Needless to say, we did not have to wait for things to deteriorate to this level, in which inflation is at a historical high of 29.9% since democracy, before making this move. This interest rate adjustment is reminiscent of the removal of the petrol subsidy after the swearing-in of this administration. At that time, I was optimistic that many more policy moves were going to follow, but I was sorely disappointed. Increasing the interest rates is just the first step in the right direction, and this must be followed by other actions for the benefits to fully accrue to the economy. If we delay again, we will be back to where we started from.

Two things have happened since the beginning of 2024: the exchange rate went parabolic, and the inflation rate went out of control. These two economic indicators have a way of feeding on each other in a vicious or virtuous cycle, depending on the conditions.

The exchange rate is one of the several leading indicators in the direction of the economy. A higher exchange rate means that input into the production of goods and services will be more expensive. Nigeria certainly does not import as much as we are made to believe. According to OEC, Nigeria's import to GDP is just about 17% of its GDP as of 2022. Nigeria exported more than it imported in the same year (Nigeria (NGA) Exports, Imports, and Trade Partners | The Observatory of Economic Complexity (oec.world)). Unfortunately, one of the most important inputs into the production of goods and services is linked to the exchange rate - petrol and diesel. While the Government has continuously subsidized petrol, the price has been paid in more indirect ways. So the assertion that the exchange rate is driven because of the "expensive tastes" of Nigerians has no basis in reality.

So what exactly is driving exchange rates? Two of the most important drivers are liquidity and inflation. Remember that inflation is a lagging indicator. Once investors see that inflation is rising in Nigeria, the first thing they want to do is get out before it gets worse, which leads to demand for the USD. When there is excess liquidity and no productive places to invest the funds, the next best thing is to get out. Both of these factors lead to pressure on the exchange rate. Another factor to consider is corruption. (Yes, this is the kind of sensational thing Nigerians like to hear, but that narrative also falls flat on its face in the presence of an unproductive economy. I will not dwell too much on that, as that could become the basis of an entirely different article.)

How does inflation affect things? You must have heard this phrase before: inflation is a monster. It is not completely true. A healthy amount of inflation (like sugar in the body) is good, but when it is too much, that is when it becomes a problem. The inflation in Nigeria has been too much for a very long time. We have been living with an unhealthy amount of inflation for the better part of a decade, and everything happening now was bound to happen when we did not control it on time. When inflation is too high, the rate of rise of prices of goods and services increases. It becomes difficult to plan. It is easier to build a house if you can predict the price of cement in six months, than if you cannot predict it. 

There are two types of inflation: demand-pull and cost-push. These are not topics I will talk about today either. There is also an economic theory we call inflation differential: this is another topic that is too complex for this post, but the summary is that with higher inflation, the weaker the local currency is expected to be.

Now, let's go back to the most recent CBN moves. Here is the summary of what happened:

1. The Monetary Policy Rate (MPR) was increased by 4% to 22.75%

2. The asymmetric corridor was moved from +100/-300 to +100/-700 basis points

3. Cash Reserve Ratio (CRR) was increased by 12.5% to 45%

4. Liquidity Ratio was maintained at 30%

Let me now now break it down.

The MPR increase means that interest rates have gone up. This will impact you because the rate at which you can borrow from Nigerian banks has increased. On the flip side, the interest you will receive on your deposits will increase. The asymmetric corridor is like a contract between the CBN and Nigerian banks. If a bank needs money in a hurry, it will have to borrow money from the CBN at MPR plus 1%, which is equivalent to 23.75% (Note that 100 basis points is a posh way of saying 1%.) And if any bank has excess liquidity, it can lend to the CBN at MPR minus 7%, which is equivalent to 15.75%.

With a cash reserve ratio of 45%, the CBN is essentially telling banks that for every N1,000 deposit they receive from you, they must send N450 to them. So what will be available for the bank to lend out or do anything with is N550. This is one way of taking out liquidity from the system.

The liquidity ratio was left unchanged at 30%. This liquidity ratio is the amount of funds the banks must have in their balance sheet as a proportion of total deposits. These funds have to be liquid assets such as cash and treasury bills. The purpose of this fund is to ensure that banks can provide funds to meet up with customer demand for withdrawals whenever they need to.

