 Okay, it's time for our very first hot topic. Nigeria risks losing Africa's biggest economy status as Naira continues to fall, sending shockwave across the market, throwing many bank chiefs off guard. The currency crisis has shrunk the books by close to 50% putting pressure on the capital adequacy levels of the sector. We're about to discuss this now with Basil Abia of the Kwakor Research Institute. Good morning to you, Basil. Good morning to you, Basil. Good morning, my pleasure to be here. So good to have you. Well, capital erosion for banks as the Naira continues to fall and the pressure on these banks to beef up their capital base is on. Talk to us about how big a challenge this is for them. When you have a situation where the value of the Naira against the dollar has eroded by at least 50%, there's a price differential between the official window, that's the investors and exporters' window. When the price differential is between 60 to 100 Naira vis-à-vis what the price is in the black market, then obviously you know that the Naira is grossly overvalued and that's exactly what foreign portfolio investors have been saying for the last two to three months. And so in the context of capitalization of bank capital holdings, we're seeing that for most fact valuations for the entire banking industry has been caught by at least 40% if I'm trying to be very conservative. So you're having a situation where the entire valuation base of Nigeria's banking industry is being exposed for the devaluation of the Naira as against the dollar. And what happens is that liabilities, all of the bank holding liabilities that are based on FX, the holdings that are either denominated in the dollar or denominated in Euro or denominated in the one or any currency outside of the Naira, for instance. Those valuations are 50%, 60%, 70% lower than the U.S. say three to four months ago prior to the fluting of the Naira or the crawl pack or what CPN and other experts called the crawl pack. So what you're seeing is that based on Basel 2 and Basel 3 regulatory requirements and basically Basel 2, Basel 3 and Basel 1, they're just cute English or technical English for a global regulatory framework for banks where there is stress testing and then there's obviously the capital adequacy of the banks. So basically what that means is that banks have certain levels of liquidity that they mostly thresholds of liquidity that they most have, obviously mostly denominated in dollar to be able to stress prove them in case of situations where the financial industry obviously is nearing collapse. And I think what led to Basel 3 being instituted as a global standard was the aftermath of the 2008, 2009 global financial crisis. And you have a situation where most Niger banks adhere to Basel 2 and of course now Basel 3. And due to those capital adequacy frameworks, banks have to find ways for more liquidity injections. They don't prop up their liquidity injections, especially in the dollar base or their capital holdings in dollar base are not propped up. Then they are at risk of running out of their debt services. They have a lot of debt obligations. Most of those debt obligations are in dollars and pounds in euros. And if they're not able to meet those obligations, then they're nearing collapse or they collapse in that set. So investors' money is obviously exposed. The entire financial industry in Nigeria is exposed. That could lead to a crisis level. So we're seeing situations where certain experts, especially based in Lagos, are clamoring for an intervention from the CBN. As a matter of fact, last year just around November when there was some stressors on the narrow. This time he wasn't even floated by the exchange. He was still heavily restricted in that sense and heavily controlled by the CBN. But the CBN had to intervene with over 17.8 billion US dollars. Not obviously in that type of land but in the timeframe for the entirety of 2022, they intervened in the interbank exchange window with a total worth of about 17.8 billion dollars. And that's because they knew they couldn't allow the narrow against the dollar to exceed the resistant point of about 860, 870 narrow to a dollar. And what happened was just after that final intervention, the narrow was managed around the 700 range. And that's what has been the case until the narrow was floated and the devaluation happened last month. So yeah, the banking industry is at risk. They would obviously be in need for recapitalization. And that will obviously be based on CBN's direction regulatory direction. So we were expecting that banks would do some recapitalization. Banks are already finding creative ways, for instance, to prop up their capital holdings, especially the ones that are US dollar denominated. That's I think the explanation for what's currently happening. All right, well, reports also have shown that the liabilities have ballooned to over about 60%. The narrow is now 850. You know, when the floating of the currency came up, we thought that we'll see some sort of release of the dollar to be able to match up with the new policy. But I'm not sure if that's what we saw. Explain further on this. Am I right? First of all, yeah, you're obviously conventional economics with regards for an exchange. You expect that running is floated based on the framework of the free market, you know, demand and supply. You expect some form of investor confidence in the market. And that investor confidence is expected to draw in more foreign exchange, right? Well, in the context of Nigeria, there are lots of structural issues that we have to be able to face. And one of that is to be able to assure that when FX liquidity comes in, there is a seamless repatriation of the FX liquidity based on capital gains for those investments. So if you're an FBI investor and you're investing in the Nigerian equities market based on the news that the Nigerian foreign exchange window is now market based, you expect that whenever you want to take in your, and of course, FBI is very fluid in terms of the investment timeframe, you could invest in the equities market this week and next week you get your gains based on the volume that say you invested on certain equities for Nigerian banks and