Onaolapo: Investors’ Confidence in Nigeria Remains Strong

Managing Director/Chief Executive Officer, Eczellon Capital Limited, Diekola Onaolapo, told Eromosele Abiodun that strong fiscal and monetary policies have endeared the economy to foreign investors, even though there have been hiccups, especially the recent suspension of the central bank governor. He also spoke on his company's achievements since it commenced operations
Recently there were reports that foreign investors were no longer buying Nigeria's Treasury Bills because of the suspension of the CBN governor, what does this say about investors’ confidence in the Nigerian economy?
Investors’ confidence in the Nigerian economy is beyond the suspension of the CBN governor. A number of factors go into investment decisions and exposure to different countries and markets. These include detailed analysis of such target country’s macroeconomic indices.
Although, financial markets and securities are not the only measure of long term economic viability and interest of foreign investment in the country, an examination of the fundamentals of the Nigerian economy would show a struggling currency, dwindling foreign reserves, declines in crude oil production, and some other factors, which may be influencing investor confidence.
In spite of these, there are remarkable opportunities which will continue to attract foreign investment interests.
There are opportunities for high returns on investments based on the surge in the middle class, power sector reforms, mortgage reforms, industrialization policies, retail markets surge, and the continuing evolution of the telecoms sector, especially in data.
With these opportunities, Nigeria still remains an attractive investment destination.
The Nigerian economy is said to be growing at seven per cent annually but the majority of Nigerians are not feeling the growth. What is responsible for this and how can we remedy the situation?
There is a difference between growth and development. Essentially, the growth of the Nigerian economy, as stated above, refers to the growth in Gross Domestic Product – GDP. The drivers of GDP growth are consumption, government spending, investments, and international trade surplus.
These components have witnessed increase overtime. GDP growth however, does not really capture other factors such as income distribution, especially if the key drivers of GDP growth are in sectors that do not directly reflect the prevailing standard of living.
The primary index for development, on the other hand, is the standard of living, which in our case is still low, mainly due to uneven distribution of wealth and the inadequacy of supporting infrastructure like power, transportation, road, health care and to some extent education.
Although Nigeria is considered a middle-income, middle-class driven economy, what constitutes real middle-class living standards in the advanced world requires a high level of wealth in Nigeria. For example, a middle class family in the United States is a wealthy family in Nigeria.
The cost of providing basics – for average middle class lifestyle – is still very high compared to the disposable income of the middle class.
In addition, globalisation and the homogenisation of products, services and consumption pattern, coupled with advancement in technology exposes developing economies like Nigeria, to the taste of the advanced world. Therefore, a marginal increase in income is followed by a higher margin of consumption appetite and pattern.
The more the average Nigerian earns, the more aware he is of available luxuries and the more inadequate his earnings become.
The key to translating growth into development is for the government to accelerate its strides by making reforms that will facilitate a more even distribution of wealth, by channeling more resources into key sectors of the economy which drive development; especially in the provision of basic infrastructure to reduce cost of living and to promote entrepreneurial endeavours.
The multiplier effect would be a total exploitation of the value chain translating into reduced unemployment, increased access to other resources, amongst other things.
The fiscal and monetary policy of the Nigerian government seems to be at variance, while the Central Bank has embarked on tightening, the Executive wants to spend to boost growth and aid employment. How do you reconcile this?
I disagree. There is no variance about this. Fiscal policies include elements like tax, how government generates revenue and spends money to boost economic activities. Governments all over the world are expected to spend; in fact they are the highest employers of capital.
On the other hand, the monetary policy, as championed by the Apex Bank in Nigeria, is used to control the supply of money with a particular purpose or target in mind, called the “Forward Guidance Policy”. In Nigeria the Forward Guidance Policy has focused on reducing inflation and moderating the value of the nation’s currency – the naira.
Different countries have different targets for this policy. Japan’s for instance, is to increase inflation, and the Eurozone has hers at curbing unemployment.
To preserve the value and purchasing power of the Naira, the Central Bank has to step in to channel resources to sectors that need it and reduce excess money in the system at the same time. Instead of the policies (fiscal and monetary) being at variance, they are complementary tools.
Recently the federal government suspended the CBN governor Sanusi Lamido Sanusi and the impact was highly felt in money and capital market. How will his suspension affect investors’ confidence in Nigeria in the long term?
