Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, He is well versed in the various factors affecting the currency markets.
Prior to joining FXTM, Lukman spent two years as a research analyst with international currency broker FXCM, where he focused on technical and fundamental analysis of the global currency, commodity and stock markets.
Lukman was also responsible for leading educational seminars for international and local high net worth individuals, and has published a series of educational articles on forex trading with City A.M.
In this interview with Ugo Onwuaso, Lukman shares his thoughts on the state of currency pairing in Nigeria and a whole lot of issues concerning global trade crisis.
What is your thought on the state of currency pairing in Nigeria (Naira/Dollar)?
That is every interesting question you’ve asked, right now before I share my thoughts, it’s good to just see what other currencies are doing, so we’ve seen the Turkish Lira crisis, we’ve seen global trade tensions, we’ve seen the uncertainties across the globe and this is spot risk aversion and reduced appetite for a lot of emerging market currencies but interestingly the naira has still witnessed stability, now the reason why the naira remained stable is because the central bank of Nigeria continues to intervene to support the local currency and the reason why the CBN continues to intervene is simply because of oil prices, as long as the oil prices remain at the elevated level the naira is likely to continue to remain stable.
Now my long term outlook for the naira is what we can see is a short fix to a longer term problem. If oil prices start to trade low due to oversupply concerns the CBN may not have as much reserve to support the local currency and this can actually end up weakening the naira.
You talked about globe trade tensions crisis, how could that impact on Nigeria?
There is a broad impact and there is direct impact. The broad impact is that we know that if the global trade tensions escalate to a full blown trade war, it has the ability to not only destabilize global growth but create instability.
Now this instability would create uncertainty and any type of uncertainty investors are likely to remove their capital away from emerging markets to more safe heavens stable economies. So Nigeria is going to be directly hit by that.
Now we know that the two biggest trading partners of Nigeria are the United States and China, so naturally if they get hit by trade war the impact will be felt in Nigeria.
Could you explain to us the implication of double digit interest rate in the country?
This is a big question, so for an extended period in Nigeria we have seen that interest rate has been on 14%, now at the 14% rate its quite high because at this level small businesses are not willing to borrow and in that case this is somewhat impacting growth.
Initially my thoughts was that the CBN will see this and cut interest rate to 12% at the end of the year but now the CBN’s decision is going to be impacted by domestic and external factors .
So domestically we know that elections are coming up by February so of what we’ve seen yesterday that inflation dropped to 11.14% which is a welcomed development for the CBN the cost push inflation situation may cause inflation to rebound.
Secondly I heard that in September there’s going to be a national minimum wage; if this actually becomes reality then Nigerians are going to have more money to spend and this is going to push consumer prices high.
Outside of Nigeria, look at the Federal Reserve, the Federal Reserve raised interest rate two more times, yes so we have a situation where there’s going to be the Fed raising rates and the CBN cutting rates, so this will simply widen the monetary policy divergent between the Fed and the CBN and ultimately this will accelerate capital out flows from Nigeria and this is a loss for Nigerian needs, so right now over 14% it’s a worrisome level for interest rates, CBN may eventually still try to take action at the end year.
Now for the CBN to take action three things need to come into place. Number one, GDP growth for Q2 which is going to be released at the end of the month needs to be very positive.
Number two, even though we’ve discussed about cost push inflation scenario we still need to see inflation in Nigeria moderate close to probably 10%, and finally oil prices, everything hangs on oil prices, unfortunately even though Nigeria continues in his quest to diversify ways for more reliance, its fortune still remains tied to oil.
So as long as oil prices remain at the elevated level and government has the revenues enough to support the naira, the CBN can cut the current interest rate to 12% at the end of the year.
What do you think the economic outlook will be with the election coming up next year?
We know how important Nigerian election is, it’s so big that the amount Nigeria uses on election is even more than the United Kingdom and Canada and these are more developed nations while Nigeria is still emerging market nation.
So naturally there’s election risks and uncertainty, this uncertainty may somewhat impact well, at the same time as we see at Nigerian stock exchange, shares are going down simply because of investors are hesitant to hold risk assets ahead of the election.
So we can see a situation where growth may be impacted until the election results.
Now it has become a pattern that stocks in Nigeria rebound after elections, it’s a pattern for the past ten years, every time there’s an election, the year before the election we see stocks trade low after the elections the stocks trade back higher but we can see something different this year.
Ten years ago Nigeria was not in recession; ten years ago oil prices were much higher than they were right now, ten years ago the Federal Reserve’s externally was not raising interest rates, so based on these things Nigerian stock market was able to rebound and we know that the stock market, is another form of showing how healthy the economy can be but we can see a situation next year where even after the elections the stock markets remains depressed based on the many negative external risk factors that continue to weigh on investors sentiment.
What do we need to do in order to grow our GDP?
That’s a very nice question you’ve asked, so right now what we can see is that last year there was strong push in diversification, everybody was speaking about diversification and we have seen some impact even though GDP growth in Q1 was 1.95% it’s slightly slow, we saw some impact in Agriculture output.
The growth of Nigerian GDP still remains in diversification but my worry is the fact that oil prices are trading where ever its trading right now, there could be some complacence that can come in, meaning that everything is looking ok right now simply because oil prices are trading where they are, the IMF has expressed their warning, the world bank has expressed their warnings, what Nigeria needs to do is explore this period the oil prices are trading where they are to push further to Agriculture, you know unemployment in Nigeria is 18% and youth unemployment is even higher, you know Nigeria is been blessed with fertile lands, a very very young working force, when you put these two things together, the answer to Nigeria expanding its GDP goes to Agriculture.
How can Nigeria move away from oil as major export commodity?
So what Nigeria can do, Nigeria could follow by example and see what other nations have done, we know that Nigeria’s infrastructure is quite weak and any nation that has a weak infrastructure naturally will have a weak GDP and this is what is with Nigeria.
What Nigeria needs to do is move away from commodity, move away from oil and look at other sustainable sources; for example Nigeria could gain GDP via tourism, tourism is a very very good GDP earner, if Nigeria is able to fix its infrastructure, able to fix these bumpy roads, able to ensure that electricity is stable this would attract tourists and this could be another form of growth for Nigeria.
If you have the opportunity to lead the economic team of this country, what would you do differently?
We know that diversification is a very long term thing, it doesn’t happen overnight, so that would be running in the back ground, then what I will do is that I will try to cut interest rate because even though cutting interest rate may create a situation where capital outflows are accelerated, cutting interest rates will help the people of Nigeria because small businesses, SMEs will be able to borrow, will be able to have that confidence to borrow and this is how domestic growth will be built.
Looking at the naira exchange, the naira exchange right now has witnessed stability and people have started to see that this stability is artificial, at the start of the year, it looked like Nigeria’s improving economic conditions was the reason why the naira remained stable but for the facts that other currencies are depreciated and the naira still remains around 360 against the dollar continues to show that the Central Bank of Nigeria continues to intervene.
So with the naira exchange, I will look for ways to actually abolish the multiple exchanges because it’s a bit confusing, and this confusion continues to repel foreign investments, so we have the official rate, we have the black market rate and we have the different rates other central banks are using. We should look for a way to have one exchange rate.
And for that to happen the naira needs to free float, now for the naira to free float of course naturally this may accelerate inflation pressures and this may naturally impact the common Nigerian but a times short term pain maybe needed to have long term pleasure.