emergency powers, President Buhari would not need anyone’s approval to sell any national asset to anyone. He would have the unprecedented powers to choose the assets to sell and to whom. It is a recipe for increased disaffection. My view.

Make ‘State of the Nation’ address compulsory
The legislature plans to ask Mr Buhari to address a joint session of the National Assembly, albeit principally to present his views on the economy. This is a welcome idea. But it should not be adhoc. Most countries have an annual address by their head of state, to their legislature or citizens. Reading the budget does not suffice as one – finance ministers do that in better climes. Actually, I think there is an opportunity here. We should have an annual ‘State of the Nation’ address by the president. It should be made a matter of law, a way to hold any sitting president accountable. And put pressure on the office-holder to perform: it is not likely an incumbent would like to address the legislature year in year out without anything tangible to show for his stewardship.

Call it privatization. And follow the law
It is believed a prominent businessman first mooted the idea of selling some national assets to fund the government’s budget. Central bank governor, Godwin Emefiele, makes the case recently that he suggested it much earlier – last year; and back then, such a sale would have garnered better valuations than they would currently. A leader in the Nigerian legislature either read the mind of the leading mogul or was privy to his thinking. For he all but read out what he suggested. $15 billion is the amount on everyone’s lips. They all probably mean well. But if you thought they were also being self-interested, you wouldn’t be blamed. I’ll elect to think their views are well-intentioned. Truth is, what is being proposed is essentially a privatization of some majority- or minority-owned government assets and entities. But the government already has a process for that. A National Council of Privatisation (NCP) needs to be constituted. Only issue might be that an NCP, statutorily led by the vice-president, might make the incumbent, Yemi Osinbajo, all too powerful for the liking of Mr Buhari’s inner circle. Otherwise, all that is being proposed potentially falls under the purview of the NCP. And there is a reason the system was designed thus: to prevent the abuse of power.

Liquidity might be a problem. Lever assets instead
There seems to be a consensus in any case: if you must sell assets, sell only the non-performing ones. Incidentally, the non-performing assets are mostly illiquid. They cannot be sold easily and readily. So if the issue is speed, asset sales would not cut it. At least the type that does not amount to pilfering our commonwealth. We often talk about how we saved little during the boom years. And yet, coveted government stakes in the Nigeria LNG Limited, a liquefied natural gas producer, and Africa Finance Corporation, a development financier, have turned out to be quite fortuitous. It is almost a miracle that these investments were ever made during those heady years. These crown jewels must not be sold. Not at this time, at least. More optimal would be to leverage the other so-called non-performing but still quite valuable assets: use them to borrow. Don’t forget that even potential buyers would borrow to fund their purchases. So why not the government be the entity that does the borrowing using assets it already owns. An argument has been made about higher debt service costs consequently. It is weak. If the objective is to get out of the current economic slump at the earliest possible time – optimists reckon a recovery could be palpable by the fourth quarter of this year, higher debt service costs in two years or so, when the economy would hopefully have revved up, would matter little. In any case, there is always the IMF – it agreed to lend $12 billion to Egypt last month. It is no longer the villain we are quick to label it. We should not be afraid to seek the fund’s help. It is now more flexible. Its conditions are not as stringent. And the fund’s endorsement is increasingly de rigueur for raising capital in global financial markets, whose participants now worry that African countries are backtracking.

Policy consistency is what inspires confidence
All these troubles have a source. Confidence. The lack of it. It would take a while for international investors to believe the government would stay the reformist course it has embarked on. I won’t harp on the authorities’ past mistakes, amply discussed in earlier columns anyway. And some were really just honest mis-steps. Even so, some of them are being repeated. For instance, finance minister Kemi Adeosun probably meant well when she advised the central bank to cut interest rates recently. But she didn’t need to say so publicly. An investor might think: was the phone faulty? Thankfully, the bank chose to look at the facts and decided to take the efficient path, as it saw it. A central bank that articulated a tightening stance only just recently after acknowledging an earlier easing move was ineffective was not now expected to reverse course only too soon. At least, not a central bank that knows what it is doing. In any case, a policy rate is a guide. It is not a directive. If policy is not reflective of the prevailing economic realities – and consistent, it would simply be ignored.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz. http://www.businessdayonline.com/en/so-you-want-to-sell-the-golden-goose-and-tomorrow/

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African central banks decide on rates