It is important for everyone to know that markets are not built around individuals but institutions. The actual impact therefore should be measured on the way the market perceives the independence of the Central Bank, because once independence is compromised, we should expect a correlative decline in the confidence of investors.
The only way to restore and therefore reinforce investors’ confidence is by assuring them of the independence of the CBN, coupled with the direction of the Apex Bank under its new leadership.
Considering the volatility suffered by the naira in recent times, some have suggested that there should be two regulated forex markets – one for essential goods and another for non- essential goods.  What is your view on that?
When we have two Foreign Exchange markets, there is a greater probability for increased volatility. Two markets will lead to more arbitrage and further work against the aim of currency stability.
Beyond the management and defense of the Naira, a longer-term solution will be to increase efforts aimed at improving the key drivers of economic development. This will facilitate economy-wide industrialization which would also make the country less import-dependent and thereby reduce the demand for forex.
The federal government has said it will continue with the CBN's tight monetary policy regime that has kept inflation at a single digit, but the manufacturing sector is suffering. What can be done about this?
Inflation cannot be considered in isolation, especially when discussing issues affecting the manufacturing sector.
The major problem of the sector is attaining competitiveness. They need to remain relevant as we face the influx of imported goods into the country, at low prices and enhanced value.
This still falls back on development. The major backbone stifling the competitiveness of the manufacturing sector has been power, but with the recent efforts at reforming the sector, we should see improvements.
The improvement in power will complement the government’s effort of granting intervention loans and influencing greater real sector lending by the banks.
In addition, further reforms that provide enabling environment for international brands to establish local production facilities, which utilize in-country raw materials and engage local labour, should be explored to facilitate knowledge transfer and alignment with improved processes based on international practices.
Innovation also has role to play in manufacturing competitiveness. Subsidized Research and Development investments will be a welcome boost to the sector in the long run.
The federal government has sent the name of the man to replace the suspended CBN governor to the senate, what advice do you have for him if cleared?
It is important to maintain the current economic policies, particularly the defense of the Naira and management of inflation. For an import dependent economy, a devalued Naira will lead to increase in prices and inflation.
We have heard figures regarding the size of the market for bonds. From an operator’s point of view, how large is Nigeria’s bond market?
The Nigeria Bond Market is relatively huge, and is in fact one of the biggest in Sub-Saharan Africa. Available figures peg it at over 7 trillion naira, with the FG having a huge share of the market at about 50 per cent. AMCON also has a significant share, with state government and corporate bonds making up the rest.
The three- and five-year tenors have been quite popular in these parts, which is more in line with investment outlook. How can government generate and build interest in the longer tenor bonds?
The strategy for investment in any kind of financial assets or securities is the prerogative of the investor, usually based on each investor’s unique investment policy to balance risk, returns and liquidity of their investment holding.
The longer term security of course has a higher maturity risk. The type of bonds favoured by investors depends on investors’ strategy, and it is not something that the government has control over.
For longer term securities, however, the government may court investors like the Pension Fund Administrators and Insurance companies who are long-term investors.
Is the appetite for investing in bonds among Nigerians strong enough to warrant a high level of optimism regarding the primary and secondary bond market?
Yes it is strong. The various reforms have made more money available to some institutions and these funds are available for investment in various asset classes. A thriving bond market provides an alternative to the dominant equities market and provides an opportunity to use another asset class for portfolio balancing.
Many have expressed fears at the federal government’s aggressive bonds’ programme. They argued that it could crowd out businesses from accessing credit. Is this really true?
Money is somewhat an emotional issue because of the fear of the lack of it or better put, the loss of it. For this reason, people would rather choose an investment with the highest attainable return at the lowest acceptable risk.
Government bond will be favoured because it is almost risk-free, gives a guarantee of return, regardless of economic performance. The opinion is that aggressive government bonds may pull funds from banks and other providers of credit to the detriment of private sector funding demand.
Whilst there may be some credibility to this, the Federal Government, through the CBN employs measures that facilitate the channeling of funds to the private sector. Some of these measures include the setting up of industry-specific funds such as the Power and Airline Intervention Fund, Agricultural Credit Guarantee Scheme Fund, Nigerian Incentive-Based Risk Sharing System for Lending, CBN Refinancing/Restructuring Fund for the Manufacturing Sector, and so on.