maybe the telecoms companies listed on Nigerian stock exchange. So you're expecting that by next week, you're expecting to get your returns, right? But knowing the formality with accessing FX in Nigeria with the CPI, CPI do not even have to date. They still don't have enough FX liquidity to meet all of the demands. We know that there's still a number. And a matter of foreign corporations, huge volume and units of US dollars. We know that there are foreign airlines close to 800, if I'm not mistaken, about 850 million US dollars, the highest in the entire country. So if CPI is not making or executing certain frameworks to ensure that first and foremost, this FX backlogs are cleared and with the news of this FX backlogs being cleared, obviously money follows where they know it can be retrieved, right? So you start to see those liquidity injections from investors faster than normal. That has not been the case in the last two months since of course the macroeconomic performance by the Tiffany Moore presidency kick started. So we're having this situation where even FBI investors are asking for more work from the CPI. I know for a fact that there was a Bloomberg article two weeks ago asking for the interest rates to be increased again to be able to account for our inflation rates that is moving around 22%, you know, 22, 23%. So with the NPR or the interest rate around 18.5%, you're expecting that maybe CPI could adhere to some of those cries, even though it is detrimental to increase the rate interest rate. Yes, yes, yes, FBI want, FBI investors are clamoring for an increase of the NPR to at least 21 to 22% to account for those high inflation numbers. I'm not sure that was the spirit of money. Where does that leave Nigerians then? Well, it means that credit availability in the real sector is harder. It means that consumers will have to bear the cost of how expensive debt or credit is in the Nigerian economy. It means that the production units in Nigeria's economy will struggle to access debt financing. And obviously production is, production starts to reduce. We've already noticed the production lag in the last two, three months as a consequence of the macroeconomic policies that have been carried out. We know that consumers are cutting down on their purchase or purchasing power, and on intensity obviously due to inflation and intentionally due to a reaction to inflation. So if you were buying, let's say we're buying food three times a day, you're cutting down to twice a day or sometimes once a day, right? That is obviously going to have a transmission effect and a multiplier effect in the larger economy. And so those huge unit producers have to cut down on their production levels or production frequencies. And that obviously has a multiplier effect throughout the economy. And yeah, the economy is currently going through all of these price shocks as a consequence of all of these decisions. So that's the situation that we're in now. Even with the floating, unfortunately, the narrow is struggling. And the major reason why the narrow is struggling is that we don't have enough foreign exchange influx into the economy. Well, you know, with all this happening, one begins to have these fears for the narrow. I mean, when you remember Zimbabwe and some of these other countries, those currencies are so big, you fear that narrow may eventually get to that point. Is that fear justifiable or is just, how do you address the fear? Well, I'll be realistic. I don't think there's any need to be fearful of a Zimbabwe or Venezuelan happening. It's gonna take a lot more structural deficiencies, a lot more terrible policy decisions to reach that level. I think we have enough coverage. Even though we are currently at the lowest external reserve rates in over three years, the lowest that we've had in the last few years, news just dropped in very early this morning that our external reserves dropped to about three billion US dollars. And don't forget that we use our external reserves to prop up the narrow or defend the narrow. So if you're guessing where CPN is getting that 17 billion US dollars to be ejected in the foreign exchange market expressing the interbank exchange window is largely from our external reserve. So we have, I wouldn't say we have sufficient reserves, but we have decent enough reserves and we have the know-how from the CPN to be able to ensure that the narrow doesn't collapse at that rate. But there are warnings. The know-how, your confidence that we have that know-how. You're still having confidence in the CPN with all the FX backlog and all of these things that Nigeria has witnessed in the past eight years. You still have that much confidence in the CPN? Not much confidence, but I'm confident enough to know that the CPN aren't going to make more fullest decisions. They will probably continue to provide debt monetization and what I mean by that is basically printing more narrow for the federal government. They would probably increase NPR by maybe another 300 business points in the next eight months. That basically means that interest rate will be about 21% by the end of this year of around 22% just around what the FBI investors want. They would make some more bad decisions but they wouldn't make enough for us to reach a Venezuela situation. The Venezuela situation is when the federal government starts to nationalize assets, starts to ensure that foreign exchange means those are now very strict. There's no longer a crawl peg, but in fact, I would call it a board level type of command control economy where they are only disbosing FX based on their own discretion, no longer on any market framework whatsoever. So I do not think CPN is ever going to reach that level. I do not think that the federal government would reach any of those levels, but there's two legroom, if you permit me to say this, two legroom for more terrible policy decisions that would affect us. Before we could get to that. But not those Venezuela levels of crisis yet. Yeah, the last time I spoke with you, I asked how long you think you projected might take the market forces to live its time and things to stabilize. You said 12 months. Do you still have that same projection? Yes, I still stand by that. 12 