By Rafiq Raji, PhD

This week, the US Federal Reserve and Bank of Japan (BoJ) meet to decide interest rates. Both would be announcing their decisions on 21 September. I don’t expect any surprises from the former. In fact, I would be hugely surprised if the Fed does anything this year. Market participants are a little anxious about the BoJ though, as it tests the limits of negative interest rates and could increase the pace of its stimulus programme. African central banks, in Ghana (19 September), Nigeria (20 September), Kenya (20 September) and South Africa (22 September), would also be announcing their decisions during the week. Between them, their economies represent about 60 percent of sub-Saharan Africa GDP. The Bank of Zambia could also announce its long-awaited decision this week – see earlier 9 August 2016 column (“Zambians and their central bank decide“) for my views. Understandably, they are mostly in hold mode. Not Kenya though. If the east African country’s central bank desires to cut rates, it has room to do so now. Kenyan growth should be almost 6 percent this year. And its inflation outlook is quite encouraging. The others, not so much. Nigeria is in recession – and growth would probably contract for the year, amid high and rising inflation. Ghana is still trying to curb longrunning double-digits inflation, albeit growth is a little decent; about 4 percent this year is my reckoning. For South Africa, currently in a tightening cycle as the inflation outlook remains relatively bleak, growth remains sobering; probably zero percent this year, albeit authorities plan to revise their forecasts upward. The South African Reserve Bank may not find it apropos to raise rates at this meeting. But the outlook suggests it may need to before year-end. At least, that is my thinking at the moment. Ahead of the monetary policy decisions, my firm, Macroafricaintel, published its Q4-2016 outlook reports. Below are some of the thoughts.

Kenya – Room for another rate cut
After having to pause policy easing hitherto on resurgent but likely temporary upward inflationary risks, the Central Bank of Kenya (CBK) could, if it wanted to, cut rates by 100 basis points to 9.5 percent, as early as its monetary policy committee (MPC) meeting this week – last time was in May, when the CBK cut rates by 100 basis points to 10.5 percent. I actually think it could ease policy further by another 100 basis points to 8.5 percent before year-end, when inflation could have eased to about 5 percent. Concerns about fuel price increases, which rose in mid-July amid resurgent insecurity, have since subsided or diminished. There is risk however of potential electricity tariff hikes, as geothermal power plants shut down for maintenance have created a supply gap of about 200MW and imports – that from Uganda (more than 90 percent of imports) up 32 percent in the year to July for instance – of diesel-fired and hydro-powered alternatives to fill it are relatively expensive. Chances are the electricity sector regulator would not entertain any new price hike requests this year; especially since the disruptions are not likely to be secular. Never mind that electioneering is already in high gear. Otherwise, the inflation outlook looks good. The Shilling has been relatively stable and should remain so. My view discountenances the downgrade of the currency by Fitch Ratings in mid-July. Why? The US$1.5 billion IMF precautionary facilities have proved quite effective buffers thus far. No reason why they shouldn’t continue to be.

South Africa – 25bps rate hike likely in November, continued pause in September
After barely coming within range in July at 6 percent, inflation would likely accelerate enough to breach the South African Reserve Bank’s (SARB) 6 percent upper bound target from August to March 2017. I anticipate a justifiable 25 basis point tightening to 7.25 percent at the November MPC meeting, the likely peak of the cycle. Thereafter, it is probable the SARB may see room to start easing rates from Q2 2017. My revised inflation forecasts see the headline averaging above 7 percent for the five months to year-end, from 6.8 percent in August to about 8 percent in December. Drought-induced food price increases are expected to continue, as the prospects for improved rains have diminished significantly. Some rand volatility is also expected towards year-end as expectations gyrate over a potential ratings downgrade to junk status by at least one of the global rating agencies, SPGlobalRatings especially. Political uncertainty would perhaps continue to hover over all considerations in any case. Above-inflation wage deals also weigh on the outlook. In September, auto workers agreed an 8-10 percent wage increase over 3 years with employers. Other labour unions are expected to take a cue from this. In the past, the SARB expressed significant worries about how these wage deals could be differential to its rate-setting decisions.