Let us tie everything up. If you deposit N1,000 into your bank account today, the bank will have to take N450 to the CBN. After that, they will have to hold on to N300 in very liquid assets. In the end, the only amount left for any kind of lending to the economy is N250 after all these deductions.

One of the ways banks make money is by lending. With very little left for lending, the laws of demand and supply kick in. Banks have to make money and borrowers need money. So, this leads to bidding up of interest rates as many borrowers go after the little available amount. To attract funds, banks will now be forced to increase deposit rates. With higher deposit rates, people will find buying the USD less attractive.

In addition to that, foreign investors will also be attracted to the higher yields in the Nigerian economy and will be tempted to bring in more funds to invest. With more foreign investors bringing in money, the pressure on the exchange rate is theoretically expected to reduce as they demand Naira.

If the exchange rate stabilizes, the impact on inflation will also reduce, and we could see inflation rates decrease. The exchange rate does not need to drop, it only needs to stabilize. Now, the inflation rate coming down does not necessarily mean that prices of goods and services will come down. It simply means that the rate of rise will slow down. Remember, I said earlier that every healthy economy requires some level of inflation, just like sugar in the body.

Ideally, we would want interest rates to be much higher than inflation to attract foreign investors, but a much higher jump could shock the economy and lead to unintended consequences. A step-wise approach would be much better, and the rates can be adjusted as we go along. 

Lastly, this is just the first step in a series of follow-up steps. We would expect the fiscal policies, which are under the purview of the Minister of Finance to implement policies that will take advantage of these higher interest rates to jump-start productivity. We hope they get it right this time around so we don't end up coming back to make drastic moves like this in the future.

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Nigeria is a wonderful country, I tell you. We believe that market forces are like witches and wizards from the legendary Nigerian villages that have been sent to oppress the poor and suck our destiny dry.

So the back story is that the NNPC has been going on raids to clamp down on petrol stations that are selling fuel above N145/liter. Once they get there, they give all motorists who are there free petrol until it finishes. So you get free petrol, as much as you want, and when it finishes, you go back to the queue for more. The issue of fuel scarcity has not been resolved — it was just made unwittingly harder. Petrol stations are simply going to start hoarding the limited product they have now and sell only in the dead of the night. Yep, that is the true definition of ‘black market’.

So let’s talk about market forces, demand and supply, and how the cost of ‘free petrol’. Don’t worry, I am going to make microeconomics as engaging as possible, so stay with me.

Once upon a time, the picture above was the equilibrium price for petrol in Nigeria. At N145/liter, Nigerians consumed about 40 million liters of petrol per day. At this point, supply and demand were at equilibrium and the petrol sector of the economy was ticking over at N5.8 billion revenues per day.

Then the music stopped.

We started hearing stories and grumblings that landing costs of one liter of petrol was now N170. Just like that. And we were busy paying N145. The signs were ominous and it became apparent that a scarcity was on the way. First petroleum marketers were blamed for hoarding products, and then Nigerians were blamed for panic buying. Meanwhile the queues got longer. What just happened?

Apparently, the landing cost of petrol has jumped to N171. If the landing cost has gone up, then for petrol marketers to make any kind of meaningful profit, the pump price would have to be somewhat higher than N171. Well, because the regulated price remained at N145, petroleum marketers stopped importing petrol. Before now, petroleum marketers provided 80% of Nigerian’s daily needs, according to DAPPMA. So, if DAPPMA owned 80%, that means NNPC could only supply 20% of Nigerian daily needs, which accounts for 8 million liters per day.

Now, there is a supply shock. Look at the last picture above. Supply shock means that the supply curve will move left from Supply 1 to Supply 2. The supply curve will move along the demand curve, thus moving the from Equilibrium E1 to Equilibrium E2. At E2, the price of petrol has to go up, according to the law of supply and demand, until demand drops to 8 million liters per day. At this point E2, the price should be somewhere around N200 per liter or more. So we are looking at a margin of around N29 per liter or more to cover for costs of transportation, taxes, other levies and profits.

