Crashing interest rate may stop forex inflows –Ebo, Afrinvest Securities boss

Omodele Adigun

As manufacturers in the country are clamouring for low interest rate, Mr Ayodeji Ebo, the Chief Executive Officer of Afrinvest Securities Limited,has cautioned that doing so now may cause sudden exit of foreign portfolio investors.  We know that we still need the foreign investors to be coming . But by the time they factor in the country’s risk premium; the risk they will take coming into Nigeria- If we bring down MPR, the treasury rate will drop to 10 per cent or 12 per cent- will that still be attractive to  the foreign investors ? We need the foreign exchange to continue to stabilize the economy,” he said.

At a public forum last week, Ebo took clinical analysis of the economy and outlook for the new year.



Coming home, our reserves consistently improved in the last one year from about $23billion , it currently hovers above $40billion.And this is what some of the foreign investors have seen that it provides confidence; We have enough arsenal to defend the Naira. Looking at the forex market, the forex market is very critical to Nigeria since we are import dependent economy. The rate at which the CBN intervened in the forex market in the third quarter of 2017 reduced significantly as a result of the progress we saw in the I & E window. The CBN had to clear a lot of backlog when the I & E window was set up. About $3.6billion was part of which CBN was used to clear the backlog. The I &E window was the saviour that have created stability so far in Nigeria that we have seen  so far since April 2017.

Though foreign investors were initially suspicious because of policy inconsistencies but as activities progressed and they discovered that the CBN was determined to ensure that this window works. In terms of policy, working with the FMDQ, when it started initially, they were not publishing the average volume on weekly basis. But now, we now have data and we can see how it has consistently improved month-on-month.A total of about $27.8billion in terms of transactions. And as of yesterday (Thursday January 25), it was around $300 billion worth of transactions was done through that window. We have seen the significant job of foreign portfolio investors. So we have seen the foreign inflows that the I &E window has attracted. But we still need to do a lot in terms of attracting Foreign Direct Investments (FDIs).But the Foreign Portfolio Investments (FPIs) also provide that liquidity in terms of the dollars. So the CBN intervention has reduced daily as a result of the activities the I & E window has been providing. By supplying the liquidity and also providing that confidence to the market.The current account balance has also improved significantly, expanding to about $9.9billion in nine months from about $2.7 billion in 2016.

Buying from the I &E window and selling in the black market may not give significant margin. That has helped to calm speculation within that space so far.


Based on projections, by the year end , we expect that the GDP should average around1.8 per cent. Inflation rate is also a factor that we have seen. Though by the rate it is moderating, it is below analysts’ expectation in terms of food prices. Food prices have been around 19 % to 20%. Food prices have remained very high because of the insecurity we have seen in the North East. That has been responsible for the high inflation rate.Now that we see some moderation in that space, we feel that it will be sustained in 2018.


For  infrastructure, we know that the government is doing a lot in that space. The Sukuk Bond proceeds of about N100billion was tied to 25 roads. This is very positive initiative because it is easier to trace some of those projects to a particular funds. If government can employ that kind of strategy, we feel it may be more effective. If they want to raise Eurobond this year, they should tell us exactly what kind of projects these funds will be channeled into. You can easily track them even if implementation is about 50 per cent; you can easily track and know what exactly the fund is used for rather than just raise the bond and proceeds channeled into paying salaries and servicing loans.


The increase in the crude oil prices has destabilised the price modulation model that was used then. When crude prices came down significantly, government should have reduced PMS price then. But since they did not implement that when crude prices went down. When crude oil price was around $45 per barrel, that was when that template at 285 was introduced. But when crude oil price was as low as $30, price of PMS should have come down. And if the masses saw that when crude oil price came down ,they reduced the fuel price , and now that is high , landing cost is between N175 and N180, it should have been easier for the government to raise pump price. But then, they were enjoying the spread within that space. And now, they have to pay for it.


