CBN’s Rate retention risky for investment

YES. I STILL EXPECT THIS YEAR to be different. The reason is that most of our peers have been completely eliminated. We had the fear of the election and now the election has come and gone. Even, surprisingly, after the controversy that trailed the election, for the first time in the country, we are...

Mallam Kasimu Garba Kurfi is the Managing Director/Chief Executive Officer of the APT Securities and Funds Limited, and a prominent player in the Nigerian capital market. Kurfi exclusively spoke to OMOBAYO AZEEZ of Business a.m. on Friday. Among other issues, he addressed the state of the economy, capital market’s rise and fall, government’ budget and market performance envisaged in Q’4. EXCERPTS: Starting with the equities market, it ended year 2018 with a loss of about N1.9 trillion. Did you expect year 2019 to be any different at the beginning of this year?

YES. I STILL EXPECT THIS YEAR to be different. The reason is that most of our peers have been completely eliminated. We had the fear of the election and now the election has come and gone. Even, surprisingly, after the controversy that trailed the election, for the first time in the country, we are getting Presidential Court of Appeal decision on the matter in less than 90 days. So, I can tell that over 90 per cent of fear of the elections in the capital market has been expunged. So, we no longer have that fear.

Lull greeted the capital market while investors awaited the president to form his cabinet. What is your appraisal of the cabinet vis-à-vis investors’ expectations?

Today the President has established his cabinet and he has assigned portfolios with strict and straightforward mandates. And he stated it very clearly that assessment of the cabinet will be carried out monthly and quarterly. Not only that, he said each and every one of the ministers has been given platform for assessment. And therefore, they know what they are expecting and they know the deliverables and they have to deliver. Not only that one. Today, we have less confusion. Where you merge three ministries under only one minister no longer exist. Most of the ministries have been separated and assigned and out of this assignment, 13 of the ministers were returned to office and those ministries are very critical to the economy. Take, for instance, the minister of finance, minister of works, minister of foreign affairs, minister of transportation, minister of justice and others. These are very key ministries. If the Minister of Finance has to learn on the job before she starts going, she will retard the economy. But she is somebody who was in the ministry. She will only go back and continue from where she stopped. She knows all the outstanding issues and she knows all her expectations and I can assure you, with that arrangement, things would be faster and better.

Nobody needs to be told the importance of the ministry of works. The ministry is one of the key ministries to any serious government. Roads are in bad shape and we need them to be put in better shape. And as you can see, before, it is under an existing minister who knows [the] ins and outs of it. As soon as he was inaugurated, he brought so many reviews of existing projects that we’ve never seen the end of. Now, he comes with a review and the Federal Executive Council has just approved it; and now, we are expecting deliverables because they know [the] ins and outs, they know the problems and they don’t need anyone to guide them.

The same thing goes with the ministry of education. If

Ordinarily, the MPR should be at the same par with the inflation. If inflation is 11 per cent, the MPR should be at 11 per cent. And if MPR is at 11 per cent, I can tell you that all other instruments are likely to go to single digits

you want to move far, you must move with education. The current minister of education had already done four years and this time, we have the same minster on the scene. Go and check the history of education. We have never had a minister that spent three years. But now, this one had spent four years and he has been given another four years. He does not need any tutelage and he will just keep going.

The case is the same with the ministry of foreign affairs. Your relationship with others is very vital and this relationship must be continuous and on-going. This is a minister that has spent four years for the first time and has been given another chance to continue in that ministry. So, our foreign affairs are a known deal and so all the agreement entered into with the previous government is likely going to continue because it is the same minister. The same thing applies to transportation. We cannot compromise transport. Is it by water or rail? The same minister who had spent four years came back. Go and check the history of Nigeria. In the last 30 years, we have not had any minister that spent for years and was given additional chance. This continuity is likely going to reflect in all their outcomes because all the on-going projects at the same ministry are most likely to be continued and seen through to the end. For me, this is something that we can say is helping this government and we are expecting deliverables on all what they have promised because they identified the key ministries to the economy. Even the judiciary, there is no justice if there is no fairness. The minister of justice has been there for four years and now, he has been restored. This is also unprecedented in the ministry. These are a kind of continuity that has not happened before in the history of Nigeria. I believe that for the sake of the larger economy, this government has identified how key these ministries are and addressed them.

Regarding the Economic Advisory Council recently constituted, what is your take as an analyst?

