Inflation spike remains a major challenge for Nigeria and several other global market economies. Foreign investors always have rules they follow to safeguard their capital against value erosion and decision on inflation rate tops such investment plans. Founder/Chief Executive Officer, Nairametrics, Ugochukwu “Ugodre” Obi-Chukwu says foreign investors are not likely to invest in the Nigerian economy unless interest rate is higher than Monetary Policy Rate or matches inflation rate. Obi-Chukwu speaks with Samuel Oamen on Nigeria’s investment climate, exchange rate, inflation, dollarisation of the economy and the overall operating business environment. Excerpts:
Investing in the economy comes with lots of risks. What do you think are the major risks that scare investors from the economy?
In Nigeria, there three main risks. There is exchange rate risk, inflation risk and regulatory risk. Those are the three main risks that any Nigerian business should worry about.
Most of the other risks can be mitigated on their own. But these three are difficult to control. It is not your fault that exchange rate is over N1,000 to a dollar. It is not like you have made the wrong investment, it is simply that the economy just happens that way.
On inflation, you are not the reason cost of goods and services are going up. It is outside of your control. And then, regulatory risks because government as well have a mind of its own. Government can make business very difficult for you, and can as well facilitate business for you.
When government becomes a business risk, it is very difficult to contain. Whether it is through taxes, fines, fees or policies that can just end your business.
People can talk of insecurity, power supply chain challenges, these can be mitigated. But you see those three- exchange rate, inflation and government risksare the most difficult ones.
And we face them here at Nairametrics. Our work tools, are affected. Previously, we can buy four laptops with N1 million. Now, you can’t even buy two laptops at N1 million. So, imagine if I want to hire 10 research analysts that will be a huge cost.
People always argue that businesses will maintain same profitability when inflation-related costs are passed to consumers. What are your views on that?
Well, I think that’s is a misconception. People think inflation is just about increasing the cost of doing business. Inflation is also the reason why you have a staff, who you are paying salary, but will go and connive with the supplier to steal from you. He has to pay his bills. It is also the reason you call a carpenter, to come and work for you, and you paid him, but you don’t see him again. Inflation is why someone will call you, and say please lend me N100,000 and I will pay you back next month, and he will not pay you back.
It is also why you have family that calls you all over the country, for help. Inflation is why someone calls and tries to defraud you.
Its very pervasive under hyperinflation. Inflation is why you have staff, who struggle to come to work. Not that they do not want to come to work, but because they can’t pay the transport fares. You can increase the prices of your goods, but can you also increase their salaries?
How many businesses, can increase the prices of their goods by 28.2 per cent? Even if you do, remember your cost is also going up, so your margin is almost the same.
So, inflation is a huge problem. Inflation is why you buy Coke and you are not sure it is Coke that is inside the bottle. That’s inflation, because someone is trying to cheat, so that he can survive.
So, during hyperinflation, you see a lot of fake products and stealing. That’s why at Nairametrics, we write a lot about inflation. Inflation can also cause massive unrest. You see that Labour Unions are protesting. That’s inflation. Minimum wage of over N30,000 cannot do anything for anybody.
The Central Bank of Nigeria (CBN) has instituted inflation targeting framework for the economy. Why do you think they are optimistic about getting the inflation rate down from current 28.2 per cent rate?
I do not think that what they are doing is any much different from what the previous central bank team did. So, inflation globally is two types- supply side and demand side.
Demand-side inflation is typically tackled with monetary policy. Supply side is when people have too much money in circulation and purchasing power is high, so there is lot of demand.
And so, the only way you can combat that is by raising interest rate. That is what happens in most developed economies. Raising rates, discourages borrowing, and that reduces spending and that has a way of reducing inflation.
In Nigeria’s case, we had increased Monetary Policy Rate but at the same time, the supply side is actually more pervasive.
The supply side deals with logistic issues, insecurity, government policies, ease of doing business and exchange rate to a large extent.
So, what the previous CBN leadership did was that rather than abandon the supply side for the government, they started to fix that themselves.
That was why they pursued development finance, and funded power, agriculture, and aviation. The CBN was pumping money into these sectors, which could not borrow from banks. They thought it could fix the supply side and reduce importation by encouraging local production.