Most of the challenges faced by the SMEs is funding. We know the Bank of Industry (BoI) is doing a lot in terms of supporting them, But the major challenge that has not been making some of the policies yield result is monitoring. For instance, if BoI has about N1billion available for funding SMEs, how do they track it for, say, six months even if 50 per cent of this can be repaid?That can also be channeled into funding another set of people. Most people saw it as national cake; what is coming from the government. We also have YouWin. We really can’t track how effective some of these policies have been in the past.


Looking at 2018, the way budget is done in Nigeria, we do budget on budget. And not budget on actual. Going by the nine-month figure that was released by the Fed Ministry of Finance, we try to annualize it. If you able to do this for nine months, what would you achieve in 12 months? And when you see the estimated actual for 2017 as compared to about N5.1 trillion revenue projected, government was expected to earn about N3.5trillion.You can see the significant variance of about 31 per cent. And despite that, government is proposing to double the revenue this year, maybe , through the tax initiatives from which they expect to achieve some mileage. I don’t think that would translate into doubling their revenue based on the actual, year-on-year. And when you look at the shortfall in the capital expenditure, the variance is about 13.6 per cent when compared with recurrent expenditure. Most times, the items at the receiving end is always the capital expenditure. The shortfall is about 76 per cent when compared to what the government planned for 2017. And for 2018, the deficit is about N2.6 trillion. Most times, you discover that if the government is not able to meet up with the revenue target, the capital expenditure will be at the receiving end. Although, this year is the year preceding elections, we expect to see a lot of groundbreaking projects. Maybe we may see improved allocation to capital expenditure so that the government will have enough grounds to campaign as we approach 2019.

So our projection for 2018 from Afrinvest is about 2.1 per cent. We expect growth to still be positive. Purchasing Manager’s Index (PMI) data has also been improving, inflation rate is moderating; forex has continued to ease. Part of what affected the economy last year, starting from about two years ago, is illiquidity in the foreign exchange.  Most companies that have ab initio reduced the business that they do, but with the stability in the forex market,  they can project for the year.

We hope that the government would try to sustain this stability that we have seen in the last 10 months in the forex market. And those are the factors that inform our 2.1 per cent GDP projection for 2018.

We expect that inflation will continue to moderate, although in the middle of the year, it is expected to pick up because government will be spending a lot this year because of elections.  We expect the Central Bank of Nigeria (CBN) to continue its own mop up. But for CBN to mop  excess liquidity through OMO and make it attractive to people, it needs to also increase the rate.

On forex, we expect that as we approach the end of the year, there will also be pressure on the foreign exchange because most times, the Naira will be converted to the dollar at the black market rate. On fuel, the government will continue to bear the cost of subsidy; NNPC will bear  the loss in terms of differentials in importation, bringing it in at over N170 and sell at N145.All these are expected to affect inflation rate as we approach the year end. But we don’t expect it to grow higher than 12.3 per cent for the year.

Interest rate

The CBN has proposed to bring down interest rate for the year. But looking at the reality, currently, inflation rate is still higher than the Monetary Policy Rate (MPR).We know that we still need the foreign investors to be coming in. But by the time they factor in the country’s risk premium that they need to see; the risk they will take coming into Nigeria- If we bring down MPR, the treasury rate will drop to 10 per cent or 12 per cent- will that still be attractive to  the foreign investors rather than investing two per cent in the US? Coming here to take 10 per cent, will that worth it by the time they factor in the risks? We need the foreign exchange to continue to stabilize the economy. So for us, we don’t see the CBN bring down MPR in 2018.Even if they try to bring it down, they will distort the equilibrium. They will be forced to take it up when they  see that the pressure is uncontrollable.

Capital market

In trying to profile what has happened in the equities market from 2006 to 2015, we saw a strong correlation between oil prices and the capital market as well as the external reserves. So it shouldn’t surprise what we’ve seen in 2018 in terms of the significant rally in the market. Though it is moderating, which is expected. The market is not expected to go all up for long time. People will take profit, which provides opportunity for new investors to coming at that particular level. That factor contributed significantly to the rally we saw in 2017 and also sustain into 2018.

Checking its 10-year- to-date performance, last year, the market broke the record, broke that losing streak of three years, 2014; 2015 and 2016. And the market closed, using Naira returns of  about 42 per cent and dollar returns of about 47 per cent.

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