The EAC list is very commendable and even the president’s enemies cannot contest it. People widely believe that regarding the economic team, he has done it right. Ask any serious person, if he is to be fair to Nigeria, and ask any person to bring the best brains of Nigeria that know the economy, understand private business and excel in how to move forward, there is no better than the team that he has established. Talk of Soludo, they know him everywhere; talk of Sagaji, he was once a lecturer, later in private sector and now to work with government. The same thing goes with others. So, when you look at the members of the team, the economic team has never been better than this. And the beauty of it is the number. I remember during the era of the previous government where they had members of economic team numbering more than 16 persons. What would be the views of 16 persons? You are not a magician. It will be very difficult to reach consensus. But with the current number, you can easily reach an agreement; and remember all these are economists. They know the ins and outs of it and if we cannot get it right now, I don’t think we will ever get it right again.

One of the key markets that reflect economic performance is that of equities, and as at today (Friday, 27 September), it stands in the red lane at -12.11%. With all the recent moves by the government regarding the economy and policies, do you see the market possibly rebounding in the last quarter to close the year on a positive note?

Well, it works in so many ways. If you remember by May, our All Share Index (ASI) lost over 13 per cent. Later MTN got listed and MTN has nothing less than 20 per cent of market capitalization. Its share price moved from N90 to N150 before it settled at around N140. If you look at it, from N90 to N138, it gained almost 50 per cent. If your capitalization is about 20 per cent and now you gain almost 40 per cent, that means your capitalization has moved from 20 to 25 per cent or there about. And what we have seen is that, that single introduction has changed our capitalization. And that also boils down to all our index losses by just two per cent by the end of first half (H1). At the end of June, our index went down to as low as two per cent. The losses arose as a result of listing of Airtel Africa in July. After its listing, it has lost about 25 per cent. And Airtel has a big capitalization in the market. It has about 15 per cent or thereabout and now by losing as much as 25 per cent, that actually brought our losses to double digits. However, by the time we ended the month of July, our losses were more than 10 per cent in that single month. But when the government continues to make positive statements, that impacts positively on the market. If you remember, when the president visited Japan, he made a very positive statement, inviting foreign investors to come and invest in Nigeria. Even recently when he received the German Ambassador, he invited them to come and invest in Nigeria. These are the kind of positive statements that the investing community wants to hear from the president and this should be complemented by the ministers. And what did you see? By the end of the month of August, the index lost just about two per cent. Today, as I am talking to you, the ASI in the month of September lost just about two per cent, and we still have two days to go. So, it is not impossible to wipe all the loss in September with either positive or break even without loss. If all indices close on what they closed in August, it gives you hope that we are in the last quarter and in the last quarter mostly, there is adjustment by the institutional investors and by the foreign investors. By then, the investors have kick-started seriously and therefore, we are likely going to anticipate positive change, both in terms of the markets and in term of the economy because our investing will start reeling out in the last quarter. And all these add to our economy. We envisage that the market will likely bounce back in the last quarter. So, it is not impossible for the last quarter to end up with marginal loss of single digit or even break even.

All these are possible because most of our stocks’ earnings are very strong and they have proven this beyond reasonable doubt. And I am telling you that most of our stocks are trading at PE ratio of less than six and this is far below the expectation in the frontier market such as ours. Most of the PE ratios in frontier markets are eight and above while ours is trading at six. Even for sake of balancing, we anticipate more inflow into the Nigerian market and then, it is likely that many of our stocks will go up. Looking at the dividend yield also, currently quite a number of companies are trading with dividend yield of 12 per cent, 13 per cent, 15 per cent. You can hardly get these anywhere in the world. So, we have what it takes. And don’t forget that there is another policy that will likely bring more foreign investors into Nigeria and the economy will be better, and the markets will also bounce back.

Lately, investors seem to have shifted attention to less risky assets. For that, the fixed income market has received more attention, what is your appraisal of this situation?

What led to this is the insistence of the MPC (Monetary Policy Committee) to sustain the monetary policy rate (MPR) at that level. Today we are talking of inflation of 11 per cent, why should the MPR be 13.5 per cent? Ordinarily, the MPR should be at the same par with the inflation. If inflation is 11 per cent, the MPR should be at 11 per cent. And if MPR is at 11 per cent, I can tell you that all other instruments are likely to go to single digits. If they go to single digit, that would promote more borrowing by the manufacturing sector to expand their production and employ more people and reduce the rate of unemployment.