Ghana – Policy easing probably next year
My inflation forecasts suggest the headline may be about 14.1 percent by December, the 2016 trough of a downward trend since June – level then was 18.4 percent – albeit there is likely a slight pick-up in September, to 17.6 percent in my view. The most recent inflation data showed a slight year-on-year acceleration to 16.9 percent in August from 16.7 percent a month earlier. But the monthly pace was negative, -0.6 percent, after an almost 2 percent average run in the year to July. Ordinarily, this would motivate some serious consideration of a potential easing of policy. Bank of Ghana (BoG) governor, Abdul-Nashiru Issahaku, who in my view is decidedly dovish, would jump at the slightest opportunity in any case. Elections in December, a few months away, requires that the BoG exercise the utmost prudence, however. Thus, I think keeping rates as they are for the remainder of the year would be most appropriate. As I see the inflation rate in the high single digits in Q1 2017 and lower for the remainder of that year, averaging at about 7 percent in 2017 from about 17 percent in 2016, an aggressive easing of policy then might be justfied. My current view is that the policy rate (26 percent going into this week’s meeting) could be cut by 300 basis points in each quarter next year, with the end-2017 level still significantly positive in real terms against my inflation forecast of about 6 percent for December 2017.

Nigeria – CBN tightening pause likely for remainder of the year
Inflation has accelerated since the last monetary policy committee (MPC) meeting of the Central Bank of Nigeria (CBN). The annual headline rose to 17.6 percent in August. My forecasts put it higher in coming months, probably ending the year at 18 percent. A weaker naira, food price increases, higher fuel prices, intermittent power shortages are just a few of the factors that I expect would buoy prices up. Manufacturers have already indicated more of their inputs’ continued price increases would now be passed on to consumers more quickly. Foreign-sourced inputs continue to be expensive because foreign exchange remains relatively scarce and dearer. Supply of local alternatives have not kept pace with increased demand. The prices for staples have also gone up, bread for instance, hiked by 20 percent in mid-August. After raising the monetary policy rate (MPR) by 200 basis points to 14 percent in May (after a 100 basis points spike to 12 percent in March), amid backlash from influential members of President Muhammadu Buhari’s administration, there are strong signs the CBN would be reluctant to raise rates further. There have even been threats of cutting interest rates via legislation. A likely economic emergency stabilization bill to be tabled before the legislature this month, I fear, may be used to do just that. The CBN governor, Godwin Emefiele, probably had this at the back of his mind, when he recently signalled all tools within the reach of the CBN, would be used to stimulate the economy. I interpret this to mean the apex bank would resort to more unconventional monetary easing. For instance, plans are afoot to boost the capital base of the government-supported Bank of Agriculture. The Bank of Industry could also get a boost – I suggest this in any case. The Nigerian Export-Import Bank (NEXIM) is another government-backed institution that could use some help. My view remains unchanged: the CBN should focus on its primary mandate of price stability. And it should tighten policy as necessary. But then there is now a need for it to balance that mandate with needed political pragmatism. The CBN needs to be able to set interest rates in the first place. That type of pragmatism, it must also extend to not making the mistake of overstretching itself: the CBN’s capacity to stimulate the economy is overrated. And it should not be easily forgotten that it tried to do just that without much success in the recent past. Banks, the health of which remains concerning (about 15 percent or more of total loans outstanding is either bad or non-performing), are currently undergoing a thorough examination by the CBN. Little things like these – tweaking regulations to ease flows, directing capital to neglected sectors, providing incentives to manufacturers, cleaning up banks and so on – could be more far-reaching and effective than undermining whatever monetary policy credibility it currently has.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz. http://www.businessdayonline.com/en/african-central-banks-decide-on-rates/

What is Japan’s African game?

By Rafiq Raji, PhD

The 6th Tokyo International Conference on African Development Summit (TICADVI), held on 27-28 August in Nairobi, Kenya, has come and gone. But what did it achieve? Some US$30 billion in aid and investments over the next three years were promised, half of what China pledged late last year at its similarly themed get-together, the Forum on China-Africa Cooperation (FOCAC); also its sixth meeting then. Some 73 memoranda of understanding were also signed, a lot of which were related to infrastructure, power generation especially. Others were in the health, education and expectedly, oil and gas sectors. A friend who attended the summit was particularly excited about some of the products on display at the exhibition along the sidelines of the event, like pay-as-you-go solar power, supplements for maize porridge, and so on.