This is how supply shocks affect economies. Assuming a pump price of N200 per liter, all of a sudden, the vibrant downstream petrol sector that was ticking merrily at N5.8 billion per day has dropped to about N1.6 billion.

In a market driven economy, it will be difficult for the price to stay at N200, when the supply just dropped by 80%. Prices should double at the very least until a clearing price is found. But this is Nigeria, where we are so suspicious of market forces that we believe everyone is a monster who is out to suck the poor dry. Therefore, we have to create our own equilibrium.

I call this new equilibrium, the fake equilibrium. The Government says the price of petrol is N145, therefore, the price of petrol is N145, because the poor must not suffer.

Now, this chart is a little bit complex.

We can see that the supply shock is still there and there is a hard cap of 8 million liters of fuel available per day. We are now operating along the Supply Curve 2, but we are stuck to the price at Supply Curve 1. What’s going on here? Can you see the “???”? That’s the volume of petrol per day that Nigerians actually get to buy at N145. No way in hell is everybody paying that N145, not even the poor masses we are protecting.

Only very lucky people who drive in, just when a petrol station opens, people with serious connections, and the rich people actually get to pay N145. The rest of us pay more. Now, the excess that we are paying above N145 is not necessarily in Naira and Kobo, but the opportunity cost of spending endless hours on fuel queues. The time that we could have spent on more productive economic activities is wasted on fuel queues. The time you could have spent to gather your thoughts and come up with crazy ideas to move the country forward, you spend it on the road, burning fuel you don’t have to look for a long fuel queue to attach yourself to. And the painful part is that a lot of people spend hours on fuel queues only to be told that fuel has finished, and then you buy black market, at a minimum of N250 per liter, if you are lucky, to continue for another fuel queue hunt. All these things are costing the economy a huge loss.

Now, not only the masses are suffering. Even NNPC is suffering. Instead of them to do useful things, they are now hunting down fuel stations, stretching already thin resources, and burning scarce petrol to execute their N145 per liter mandate.

I have heard a lot of excuses that Nigerians are monsters and that if fuel prices are deregulated, they will collude to raise petrol prices through the roof. While I concede that there is a possibility of that happening, the Department of Petroleum Resources (DPR) should look for ways to ensure that such collusion does not happen. That’s what we are paying them to do with our taxes. Have we ever wondered why telecommunication giants have not been able to collude to raise calling tariffs through the roof?

When fuel prices were raised from N86.50 to N145, I saw a couple of petrol stations with fuel queues while others were virtually empty and I wondered what was going on until I discovered that the ones that had queues were selling at N143. That told me something. Many Nigerians were ready to stay on some queue because of N140 max (that is N2.00 per liter for maximum of 70 liters). Likewise, many others felt, that have better things to do with their time.

Now, I am not saying that NNPC should scrap their N145 per liter. But if petrol stations want to sell at N300 per liter, let them be. As long as NNPC stations are selling at N145, those who want cheap fuel can go and buy the cheap fuel. Economics allow for discriminatory pricing — those who pay for economy class and those who pay for business class are still going to fly from Abuja and land in Lagos. The extra comfort the business class tickets provide is worth it for some, but for many, it is not worth it. Let everyone find their level.

So, when I hear argument that petrol stations selling petrol at N250 are doing economic sabotage, I disagree. The real economic sabotage is not allowing everyone who wants to import petrol, import petrol.

There is a standard pricing for imported refined petrol. The DPR/NNPC should look for ways of allowing people import the products freely, agree to an embedded profit margin that will adjust with market prices, and let us all flourish.

I may be a little biased when it comes to cryptocurrencies, but whenever I talk to an audience about it, I try as much as possible to reiterate the risks. A friend even accused me of being so bearish about cryptocurrencies, yet I just couldn’t stop talking about how people are getting rich out of them. Now, we’ve gotten that disclosure out of the way, let’s get down to business.

If this is your first contact with any article that is cryptocurrencyrelated, I strongly suggest that you read the first article I wrote about the Bitcoin here. Now when you are done, also read this one. Now, we are all caught up, and we can talk about the risk of holding, or trading, cryptocurrencies.

