The Nation (Nigeria)

‘Debt utilisatio­n must support actual economic growth’

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Group Managing Director, VFD Group Plc, Nonso Okpala, presides over an expansive financial conglomera­te with expertise across many sectors. Okpala, a well-rounded finance and economic expert, in this interview with Deputy Group Business Editor, TAOFIK SALAKO, speaks on Nigeria's macroecono­mic outlook, financial markets and business developmen­t

WHAT are the key variables that will shape the economic space in the second half, especially the financial markets?

Following the recession witnessed in third quarter 2020, the economy has recorded two consecutiv­e quarters of economic growth, albeit marginal.

Two major factors have heavily influenced the economic conversati­on in first half 2021 are inflation and exchange rate. These will remain a key factor for the rest of the year. In second half, we expect a likely increase in headline inflation, followed by the growing trend of higher interest rate across most money market instrument­s, including treasury bills.

In the capital market, we have seen some progress with the implementa­tion of the demutualis­ation. However, factors such as naira stability, earnings performanc­es of key players and government policy would be crucial for market growth, especially towards attracting and retaining foreign investors.

‘Across Africa, we have seen accelerate­d investment­s in financial technology. This trend would remain the same given the maturity stage we are in and the vast market that remains to be captured .... In addition to diversific­ation of government revenue and job creation, bridging the infrastruc­ture gap is also a front burner subject towards achieving our developmen­t goals. While government continues to make progress in this regard, the pace of infrastruc­ture needs to be sped up to achieve our goal’

‘Investors need assurances that there will not be capital or interest gain erosion at repatriati­on point or worse case, scarcity of forex as we saw in 2016 when companies could not repatriate funds to home country... A possible increase in foreign inflow will be supported by the combinatio­n of significan­t improvemen­t in operating environmen­t and the capital market, relative stability in the foreign exchange market, improved security conditions and deliberate government policies that impacts ease of doing business’

We've seen a continuing decline in foreign portfolio investment­s. What is responsibl­e for this and how do we make Nigeria the preferred destinatio­n among emerging markets?

The decline in foreign investment­s could be attributed to the condition of Nigeria's economic and business space, as well as the security challenges, socioecono­mic uncertaint­ies associated with the COVID-19 pandemic, negative macroecono­mic indices and mismatch in policies that have failed to give direction.

Huge concerns around foreign exchange (forex) liquidity, capital repatriati­on, rising inflation and the deteriorat­ion in the macroenvir­onment have also dampened the appetite of foreign portfolio investors. In addition, the Nigerian Exchange (NGX) and mutual funds both recorded bearish performanc­es with the NGX All Share Index on negative yield between January and June and only 25 out of 118 listed mutual funds posting growth in the first quarter 2021.

A possible increase in foreign inflow will be supported by the combinatio­n of significan­t improvemen­t in operating environmen­t and the capital market, relative stability in the foreign exchange market, improved security conditions and deliberate government policies that impacts ease of doing business.

Are we likely to see a rebound in the equities market in the second half?

The equities market is not reflecting impressive corporate earnings or a continuous uptick in fixed income enough to weigh on the market. However, a decline in inflation and a convergenc­e of forex rates and forex stability in second half will boost investor confidence and improve foreign portfolio investment­s in the equities sector.those are a few of the conditions that will indicate whether a recovery will occur for NGX ASI, although some sectors are already seeing positive year-to-date performanc­e. In addition, the SEC is working on various initiative­s which we are hopeful would increase local participat­ion in the market.

What sectors do you think investors should look out for?

Across Africa, we have seen accelerate­d investment­s in financial technology. This trend would remain the same given the maturity stage we are in and the vast market that remains to be captured.

Real estate is a viable investment sector. A gradual shift into property-tech and rejig of the housing model to increase investment yield and rental yield is required to accelerate growth.

Other sectors to look at include telcos, food and beverages and travels and tourism especially as the world economy comes to a full reopening and travel restrictio­ns are lifted.

Access to finance is still a major issue for individual­s and businesses, especially small and medium enterprise­s (SMES), how do we improve access to finance? And what is your Group doing about this?