Like China, Japan is involved in quite a few infrastructure projects in various African countries, albeit to a lesser degree. And Japanese companies already do quite a great deal of business in most of these. Chinese companies increasingly so as well. In sum though, China’s engagement with the continent is more intense and widespread. The Japanese make up for this in other ways. Japanese brands evoke feelings of quality, brilliance and efficiency. From electronics to cars, they are quite ubiquitous across the continent. Despite China’s growing closeness, similar sentiments are barely associated with its brands, if at all. Chinese goods are still considered inferior. Surprisingly, their cheapness barely appeals commensurately. Even so, China’s experience and relatively ample resources may be more germane to African needs. No matter. Both are willing. Sand in the wheels? Both are staunch rivals, albeit they feign some level of maturity in front of their African ‘friends’ – an official Chinese delegation attended TICADVI.

They all want the same thing
When there are numerous suitors for a potential bride, it is often ironic that blessings do not always follow. The one being sought after might overestimate her value, dither, or hope for better opportunities that may never come. Africa is one of many frontiers of interest to these world powers. So for Japan and China, longstanding rivals, whose volatile relationship is writ large by a territorial dispute over eight islands in the East China Sea, Africa provides a vast field for them to spar. Even so, they both really want the same thing: influence. Like China, Japan is also interested in the continent’s mineral resources. Resource-poor Japan seeks fuel for its energy needs, as its nuclear-dominated system have been mostly shut down since the 2011 Fukushima mishap. Both are also counting on African countries to pursue varied agendas at the United Nations and other multilateral institutions. Like the Europeans and Americans before them, Japan and China are also building military bases on the continent. Simply put, they are pursuing their own interests. Knowing this could be a blessing for African countries, whose negotiating positions are enhanced as a result. The temptation to pitch one against the other should be resisted, however. Instead, African countries should articulate what their development needs are and then go with the partner that best ensures their fulfilment. Japan is not offering as much money as China is. But it has one advantage over the latter. It is more technologically advanced. Its projects are executed with the highest standards and are delivered on time. And they last. China, on the other hand, knows only too well how steep the road to development can be. It is likely a better teacher on how to traverse that road than Japan could ever be at the moment. There need not be a dilemma in any case. Both can help.

Accept only the help that liberates you
As the Japanese prime minister, Shinzo Abe, was engaged in his charm offensive – the TICAD conference was being held on African soil for the first time – Chinese officials were quick to deride his efforts. It was almost the same way the Americans were all too quick to point out how the Chinese then newfound interest in Africa was going to be similarly or more exploitative. Truth is, these supposed development partners go into these relationships often because they already see more advantages for themselves. Or at least, they see the costs and benefits as evenly balanced – not in the African case: whether the partner is China, Japan, America or Europe, the advantages are tilted towards the other side. And the toast is always the same: we want to help. That is all very well. What African countries need the most, in addition to infrastructure, is technology and skills transfer. In doing this though, the situation can no longer be as it is currently, whereby these so-called partners set up businesses on the continent, bring their own staff, integrate little and barely mask their disdain. The scorecards cannot continue to be about how many billions of dollars our partners’ supposed benevolence allowed for each time. Thankfully, more energy at these summits is now being devoted towards changing this lopsided paradigm.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz. http://www.businessdayonline.com/en/what-is-japans-african-game/ 

Political meddling costs economies

By Rafiq Raji, PhD

Emerging market economies currently in or teetering on the brink of recession eerily have one thing in common: political wrangling. Brazil recently impeached its socialist-oriented first female leader, Dilma Rousseff, who defiantly held on till the very last moment – hard as nails, that one. Still, Ms Rousseff’s meddling is in part responsible for Brazil’s current biting recession, almost two years old now. Russia has always been a political theatre of sorts, with its leader, Vladimir Putin, pulling the strings at almost every turn; also in recession since early 2015. Apart from soft crude oil prices, the Russian leader’s expansionism – borne out of a determination to retain influence in former Soviet Republics – has been blamed. The very competent former governor of the Reserve Bank of India and globally acclaimed economist, Raghuram Rajan, stepped down this month (4 September), the end of his first and only term. He probably saw the signs: the ruling political elite thought him too independent and a little too popular abroad. His halo was a little bit discomfiting, it is thought, for Indian prime minister, Narendra Modi. In South Africa, it has been one political drama after another, none exhilarating. Bizarrely, as in the Indian case, an underling, a high calibre one also, is supposedly punching above his weight; almost always the raison d’etre of most political conflicts. There is reportedly no love lost between the South African president, Mr Jacob Zuma, and his respected finance minster, Pravin Gordhan. Their wrangling is beginning to take a toll on the economy. Not that it didn’t hitherto: the rand has been edgy each time new disagreements between the two come to light.