At the time of writing the first article in September 2016, Bitcoin was selling for around $600, and the time of writing the second article in December 2016, the price was around $770. In just about a year, the currency is now selling at $15,500. There is no widespread and easily accessible asset that has done this well, except a couple of other cryptocurrencies. Therein lies the risk — an asset that can gain over 2,900% in just under a year can easily lose 99% of its value in just one week. Know this and know peace; then construct your portfolio accordingly.

Before we go on, I need to point something out real quick. There are a lot of schemes out there that promise some kind of Bitcoin payouts if you buy Bitcoins and invest in their schemes. Please note that these are pyramid schemes. The pyramids will collapse one day, and you will be left with the short end of the stick. These schemes are done using Bitcoins, but note that these schemes are not Bitcoins. Just the same way that the MMM pyramid scheme used Naira does not equate MMM with Naira.

The Bad News

Cryptocurrency prices are going to crash. This is something that will happen as long as the sun rises from the East. But the problem is I don’t know when and I don’t know how, and I also don’t know at what level this will happen.

There are two types of risky investments. The one in which there is a lot of small gains and one large loss, with a variable chance of occurrence, which can wipe out your entire portfolio and even run you into huge debt. Then there is the other one in which you make small losses, but one huge again, also with a variable chance of occurrence, which can make you wealthy. The latter is associated with gambling, but the former seems to be describing Bitcoin/cryptocurrencies at the moment. It doesn’t matter at what price you enter, it just looks as if it is almost impossible to lose. Those who bought when the price hit a previous all time high of $7,600, before dropping to $5,700 are probably now smiling because the price is now climbing towards $16,000. Those who bought at $19,000 before it dropped to $11,000 and held on are probably heaving some sigh of relief now as the currency seems to be recovering. The drop and then a quick recovery has been the hallmark of Bitcoin for several years now, but the question is how sustainable can this be?

I am now going to focus on the risks facing Bitcoin. Bitcoin is the largest and most established cryptocurrency, and for as long as this currency is alive, other cryptocurrencies (not all of them though) are going to do well. Bitcoin will have to crash first before the dominoes come falling down. Whether Bitcoin will remain as the largest cryptocurrency after everything comes down is something I cannot tell.

Risk 1

I have already mentioned the first risk that Bitcoin faces — pyramid schemes. This is not likely to bring down Bitcoins, because most Bitcoin holders know about pyramid schemes. It is only newbies, who really don’t understand what Bitcoin is, that are going to be caught in this storm. The damage to Bitcoin itself will be very minimal.

Risk 2

The second risk is from Government regulations. Governments may decide to shut down Bitcoin from within their borders, but this will require coordinated actions from all Governments. Now the problem here is that Australia, Switzerland, Russia, Japan, and Canada already have policies that favor Bitcoin. Even Vanuatu is now providing citizenship in exchange for Bitcoins. It will take a lot of effort to make all of them backtrack, and the chances of this happening is slim to none. I believe the risk from this is also minimal even if Jamie Dimon thinks otherwise.

Risk 3

The third risk is the lack of consensus in the Bitcoin community. This has led to a few forks with many more lined up for the future as a few factions break away. This weakness also happens to be the strength; there is a decentralization of the currency, which means just a few people cannot dictate how the asset should behave. This is how markets work — many people with diverging self-interests who finally settle for an equilibrium where everyone reaches compromise. The risk here is there is no one can predict what a breakaway faction can decide to do to the mother-ship. But the risk here is also minimal, because whatever they do will also negatively affect the coin they are promoting, and they will jettison the idea.

Risk 4

The fourth risk is the fact that the price has run up in a very short time, which has created a bubble. But how long will this bubble, that has burst so many times, last? Will investors/speculators just wake up and start selling because the price is ‘too high’? I don’t think so. Something will have to cause the price crash. And the truth is a bubble can only be deemed so with the benefit of hindsight. This is a real risk to Bitcoin and other cryptocurrencies as an asset class, but it does not change the underlying value. (Please don’t ask me about the fair value of Bitcoin, I don’t know. Just exactly the same way no one knows the true fair value of Gold. The value is whatever the market says it is.)