The real issue however is the overall business environment and the attendant high default risk of private sector borrowers. Another is the short-term preference of investors versus the longer term funding requirements of several sectors. These issues have to be dealt with through creative, broader-spectrum reforms.
Private equity investors are not in high number in our clime, want can be done to improve the market.
I beg to differ on this point of view. Private equity investors are budding in the country. That is why it is called “private” equity – they may not be so publicly known.
According to the Africa Assets Data, Private Equity Firms invested USD1.13 billion across Sub-Saharan Africa in 2012. The top 3 investment destinations were Kenya, Nigeria and South Africa. In fact, West Africa had the highest number of deals by region with 20 deals out of 58 deals, with South Africa trailing behind at 15 deals.
Prior to 2013, there has been a focus primarily on manufacturing, agribusiness and financial services, but from last year, infrastructure has topped the chart with sectors like power and transportation driving these deals. So the Private Equity segment, though very conservative, is very much thriving.
The capital market is gradually recovering from the 2008 financial crisis but the IPO market has since dried up, what is responsible for this?
The impact of the 2008 global financial market crisis was heavily felt in the Nigerian stock market. Many investors made significant losses on their investments and overall investor confidence suffered a great set back.
When this happens, and an equities market dips, companies are less likely to raise capital through the stock market due to the negative attitudes investors would have.
Moreover the entire economy is still emerging from the effects of the global economic recession. Therefore, many companies which could have been raising funds from the equities market are just restructuring and repositioning.
But as you mentioned, investor confidence is improving and there have been increased activities on the Exchange. We are aware that a number of companies are engaged in preliminary activities for primary issues.
As a player in the issuing house business, is there hope for issuing houses given the capital market crisis and can you take us through activities in the sector in the last two years?
Issuing Houses engage in assisting in capital raising exercises, through the issuing of new financial assets/securities and offering such in the capital market. Issuing Houses also advise corporations and companies on business combination endeavours such as Mergers and Acquisition.
In the last two years, the finance requirements in the private and public sectors have seen capital raising activities increase, with about N260 billion worth of bonds issued by State Governments alone. The debt-issuance was the main activity in the issuing house space, because, as mentioned earlier, the equities market had not fully recovered from the dip of 2008.
The outlook is however promising, with effects of the reforms in the power sector expected to impact equity issuance for the refinancing of acquisition capital used in the PHCN and NIPP divestment exercises.
Also, reforms and evolution of certain sectors are expected to initiate some mergers and acquisition activities.
Eczellon Capital has been operating in the financial sector for three years; can you relate your experience?
Eczellon Capital has been operating as an investment bank, with specialization in corporate finance and advisory services, that is, business, financial and project advisory services. We are licensed by the Securities and Exchange Commission (SEC) in Nigeria to also practice the business of Issuing House.
Within the three years of our operation, we have been privileged to work with players in key sectors of the Nigerian economy, such as power, oil and gas, financial services, commercial real estate and retail and so on, with both public and private sector clients.
This exposure to the African market is the core of our experience, which makes us realize that professional firms like ours have a lot to contribute to the growth and development of Africa.
Our experience is that although Africa is the new frontier for global economic growth, it is still a land of unfulfilled dreams. The African Dream has not been fulfilled, not for lack of potential, but for lack of access – access to the real tools which power dreams. These tools are finance, with quality education and advice to the agents of economic growth and development, that is, businesses, governments and even individual entrepreneurs.
Our belief at Eczellon Capital is that the African Dream will come from the emergence of real entrepreneurship and the sustainability of businesses, backed by the effectiveness of government in providing an enabling environment.
We have seen that governments alone cannot deliver all the developmental goals for our country and continent. The private sector will have to lead this charge and professionals, like investment bankers, will need to support by leveraging their expertise to create the desired future.
We, at Eczellon Capital, seek to continue our participation in the deepening of the economy by assisting businesses, governments and even individuals create innovative ideas and implementing them by providing suitable financing and expert advice.
What do you do at Eczellon Capital and what are some of your achievements?
As mentioned earlier, we are an investment bank operating the business of issuing house, corporate finance and advisory services. But beyond that, we are a firm that creates opportunities for our clients and stakeholders to attain their dreams.
So far, Eczellon Capital has successfully worked with its clients in creating solutions that ensure these clients have the tools they need to grow their businesses sustainably and deliver value to their stakeholders consistently.
