Agusto FX projection: Fiscal, monetary authorities guilty of poor forex inflow management

Aprojection by leading African and Nigeria based credit rating agency, Agusto & Co, of huge potential foreign exchange inflows into Nigeria, appears to expose a serious lacuna in the management of the inflows and the economy by both fiscal and monetary authorities.

Agusto & Co will provide fuller details and explanations on its key projections on the economy for 2022 on Thursday, but in an advanced briefing note made available to Business a.m., the company projects that Nigeria’s foreign currency inflows of $90 billion will be more than twice its foreign currency debt of $44 billion at the end of 2022.

Agusto & Co goes on to add that, “This means that Nigeria needs only 6 months of USD inflows to liquidate her FCY [foreign currency] debts. Kenya needs three years’ FX inflows to liquidate her FCY debts,” it attempted to draw a comparison.

In what seems to suggest that Nigeria should not be having problems giving the foreign currency inflows that come in from different sources, the rating agency adds reassuringly that, “We, therefore, believe that Nigeria will continue to meet her USD obligations comfortably – at least in the near term.”

A few economic and financial analysts have picked up on that same positive projection especially in relation to the size, viz-a-viz Nigeria’s foreign currency debts, with some saying the country is actually in a good place and wondered what could really be wrong with the management of Nigeria’s total foreign exchange inflows. 

Enitan Sanusi, an economist, banker, and entrepreneur, who has seen the Agusto numbers, told Business a.m., “It got me scratching my head somewhere… if we are to take its projection that ‘aggregate foreign exchange inflow in 2022 will be around USD 90 billion compared to projected debt of USD 44 billion as at the end of 2022.”

He said what this shows is a “potentially resilient economy with consistent FX inflow mix of increasing oil and gas receipts, direct and portfolio investment, trade credits, concessional loans, Eurobonds to moderate devaluation, subdue imports inflation and maintain decent GDP growth rate of 5-6 percent in 2022.”

Sanusi said he is concerned though about how to rein in what he termed a ‘Helicopter-type’ monetary authorities with a penchant for “spraying printed paper Naira not backed by forex inflows, to create massive economy gullies and craters of distortions, rents, inequalities, rigidities, resulting in declining revenue, high cost, low margin, losses and all manners of disincentives, destruction of the real sector that creates jobs, grow incomes.”

Sanusi’s concerns are those shared by a broad number of analysts. And in what is practically an election year the fear is growing about the possible actions or inaction that would ensue with regards to managing the Nigerian economy.

With crude oil prices continuing to rally in the international market and many analysts, including internationals like JPMorgan, Morgan Stanley and OANDA taking a bet on the possibility of a three figure price for crude, analysts looking at the Nigerian economy have been positive in their 2022 outlook for the economy.

On Thursday when Agusto & Co makes a detailed presentation of what they see for the economy in 2022, they will also be telling their clients that they have made a projection call of real GDP growth of 3-4 percent, which they have summarily said will be driven largely by the services, manufacturing, and oil and gas sectors of the economy.

They will tell businesses that in 2022 they will need to deliver an ROE that is above average inflation of about 15 percent; and that financial services businesses will struggle to meet this hurdle rate largely due to negative regulations and a higher effective tax rate.

They are also projecting that there will be weak performance by quoted companies and the apathy of foreign investors towards the Nigerian stock market mean another lacklustre year on the NGX.

The country’s population is projected to grow at 2.5 percent, a rate at which they will eat the bulk of the real GDP growth of 3%-4% we have projected, the rating agency wrote. “This means that real GDP per person will still be below ₦383,000 for 2015,” Agusto & Co said.

They also project that real wages of employees who work for the key businesses in the real sector will continue to fall and that unemployment will continue to rise as school leavers join an economy that is weak at creating jobs.

The rating agency is also making the call that average inflation for 2022 will be higher than the long-term (ten-year) average of 12 percent but that it will be lower than the average of 17 percent in 2021.

“The gap between demand and supply of goods and services will continue to put an upward pressure on inflation, while improved supply of USD will moderate currency depreciation and thus imported inflation,” the rating agency also said.

It added that the Central Bank of Nigeria (CBN) will continue to manage Naira interest rates, adding that, “We, therefore, believe that the yield on one-year FGN treasury bills will remain below inflation in 2022. This negative real return will increase speculative demand for foreign exchange (FX),” Agusto & Co said.

Last year,  it said savers earned, on average, seven percent return on one-year FGN securities but those who went into USD earned a 20% return as exchange rates moved from N470/$1 to N563/$1 in the parallel market.

On dollar interest rates, Agusto & Co said interest rates measured by the yield on FGN’s 10-year USD bonds averaged 7.1 percent in 2021 compared to 1.4 percent on those issued by the US government.

“This translates to a country risk premium of 5.7% on the FGN bonds. The premium that the FGN pays in this tenor bucket relative to the US government is usually 400-600 basis points. We expect this premium to be around 500 basis points in 2022.

“Uncertainties about the 2023 elections will put an upward pressure on this premium but this should be moderated by improved oil and gas export revenues,” they wrote.

The rating agency also alluded to the challenges banks are facing with regards to regulatory control. For instance, they observed that at the end of 2021, mandatory Cash Reserve Requirement (CRR) of banks stood at about 35 percent of local currency (LCY) deposits, but stated that, historically, cash reserves were between five percent and 10 percent of LCY deposits.

“In Ghana and Kenya, they are currently 8% and 4.25% of LCY deposits respectively. In addition to these mandatory CRR, Nigerian banks hold “special bills”, issued by the CBN, that bear interest at 0.5% per annum. These “special bills” are not easily convertible into cash and are, in substance, interest bearing cash reserves. We estimate that cash reserves (including interest bearing cash reserves) were about 50% of LCY deposits at the end of 2021. We do not believe that the CBN will reduce this ratio significantly in 2022 as it continues to see this as a major instrument for maintaining “stable” exchange rates,” they also stated.

Also looking into the future of 2022, ubiquitous economist and much sought after commentator, Bismarck Rewane, presented his outlook for the economy at a FirstBank of Nigeria virtual meeting, where he described 2022 as a year of two halves.

According to him, if Nigeria goes into reform, it could be one half, adding, however, that reform could be impeded by political considerations and labour union activities.

Rewane said insecurity could prove tricky to contain and will become a political campaign tool for the opposition this year.

He projects the CBN to increase forex supply to manufacturers and ease currency pressures, and that pre-election spending will be positive for aggregate demand and will boost corporate performance.

Declining inflation will be positive for consumer purchasing power, said Rewane, adding that monetary tightening in advanced economies could trigger capital outflows.

He said oil prices will remain relatively stable, but that real GDP growth will be sublime, adding that competition between traditional banks and fin-techs will intensify and force banks to reduce or eliminate transaction costs.

It is banks with constant innovation and regional diversification that will remain resilient, Rewane stated.