Less than three months ago, conversations around cryptocurrencies centered around what value the cryptocurrency was trying to deliver, and what gap it was trying to fill, but now conversations are now about how high can the price go? People who discovered Bitcoin, are now discovering hundreds of other cryptocurrencies and the question is, “Which one is going to gain 300% next?” The question is not, “Which one is going to change the way we do things and deliver value over the long term?” The fever is sky high, and the evidence is in the market. From about 70% of total market share just some months ago, Bitcoin now accounts for less than 45% of market share. People are spinning off new cryptocurrencies every day, and people are lapping them up because, “Wow! Bitcoin is doing well, but it is too slow, other cryptocurrencies are moving faster than Bitcoin!”

Coinbase now has more accounts than Charles Schwab. And Coinbase has been forced to include a couple of other cryptocurrencies because of huge demand for them. Most cryptocurrencies exchanges are bursting at the seam as huge cash flows into the market.

I joined a couple of Telegram groups, which talk about different cryptocurrencies and it is pure madness. You see people screaming “Hodl!”, “To the mooooon!” and so on. I have seen people banned from Telegram groups for asking questions about the underlying value the cryptocurrency. I have also seen people banned for asking why the 24 hour volume of a certain cryptocurrency is more than 50% of its market capitalization.

I watched Bitcoin buyers eat up a sell wall of $500,000 (half a million US dollars) at $19,500.00 in about 30 seconds. It was beautiful to watch, breathtaking and scary. (My heart goes out to those people who bought up the coins at $19,500.) I saw a fintech microcap company gain 2,400% after admitting its link to cryptocurrency.

We have a great technology in our hands but irrational exuberance has taken over. People are taking out mortgage and credit cards to buy Bitcoins and other cryptocurrencies. Well here is the problem: by taking out a loan to buy an asset, you either believe the asset will throw out cash at you, which cryptocurrency does not do, or continue to go up in value. Continuing to go up in value is contingent on new money flowing in. If people are borrowing to buy an asset, it means that they have finished using their disposable income. Now that people have finished using their disposable income, they will soon finish borrowing to fund purchases. When all that is done, where is the new money going to come from? Now, for people who borrowed money to buy the asset, what happens when cryptocurrencies can no longer go up, because no new money is coming in? Yes, they will have to start selling to meet up with debt repayment. At that point in time, all of us are going to be on our own.

I am doing a sign of the cross one more time for those who bought Bitcoins at $19,500, except they were lucky to use to use the bitcoins to buy alternative coins (altcoins). Now that altcoins have gone crazy, because people feel they will move faster than bitcoins, what happens when no new money comes in again?

Worst still is that cryptocurrencies are trading in unregulated markets. Prices can be manipulated downwards or upwards by those who have money. There is no control, no investor protection. Sooner or later, human greed will take over and all hell will be let loose.

I can confidently say we are at the inflection point, or very close to it. Markets always do the opposite of what people expect. This time last year, when Saxo Bank predicted that Bitcoin was going to hit $2,100 before the end of 2017, people laughed from Shanghai to San Francisco. That time Bitcoin was $700. Now everybody is saying 2018 is going to be massive for cryptocurrencies. No, my friends, 2018 is going to be the year of the gnashing of teeth.

Risk 5

The fifth and the last risk is the unknown unknown. Bitcoin is going to crash, and that time is not far. The cause of this crash, and how it will happen, is unknown, for now. We are all going to be blindsided — it may be insidious and it may be fast. Will it drop to zero? I don’t know, but it is highly unlikely. Even the people who will cause the crash will be surprised that they actually crashed Bitcoin. And when it finally happens, many will act like it had always been obvious all along, as all markets crashes are always obvious with benefit of hindsight. Many Bloomberg, Financial Times and New York Times article will go to town with how they predicted how Bitcoin was going to crash, and they will do everything to force their current narratives to that event. But I can bet everything I have to my last shirt, that the crash will not be anywhere near what anyone is currently predicting will be the cause.

How do I know this?