Risk models have been adjusted
Last week, two financiers withdrew their support for some of South Africa’s state-owned enterprises (SOEs). Futuregrowth, an asset manager, worried increased political uncertainty now made it difficult to assess risk: supposedly business decisions are likely to be politically-induced. The second, Danish lender, Jyske Bank, went underweight the bonds of state-owned power utility, Eskom, citing governance concerns. More investors and financial institutions have probably done as much, or plan to, quietly. Such is the gravity of the crisis that the South African public enterprises minister, Lynne Brown, has asked investors to talk to her directly on concerns they might have about SOEs. That might seem like a proactive move. But it brings to fore the institutional deterioration there is, if that is what it now takes to reassure investors. She would probably be ignored. Mr Zuma’s cabinet recently announced a presidential co-ordinating committee for SOEs would be set up before year-end. Add to that, the beleaguered national carrier, South African Airways, announced last week, it would need at least US$1 billion in loans for immediate use to fend off a looming liquidity crisis that could cause the grounding of some of its aircrafts and so on. Even as the revelation is a stinging indictment of the carrier’s management led by chairperson, Dudu Myeni, who has been severally accused of mismanagement, Mr Zuma is unfazed: Ms Myeni has been re-appointed.

As if all these were not enough, the South African cabinet last week supposedly considered the constitution of a judicial enquiry to investigate the propriety in banks’ decision to pull the plug on firms owned by the Gupta family – wealthy Indian immigrants whose close ties with Mr Zuma, have been a source of tremendous controversy, based on a press statement (1 September) released by mineral resources minister, Mosebenzi Zwane, who chairs an inter-ministerial committee on the matter. After an uproar, in the press and by market participants, at such brazenness in the face of a struggling economy and already nervous investors, Mr Zuma’s office disowned Mr Zwane’s claims, regarding them as his personal opinion. Had it gone ahead – not that it wouldn’t in the future (in one form or another) while Mr Zuma is still at the helm, the enquiry would have had the mandate to review key banking laws, with the ultimate aim of curbing the influence and powers of the Treasury and South African Reserve Bank (SARB). These series of events in Africa’s most industrialized economy have been viewed in a very negative light. And rightly so. One of the likely consequences may very well be an all but certain ratings downgrade to junk status before year-end by one of the three leading rating agencies, SPGlobalRatings probably.

News that Mr Gordhan might be arrested on graft charges broke last week. Even after fervent denials, the police insisted Mr Gordhan show up at its offices for questioning. As was his legal right, Mr Gordhan declined. To avoid a potential media backlash – the typical refrain is that no one is above the law, Mr Gordhan’s lawyers presented an elaborate testimonial of how much cooperation their client had already offered the police. That is beside the point though. The officials of a well-run government should not have to work at such cross purposes in full glare of the public, especially considering how sensitive Mr Gordhan’s treasury portfolio is. Even as Mr Zuma has made numerous statements about how much confidence he has in his finance minister, even making him come along to the G20 meeting recently held in China, it is abundantly clear they are not on the very best of terms. It may be just the right time for Mr Gordhan to take a bow – my column of 1 March 2016 (“Gordhan’s burden”) might be worth a read.

Take heed
The South African experience is just an example of the potential costs to an economy when politicians begin to interfere – often untowardly – in how supposedly independent and reputable institutions are managed. There are lessons in the whole saga for the Nigerian government, which is currently contemplating more aggressive interventionist measures to stem the tide of a now officially confirmed economic recession. To think only just recently, political meddling at the Nigerian central bank, proved to be tremendously costly. Unfazed it seems, the Nigerian government is believed to desire the lowering of interest rates by legislation, akin to that recently done in Kenya. An economic emergency declaration is also being mulled: it could involve asking banks to issue loans to specific individuals, companies or sectors, irrespective of their risk profiles, determining how interest rates are set, deciding who gets foreign exchange (and at what price) and so on. Such moves would be received negatively by market participants. In the event, Nigerian authorities might find planned foreign borrowings unpalatable, as international investors likely price in a higher political risk premium. Already red-eyed foreign investors would not suffer fools gladly.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz. http://www.businessdayonline.com/en/political-meddling-costs-economies/