months. I think my predictions are based on a number of factors. First and foremost exogenous factors. What I mean by that are that because the bulk of our economy is dependent on our oil exports or revenues from oil sales. I think that the global oil market would stick to those $70 to $80 per barrel numbers. So that's more than enough for us to continue to float as an economy. I also think that we're going to continue to increase our oil production levels. I think not that I think the data for the last month is that we did 1.4 million barrels. There's a probability that we would reach at least 1.6 million barrels before the end of the year. That's another factor. Third factor is that we've already removed a core factor of what used to hemorrhage our public boss. And what I mean by that is that we used to spend so much of our FX earnings on our subsidy bill. Now we've cut that out. This gives us leg room. This sufficient FX was to be able to spend this budget. As you've noted last night. But I was seeing the FX though. I was seeing it. Well, it testament to all seeing the FX is that even though there's an FX scarcity, we had our highest FAC allocation levels. Yesterday, last night, states are getting more revenues than possible because of that FX subsidy bill being removed. And the more decentralized FX imputes are, the better the economic outcome. So it basically means that states now have more money to spend on capital projects and of course on recurrent expenditure like salaries. So I'm not betting on state governors to do the right things with this money. Unfortunately. I have more than enough sample sizes. Unfortunately. And the sample sizes that our state governors are largely not good enough. I've seen that from 1910 to now. That's enough evidence to base that judgment on. But based on a number of things that I've mentioned, the exogenous influence of oil prices, the stability of the economy due to the fact that we no longer have to spend those humongous amounts of money on subsidy, on paying for subsidy. And I like you that stabilization will happen earlier than normal. Yes, yes, I'm confident that in the next 12 months we'll see some stability. I'm not saying that things will get better. I'm just saying that on the foreign exchange window at least we'll find a price point that we can stick with. We found a price point early this year in January if I were at around 740 Naira per dollar. And that stood for six months. Obviously due to interventions by the CBN. I'm confident that in the next two weeks the CBN will inject some form of interventions again so that we don't pass the resistant points of about 816 Naira. So it goes back to around 700 or even just over in the early 800s. And if it stays in the early 800s for five, six, seven months, then that is at just every point. And the price discovery point is a bit of stability. There's no speculation. People in the markets know exactly what rates they're going to get it at. People know what the effects of the numbers are. 850. 850. Yeah, it's 63, some black market sellers are saying in Lagos and in Abutia. It is scary, Basil. It is scary. It is scary. Everything is, people can't even travel anymore. A lot of things are being affected terribly. It is scary to think that the Naira will remain at 850 or 64, more than one, two, three, four, five months. It is scary. But then we keep on... It could get worse as well. It could get worse. It could get worse. And so people are asking, what do you think will get to 1000 first? Is it the fair price or the Naira? Well, I don't think we're going to see 1000 Naira units in terms of value for either a full price or for the dollar. But again, I have not, these things are not, these predictions are not set in stone. You make predictions based on available data points, right? The available data points that I have, I think we'll manage just around the age of 50. Please don't discount the fact that I'm sounding this way to say that things are not terrible. Things are really, really terrible. I know personal stories. I see things. I know what I'm going through personally in terms of inflation affecting my pockets and all of that. I see the numbers on a daily basis. The economy is currently being battered. The price shocks are unbearable. No doubt about that. But what I'm trying to say here is, not to be post-confidence in the markets, but just explain in pure, in layman English, exactly what the numbers are telling me. As I mentioned, I mentioned the numbers with regards interventions that the CPN has made in the last one year. I mentioned the fact that exchange reserves have deeped to our lowest levels in three years. And I mentioned, of course, what the pricing is in the black market as well as on the I&E FX window. I&E FX window is about $763. If I'm not mistaken, the black market is $863, $870, depending on where you're getting your news from in Lagos and Abuja. So yeah, it's going to be a lot more of these problems, but I do not see PMS price going to $1,000. Hopefully it doesn't get there. Hopefully it doesn't get there. Thank you so much. Just some news as well. We're getting 27 million liters of PMS from Rotterdam this week. I'm not mistaken. Yes. Obviously, two more weeks for that to float into the market. I don't know how much of that volume will cost the pricing to reduce, but I do know that pricing will stabilize. Well, the importer has lamented the high cost of importing that fuel. The importer has lamented the cost of importing it and is clamoring for the fixing of our refineries as the only way to go. So there you have it. We'll wait and see how the arrival of this petrol would affect the cost of fuel in the coming weeks. Just to make my final point with regard to the importer to interest you and the entire audience to know that it took six Nigerian banks, six Nigerian banks, to provide the liquidity needed for that import. That's to tell you how terrible it is. Six banks to facilitate the importation of that vessel. So thank you so much, Basil Abiyah, for your time. Basil is of the Quaco research, and he's joined us this morning to discuss this very serious issue on our very first hot topic. Thank you, Basil. We'll be right back to give you our second hot topic.