By the way, inflation dropped to about 11 to 12 per cent at some point, and it started rising after the Covid-19 pandemic, and intervention funds increased the money supply.
For inflation to come down, is beyond making a bold statement. It requires a lot of work. You have to address exchange rate issues, and ease of doing business. It is not monetary policy that will solve it, it is a government that will fix these issues.
In what way does inflation affect interest rates in an economy?
Inflation is also a challenge for interest rates. Interest rates will remain high, and that will also impact businesses. If inflation is 28.2 per cent, what do you think the interest rate will be? Banks that are lending below inflation, are doing so probably at a loss, even if they use the 10 or 12-year average inflation rate. Banks will always raise interest rates because of inflation.
The interesting thing is that we are looking for foreign investors to come into Nigeria. The foreign investors will not come into Nigeria if we do not raise interest rate to be at least higher than the Monetary Policy Rate or match the inflation rate.
This means that every dollar from foreign investors should earn at least 10 per cent or more for them. And that is very expensive for an emerging economy like Nigeria to afford.
If we cannot afford to pay foreign investors that money, they are not going to come in. We rely on capital importation, which should fetch about $20 to $25 billion yearly from foreign investors. Right now, we are not in any way close to $5 billion. You see why the exchange rate is where it is. To get them in, you have to increase interest rates. You see, it is a huge quagmire.
What other options are available for the economic managers to support the exchange rate?
The other option is to go to countries to seek investments. That’s why you see the President going to Saudi Arabia, and Europe trying to woo investors by getting those countries to bring their companies to Nigeria through Foreign Direct Investments (FDIs).
That is a better, way, but FDIs usually take time. Their money does not go out quickly. Their money stays in your country. But for you to attract FDIs, your incentives must be very, very good.
So, you have to promise them 24-hour power, good roads, security, easy clearing of goods at the ports, skilled manpower, and so on.
For instance, if the government convinces Apple to set up a Nigeria office. Where are you going to set it up? Is it in Lagos, Ogun, Abuja? Do you have the facilities they need to run, skilled manpower that can do that?
What do you think will happen to the naira if the FDIs are not coming in as quickly as expected?
I don’t mind losing this argument, but we will likely see a weaker naira down the line before it starts to stabilise because the indicators don’t look good yet.
It is good that we are clearing backlogs that will serve as a confidence booster. But what will attract the sort of forex we need as a country, will take a while. As an import-driven economy, people source dollars to import their goods. They then sell in naira and mop up another round of dollars for imports. As you are taking out the dollars, what is coming in as export earnings is small. A lot of the things you see happening in a cycle.
Let’s talk about the diversification of assets. What are your views when it comes to asset diversification in investment?
I think every investor should take steps to diversify his or her portfolios. There are several routes one can explore to increase wealth. That also helps to spread risks. One needs investments in bonds, fixed income, stocks, real estate and so on. It also depends on where you are in life, as investment ethos should support where you are in life, in terms of age.
Tell us about the Nairametrics journey and success story so far?
We started in Ire Akari Estate, Lagos about 10 years ago. Then we moved to Opebi and other places within Lagos. Then we opened the Abuja Desk. We also plan to open the Ikoyi Office in Lagos. This is just like our 10th year. As a website, Nairametrics.com should be 10 years old this year. But as a company, it was set up in 2015. Initially, we started just like a Blogspot named Ugometrics.com.
We decided to make it a business in 2015 so that we can reach a lot of people and attract investment. Then, I decided I would not be the only one writing. I decided to get other people involved.
We wanted something to capture the essence of what Nairametrics is about, which is the economy, money, investment and Naira depicted that for me. At that time, there were not many platforms covering the Nigerian capital market. Not that many.
The market has come to recognise Nairametrics for the quality of its market reports. And you were named the Entrepreneur of the Year 2023 by Ernst & Young (EY). How would you react to that?
It was a huge surprise. To be honest, I did not even think I was going to be considered Entrepreneur of the Year by EY. It was an interesting interview because EY had a panel, very vibrant panel at the EY office in Ikoyi, Lagos.