Bitcoin is a very young asset class. It takes very little to move the price up and down, hence its current volatility. Early this year, the ducks were all lined up for the death of Bitcoin, largely because of the inability of the promoters to reach a consensus with regards to the way forward. The network was clogged. Transaction fees were going through the roof. Ethereum was taking up market share, and people were beginning to predict that Ethereum market capital would soon overtake that of Bitcoin. Until one man, somewhere, came up with a solution. No one saw the solution coming, but lo and behold, the community was ready to activate SegWit. The market was still uncertain until Litecoin activated SegWit successfully. Bitcoin price doubled, not long after that. One man, working assiduously day and night, saved the day. One man cannot save oil price. One man cannot save stock market prices. One man cannot save the real estate markets. But one man saved Bitcoin. Bitcoin is still a very young asset class, and the headwinds are coming.

If you are still reading, and haven’t sold your cryptocurrencies yet, then let’s talk about the good news. Thank you for staying with me so far.

The Good News

Bitcoin has shown resilience in its short life, and it will weather the storm. After the crash, cryptocurrencies will evolve and become bigger and better than it currently is, but this is not going to happen in weeks or months like the market is currently behaving. We are already in a world where almost every single thing we do is in bytes. Zeros and Ones. Bitcoin is filling a gap — a digital asset that is outside the control of a few people (read: central banks). The market (read: the people) determine what the price of this asset should be, at every point in time.

Bitcoin has limited supply, except the whole community agrees to increase the supply, which is unlikely to happen. There was once a time a rise in Bitcoin price led to increase in purchase of goods and services in Bitcoin. Now, those who hold Bitcoins have started reducing its use, except when they want to trade for other cryptocurrencies, and most of them have plans of coming back into Bitcoins at one point in the future. Those who don’t believe in Bitcoins state problems such as slow transaction speed, fear of Government intervention, etc. All of a sudden we have two sets of people — those who are holding Bitcoins, because they are now seeing it as a store of value, and those who believe it does not have any kind of utility. But the rising price is now bringing in people who once thought it was some kind of Ponzi scheme, and they are now becoming ‘hodlers’. People are no longer buying Bitcoin because it is a new type of digital currency (Ethereum has filled that gap), they are buying it because it is now increasingly looking like a new type of asset, a store of value.

It is this ongoing switch in identity that will make Bitcoin survive the oncoming crash.

There is one more thing in play. Global asset prices are at historical highs, from bonds to treasury bills to real estate to equities to private equities. Startups are now raising money like they never raised in the past. Interest rates are at historical lows and even negative in some countries. Cash is becoming worthless, and billions of dollars are roaming the world looking for where to park. Bitcoin price increase should be viewed through this context, albeit with caution because people are using easy credits to fuel a possible bubble. There is really nowhere else to put money. Now, even regulated institutional investors want a skin in the game, hence the excitement about the Bitcoin futures market.

There has been a lot of logical argument against the use of Bitcoins and other cryptocurrencies, but in reality, the price is whatever the market deems it to be. And today, Bitcoin is $15,500. For as long as market is confident in the pricing of an asset, that is what the price is. While we can only predict a bubble with the benefit of hindsight, I am sure that the cryptocurrency market will probably lose 50–70% of it’s value in the coming months.

Conclusion

While my Twitter timeline may look like a cryptocurrency ticker, please use this post as my warning that we are playing a dangerous game with our money. I am aware of the risks, and I also want you to be aware.

Disclosure: I have sold about 40% of my cryptocurrency holdings, and I will still sell more.

Nigeria LNG Limited has been in the news for the past few weeks. This was a result of the recommendation that came from somewhere about selling some national assets to plug some of the hole Nigeria has found itself because of the recession and low oil price.

As for me, I have no opinion about whether it should be sold or not. The only opinion I have is that if the NLNG assets are to be sold, they should be sold at the right price. Anything less than the right price will be a slap on the collective faces of tax-paying Nigerians — let’s add non-tax-paying ones, as long as they qualify to hold the green passport.

So, as a dutiful tax-paying Nigerian, I have decided to go on a little adventure to calculate the value of the assets. According to the MD, Mr. Tony Attah, the NLNG assets are worth $13 billion. Nigeria holds 49% of these assets. This invariably means that if the economic managers decide to sell Nigeria’s stake in the company, that should bring in about $6.73 billion. Hmm. Is that all it is really worth? He definitely knows much more than I do. I do not work at NLNG. He is the MD. Big difference.