An example is a client which started as a mid-size Operation and Maintenance services firm in the oil and gas sector. We worked with this client in developing growth strategies, structuring strategic investments and raising capital. Today, this client is a fast growing integrated energy group.
We also acted as transaction advisors to some of the consortia in the NIPP divestment with responsibilities spanning transaction coordination and capital sourcing. Also in the power sector, we are currently working with a number of clients in the process of establishing green field independent power projects.
We are also currently engaged on mandates in financial services including capital sourcing for the restructuring of a mortgage institution and advising on a business combination exercise in the insurance industry.
We are working with a telecommunications company implementing a strategic expansion with the roll out of a new generation data service to complement its existing operation.
Essentially our focus sectors have been energy, power, oil and gas, financial services, infrastructure and the public sector.
Our approach to mandate engagement has also helped us gain the trust of our clients. We seek to create real solutions to our client and stakeholders’ needs, by first obtaining deep level knowledge about those needs, and then deploying our creativity and innovation to develop new approaches to business challenges and investment considerations. 
We provide hands-on approach by taking interest in our client’s business, empathising with their needs and developing solutions which truly answer to these needs.
What are your immediate and long term plans?
Our plan is to grow into a leading financial services powerhouse on the African continent in the foreseeable future.
Our goal is to be established as investment banking experts who operate at the highest standards of professionalism in the industry and are therefore trusted by our clients and valued by our stakeholders.
On the medium term basis, our ambition is to be a top investment bank in Africa that consistently delivers value to clients and shareholders, and attracts and retains employees who take pride in working for the firm.
In the short run, we are concentrating on expanding our client base through the development of tailored solutions for our sectors of focus. We are also fostering strategic partnerships with key international investors who are seeking opportunities for high return engagement of their capital.
In addition, we are actively engaging the public sector in creating solutions to infrastructural gaps and to aid governments, especially at state level in increasing revenue through our tailored IGR strategies. Our approach is research-based project development for each client-state and to use our expertise in developing implementation strategies for the projects.
Our long term goal is to increase our footprint in the entire African market, supporting institutions of economic development – businesses, governments and even individuals – to create what will be African legacies to the world.
Given your experience in your sector, how do foreign investors see the Nigerian economy?
The attractiveness of Nigeria for business and investment has significantly improved over the last decade, leading to increased foreign investment. However, there still remains some level of uncertainty occasioned by over-heated political dynamics, regional unrests, and “perceived” economic instability.
In spite of this, the Nigerian market cannot be ignored by foreign investors. Our socio-economic parameters, such as population size, culture, youth et cetera make the country an exciting market, with remarkable potential for growth. Foreign investors see this and want a piece of the action.
Upon the conclusion of the GDP rebasing exercise by the National Bureau of Statistics, Nigeria will rank as the biggest economy on the African continent. Per capita GDP will increase by almost 70 per cent.
Various new sectors will emerge as active contributors to the economy beyond oil and gas and agriculture, and you will see a fairer representation of the market including sectors that are engaging the large youth population, such as e-commerce, retail and entertainment. All these, present exciting prospects to foreign investors who seek growth sectors to which their capital can be deployed.
Nigeria is no doubt a challenging environment to do business compared to relatively stable markets of the advanced markets. The challenges however are quite obvious to foreign investors who have been doing business in Nigeria and despite these challenges their interest has not waned.
A growing number of foreign investors are beginning to realize that one of the errors of judgment in looking at Africa as an investment destination is to think of Africa as one market, with a homogenous risk profile. The continent and the various countries therein, are diverse markets with peculiar traits.
Therefore, foreign investment into projects and businesses are being considered on a case by case basis, with deep, common sense evaluation of the real risks and not by perception based on sensational media reporting.
The key thing for foreign investors is to understand the real factors impacting their investment and what the trends are really saying.
For instance, three years ago, an investment in Ukraine would have been considered a low risk investment, relative to a similar investment in a country like Nigeria. Today, however, the reality argues differently?
This is why many foreign investors are partnering with local firms in advisory services and investment banking who have a better understanding of the local market terrain.
For instance, at Eczellon Capital, we have developed relationship with foreign investors who trust our judgment on structured deals, investment prospects and projects.lik
Various private corporations and businesses are innovatively dealing with issues in the market and are thriving. They are also able to post decent returns to their investors.
This is increasing the size of the quadrant of “low risk, high return” opportunities, which discerning investors are tapping into, especially in mid-size emerging sectors.

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