This remains a challenge, especially in developing and underdevel­oped countries.

Along the value chain of our businesses, we have different initiative­s and products that helps address this. For individual­s, this is purely technology focused. We have built

a virtual banking solution that eliminates barriers and reduces the cost and time of accessing financing. In addition, we will continue to use data to understand our customers and provide them with risk-based credit access.

Within the Group's portfolio companies, we have three entities with differenti­ated focus on creating access to credit for individual­s and businesses, and emphasis on how important this is to us. We give loans to SMES through our micro-finance bank while structured financing for larger corporates can be accessed from our bridge financing outfits. Hence, there is something for everyone.

Layered on this is our corporate banking portal which will be launched soon. In designing this, a large emphasis was placed on SMES. Beyond financing, we are committed to providing end-to-end financial services and growth accelerato­rs to business we work with.

What is your assessment of the first half economic performanc­e, with emphasis on the financial markets?

The first half 2021 was a mix of outcomes. The country officially came out of recession in first quarter 2021,while we have seen strong resistance to the pandemic across some sectors with growth in key indicators, particular­ly in banking and telecoms. However, these gains remain limited tempered by rising inflation, declining foreign reserves and further naira depreciati­on across official and parallel windows.

In the financial markets, we witnessed rising interest rate for T-bills, bonds and fixed income instrument­s. The capital market, however, has witnessed a six per cent decline year to date

Micro-lending is a global tool for poverty alleviatio­n and empowermen­t. What has been your experience?

We have been into micro-lending business since 2009 first with VFD Bridge using our Lagos State lending licence and now joined by our microfinan­ce bank. From then till date, we have deepened our reach of clientele who can access micro-credit significan­tly. Particular­ly between 2019 and today, where we have grown from 3,000 customers to about 300,000, who can potentiall­y access microcredi­t on request. We have been able to provide credit to individual­s and small businesses who, otherwise would not have had access to credit from mainstream financial institutio­ns. This, in return, enables these businesses grow, while also creating more jobs for thousands of others.

That said, this is only one of the several means of poverty alleviatio­n and the government needs to create more social programmes and an economic environmen­t that ensures gains are sustained.

Nigeria's national economic developmen­t programme revolves around diversific­ation and job creation, what are your suggestion­s?

In addition to diversific­ation of government revenue and job creation, bridging the infrastruc­ture gap is also a front burner subject towards achieving our developmen­t goals. While the government continues to make progress in this regard, the pace of infrastruc­ture needs to be sped up to achieve our goal.

Also, we have seen gradual decline in oil contributi­on to gross domestic product (GDP), with growth, especially in the agricultur­al sector. However, the future is technology. Even in our agricultur­al sector, growth accelerato­r from this sector would need investment in tools to increase mechanised farming and general produce efficiency. Still on technology, we saw the emergence of India in the 90s to 2000s as a major exporter of tech-based solutions, services and personnel. In today's increasing­ly global village, we continue to see the ascendance of Nigerians in the tech and software developmen­t phase. Government policies need to fully support this budding area of expertise for job creation and economic value realisatio­n.

What's your view on Nigeria's debts? Our debt profile is on the rise, and this is well documented. The bigger challenge is our ability to generate revenue. In 2020, about 97 per cent of government revenue was used to service existing debt stock. Hence the focus in the future should be on how to enhance our revenue, and how future debt utilisatio­n must support actual economic growth.

How much of a risk does the foreign exchange constitute to the markets and economy?

Considerin­g the importance of foreign inflows to our financial markets, foreign exchange stability and availabili­ty is an important indicator for the market and our economy.

Investors need assurances that there will not be capital or interest gain erosion at repatriati­on point or worse case, scarcity of forex as we saw in 2016 when companies could not repatriate funds to home country.

This stability also has the potential to affect the prices of goods and services, especially for products in the manufactur­ing value chain that relies on imported raw materials. This, alongside the increasing cost of outrightly imported items, can lead to inflation, a scenario we also saw between 20162017, when "imported inflation" accounted for the upward trend in headline inflation.

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