But as an investor, I like cross-checking asset values. And this one definitely concerns me. So, I will check.

First, we know that Nigeria received $12.9 billion as dividends over a period of 8 years. I have searched high and low, but I have not been able to get a breakdown of how the payments were made. So, for the sake of simplicity, we will assume that the payments were made equally over a period of 8 years. If that is the case, then NLNG paid $1.6125 billion annually as dividends.

8 years is a long time and good enough length of time to cover an economic cycle. So I believe that assumption is sound.

The next step is to determine the discount rate to apply. Yeah, this is a little mathematical, but not too difficult. Using the Capital Asset Pricing Model, the discount rate for the Nigeria LNG should be about 6.36%. This is a pretty much safe asset. And this is also very close to the average yield on Nigeria Eurobonds, which is 6.32%.

Now, let’s go to the valuation part. Remember that the annual estimated dividends received by Nigeria is $1.6125 billion. We are assuming that the country will continue to receive this amount into perpetuity. Now, using the discount rate of 6.36%, the value of 49% of the NLNG assets should be $25.35 billion. This means that NLNG as a whole should be worth approximately $51.73 billion. So where did Mr. Attah get $13 billion?

If we use the MD’s valuation, that means he either used a discount rate of 25.3%, which I believe is too high, or he believes that the dividends that NLNG will pay going forward will decline rapidly. It may also be the case that he used the book value of the assets, which is just a function of the historical costs.

But I will humbly disagree with Mr. Attah at this point.

As a tax-paying Nigerian, I wish to let the economic managers know that if they must sell our stake in Nigeria LNG, any price below $25.35 billion is not acceptable.

PS. To determine the discount rate, I used 0.97 as the beta (the unlevered beta for petroleum producing companies), risk free rate of 2.4822% (which is the US 30-year bond yield as at October 13, 2016), and market risk premium of 4%.

Courtesy: www.etftrends.com

I don’t like assumptions, but when you don’t have enough data, and when you also have no idea what will happen to y when x happens, then you have to fall back on assumptions. So I decided to pull out my Excel Spreadsheet, after an interesting conversation with a good friend this morning about whether improved oil production can lift Nigeria out of recession.

I am not an oil and gas specialist, and I am not even an economist. I am just an investment manager, but I watch all my investments, both personal and for others, like a hawk. So I tend to do a lot of exercises because I combine both top-down and bottom-up investment models when I make investment decisions.

We are going to keep it as simple as possible. Nothing complicated. No Monte Carlo simulations, just add, multiply and divide.

The first assumption we are going to make is that oil price will remain stable at $45 per barrel. While in reality, it is possible that if Nigeria suddenly ramps up oil production, oil price may take a hit. We will ignore that, because there is no way to know how much the price will be impacted.

The next data point is the level of oil production. The 2017 budget assumption placed oil production levels at about 2.2 million barrels a day. Now, let’s take a look at oil production in the first half of 2016. The average oil production was about 1.9 million barrels per day according to the Nigerian Bureau of Statistics (which stated that oil production dropped by 0.42 million in 2016 Q2 to 1.69 million barrels per day from 2.11 million barrels per day in 2016 Q1). The second assumption we are going to make is the maximum output that can be generated in reality. According to NNPC, Nigeria can produce up to 2.7 million barrels per day. The maximum output Nigeria has experienced over the past 10 years was sometime in mid-2011, and it was just a little above 2.25 million barrels per day. That was the time during which vandalism was at its lowest ebb, and well, crude oil theft also held sway. No one has been able to estimate exactly how much was stolen but there is a ballpark value of around 250,000 barrels per day. Adding the maximum output in 10 years with the estimated amount stolen, we can arrive at a maximum output of 2.5 million barrels per day.

We now have all the data we need. Let’s get to work.

If vandalism and crude oil thefts are handled, Nigeria will improve its output by 600,000 barrels per day. At $45 per barrel, this will amount to about $9.855 billion in one year. But not so fast. We are not done. Nigeria operates Joint Ventures with major oil producers and gets about 60% share. So, that 60% share will lead to about $5.913 billion additional income in one year.