Several people were interviewed. It was my turn and I faced a six-people panel. They started asking me about the business, the revenue stream and business model, and so on. Of course, I was answering genuinely. And they already had the report and audited account, because those were part of entry for that award. At the end of the day, they gave me good advice on how to proceed and what to do as we grow. Then, I left. Then, a few weeks later, I was given the award.
What was the level of work and investments you did to achieve this degree of success?
A lot of sleepless nights. A lot of work. I was running Nairametrics with a 9 to 5 job, for a long time. When I started, I had just left a company I was working for at the time. There were setbacks. I had an opportunity to buy a house in the US with about $100,000 I had at that time. With that, you could buy a good three or four-bedroom apartment in the US at that time.
I was caught between doing that and investing in Nairametrics. I took the money and invested it in Nairametrics. I furnished the office and provided working tools for the staff. And we started. I did not get outside capital at all. When we started, I needed people I could trust, people that are like family.
We did not generate one kobo for about three years. I was just splitting my salary from paid employment with staff.
There were lots of challenges, employee turnover, sleepless nights and so on. Most times, when I came back from work, I focused on the website and wrote the story myself. It involved a lot of work and sacrifices. I had a lot of problems with my family. My wife was upset that I did not always have time for the kids.
I also took my 9 to 5 job very seriously. I believe that one can do three or four jobs, but just make sure you are doing all of them well.
It involved a lot of dedication and hardworking and we continued.
Around that time, one of my other friends based in the US decided to be a Partner, because I needed someone who was also technically competent. He works as an investment banker in the US. He is also a Chartered Accountant like me.
He came on board, and we started driving the business. I thought that what we were trying to do, could not be just one person. I also did not want Nairametrics to be like any regular Nigerian website. I wanted the content to be unique. I wanted a situation where when you read the content, you will know that it is an expert who is writing. So, that means that people who write for us must be experts in their areas of specialization.
We got our first major cheque in 2019. I can’t forget that day. We got like six months’ salary. It was a breakeven point. That was the only time I did not use my money to pay salary. Covid was also a breakthrough year for us.
The CBN has said another round of banking sector capitalization is coming. Which segment of the economy do you think has the biggest chance of driving the $1 trillion economy government target by 2030?
If there are industries that could drive Nigeria into a $1 trillion economy, then you have to look at pension funds and mutual funds. Those are industries or sectors that mobilise private capital as equity, not as debt.
Banks represent about five per cent of GDP. Power is not even up to one per cent of the GDP. Power has the potential to be bigger. Look at Arts and Entertainment, there is less than one per cent of GDP. Those are the areas that should jumpstart the GDP not banks.
I understand their point is that they can do that by having bigger banks. No. It is by having bigger pension funds, mutual funds and private equity companies. These are the guys that can come and invest in companies, and wait for those companies to mature.
Those that invested in Facebook, when it was zero market capital in 2004, when it started. When Facebook went public in 2012, it was bigger than the entire Nigerian capital market.
Facebook started with private capital, not banks. I think bank recapitalisation is to improve the health of the financial sector. We understand that some banks need to improve their Capital Adequacy Ratios. A lot of banks are enjoying regulatory forbearance, and they will need to increase the capital adequacy ratio.
What are your views on the dollarisation of the economy and the risks that come with it?
One of our biggest fears is not avoiding dollarisation. Dollarisation is a spiral, which means getting into a never-ending downward trend. That’s why you have to be wise. Dollarisation happens because you are afraid, that inflation will keep eating up your naira. But as you keep buying dollars, the exchange rate will depreciate again, and it will spiral. It is of great concern.
There is a sense of hurry that the government also has. Even government dollarises. When they privatise assets, the assets are sold in dollars. Even at the ports, the fees you pay are converted into dollars, as well.
Government machinery itself is essentially dollarised and other segments of the economy follow. The only way to solve dollarisation is to have a stable exchange rate. People need to have confidence in their local currency, which means that inflation also needs to be reduced. You need to restore confidence in your local currency, otherwise, people will dollars their assets. People will only hold the currency that will guarantee their survival.