If the CBN would have looked at it like this, it would have been better. Now they have only one meeting left in the year. At the last meeting in September, they maintained the MPR and others and this is where our major problems are. We believe that since the inflation is now 11 per cent, the CBN should try to address the MPR. If they do that, there will be lower cost of lending and therefore, more manufacturing companies will borrow especially now that the government has tested it and closed the border. By closing the border you are blocking the importation of foreign goods and therefore encouraging the local companies to produce more. And if they do so, Nigeria alone has a big market to consume it. We are talking of a population of 200 million people. You can imagine. And notwithstanding, even with the closure of the border, nobody stops you to come into the Nigeria borders, to buy Nigerian made goods and take it out. It’s never stopped. The border is never closed to any such legitimate deals. Most of our neighbours rely on us and we expect that most of these measures will work for us. We believe that the market can do better and the fixed income can go lower. Once it goes lower, it will encourage the equity market. So, the shifting into fixed market is simply because of the CBN’s insistence to hold the MPR at 13.5 per cent. So, if they can temper that one, I can assure you there will be more adjustment in the equity market.

Regarding the latest recapitalization mandate given by NAICOM to insurance companies, what impact is this having on the market regarding how the insurers struggle to raise capital to meet this requirement?

You see, we are going into a different dimension. Anybody who knows accounting will know that we have a big challenge. Recently, WAPIC announced to the market that they are coming with the right issue at N0.38 for a par value of N0.50. The par value is the amount recognized in your books. Now if you are coming to the market at a discount below the par value, what it means is a reverse. You know most of the companies came at a premium: N0.50 at N1, at N2, N3. What it means is that the par value of N0.50 will be recognized and the difference will be pushed to the premium. Now, it is the reverse. Once they are coming at discount, the par value must be reflected in the book even though you are buying it at N0.38, the par value will be N0.50. And therefore, as you are buying at a discount, the insurance companies should augment for the discounted value to add to it to write in their book value. So, this is the different dimension that is happening in the market. I want to see how the regulators and the financial reporting accounting look at this issue and deal with it because if it is not properly treated, it is likely going to be a problem to the books. But I can assure that most of the insurance companies except very few will have to come below their book value. And this is an entirely new dimension that we have never experienced in the capital market.

The federal government just proposed a budget for the fiscal year 2020, wherein it intends to spend N9.17 trillion and generate N7.17 trillion, provided this is approved by the national assembly. Do you see the numbers as appropriate for the current state of the economy?

On the budget, it is just the term of reference that has been sent to the National Assembly for approval. The National Assembly can approve or adjust it. What I am very certain of is that when you look at the budget, it is only marginally an increase of less than 10 per cent compared with 2018 budget. If you take 10 per cent and today, inflation is 11 per cent, is it a growing budget or the other way round? The budget has not increased and we need better than that. If you want to deal with the inflation at 11 percent, the minimum increase should also be 11 per cent so that you can sustain what you’ve done in 2019 in 2020. And don’t forget that our gross population grows at 2.5 per cent and today, they are forecasting a GDP growth that is lower than that. So when members of your family are increasing, and you outsource your income, are you getting better like that or getting worse? We need to wake up, we need to rise, and broaden all our sources of revenue to ensure, for instance, that all and sundry pay tax, and that this tax is properly accounted. If we do that we will be better off. Go to all other economies in frontier economies especially in Africa, they generate more than 10 per cent of their GDP as tax. Today, we are generating less than eight per cent and that is not good enough. They have just recently proposed to increase the Value Added Tax from five per cent to 7.5 per cent. What that means is 50 per cent increase in VAT. I can tell you, in South Africa or Ghana, none of the African countries charge VAT for as low as five per cent, except Nigeria. VAT has gone far. If you go to many developed countries, they charge VAT in double digits, no single digit. They believe it is a source of revenue and they charge it because who pays is the consumer. But now, we have only moved it by 50 per cent to 7.5 per cent. If you compare it with the developed countries, you will see that we are the one charging least VAT. Therefore we need to look inward and charge all our sources of revenue and ensure that we earn more from outside the oil.

APT Securities is listed by the Nigerian Stock Exchange among the top performing dealing members, year to date. What philosophy drives your operations?

I think it is all about being focused. Anybody who knows APT will never derail. Today, we have large number of branches that cut across the country. I think with the exception of one or two brokerage firms, no other one has as many branches as APT does and all these branches are functioning. Another thing is to have a niche. When you get your niche right, you will do things differently and be different. We do this and hope to persist on it. Doing things different from others’ is key. Also with our App, APT App, you can trade from anywhere in the world. Some of my clients outside the country trade conveniently using the APT Mobile App. With your handset, you can trade anywhere. This is an offer we have brought and it is working for us.

We need to wake up, we need to rise, and broaden all our sources of revenue to ensure, for instance, that all and sundry pay tax, and that this tax is properly accounted. If we do that we will be better off

Kurfi