Let me rephrase this. Nigeria will only enjoy additional income of $5.913 billion in one year, if oil vandalism and crude oil thefts drop to zero. This is based on two assumptions — one, oil price will remain stable at $45 (we will leave the exact oil price for the gods), and two, Nigeria will be able to produce 2.5 million barrels per day — and one fact, which is, Nigeria average production was 1.9 million barrels per day in the first half of 2016.

Now, let’s attempt to answer the question: can improved oil production lift us out of recession?

Summary up to this point. We know that we are in a recession and contracting at 2% per annum. We also know that we can generate an additional $5.913 billion per annum from crude oil sales.

It is time to make the third assumption. The income generated by the improved crude oil production is expected to have a multiplier effect in the economy. But by how much? This is a critical point because it will be foolhardy to assume that a $1.00 growth in oil production will lead to a $1.00 growth in the GDP. The effect could be $5.00 or $10.00 or even $20.00. I have scoured the Internet and no such data exists. But we are not going to just pull figures from the air, we need something to work with. Let me apologize at this point, because things are going to get just a teeny weeny complicated now. You don’t need to understand the mathematics behind it, so feel free to skip the next two paragraphs. And I will not be taking questions on how I did the mathematics, unless you are willing to pay for it. In US$.

At the end of June 2015, crude petroleum and natural gas (oil and gas for short) sector accounted for N1.614 trillion, while the GDP stood at N16.623 trillion. At the end of June 2016, oil and gas dropped to 0.896 trillion — this is a 17.5% drop. The GDP also dropped by 2.2% within the same period to N16.254 trillion. All prices used are at 2010 Constant Basic Prices (this has to do with the GDP rebase all those economists have been talking about). Going by the values provided, oil and gas dropped by N282 billion within a period of one year, while the total economy dropped by N369 billion within the same period. We can stop here and say okay, the first amount led to the second amount, but it is not that simple.

We will have to take it just one notch up again. We don’t want to be making too many assumptions. We need to be as close to reality as possible. So, we should have used some kind of time series to define the correlation between oil and gas output and GDP growth over the past 30 years or so. But that will need a lot of data and the results are going to be very close to what we have now because we need to weight the time series to actually reflect current realities. The relationship between oil and gas and telecommunications, for example, will not be significant prior to 2002, just before the telecommunication companies entered Nigeria. But that relationship may be quite significant now, and using an equal weighting may not show the true picture of things. Yeah, I know I am getting really academical, and that was not my intention. So, I will stop here.

Okay, so we know that oil and gas sector production dropped by N282 billion, while the GDP dropped by N369 billion between June 2015 and June 2016. Based on that we can assume (yikes, that word again) that the multiplier effect that oil and gas has on the economy is about 1.3x. This means that for every N1.00 drop in oil and gas production, the economy will suffer by N1.30 and for every N1.00 rise in oil and gas production, the economy will grow by N1.30.

Now, let’s go back to that $5.913 billion. This is the value we calculated to be the increase in output that Nigeria will enjoy if oil vandalism and thefts are curtailed. Also remember that the Nigerian economy lost N369 billion over the past one year. We also said the multiplier effect is 1.3x. So for the $5.913 billion extra income, GDP is expected to add $7.687 billion. Using the official exchange rate of N315/$, this is equivalent to N2.4 trillion. This is a far cry from the N369 billion lost in 12 months.

So, to get us out of this recession, we don’t seem to need oil price to rally. All we need is for oil production to improve a little from where it is, and we can get our economy ticking over again.

This is to wish Operation Crocodile Smile all the best with getting us back to where we belong.

Recession is a word. It is a also noun. It is a powerful noun that has thrown 4.6 million people out of jobs in a little over a year. A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. I got that definition from Google.

No, recession is not just a word. It is a painful process that all economies pass through once in a while. It usually follows a period of high growth, and like a bubble, the growth stalls and then we reset. The job of economic managers is to ensure that the recession, this period of reset, is as short as possible because it can be quite painful. Recession is like that injection you have to take to bring your temperature down when you are running a high fever. The shorter one feels the needle the better. A very bad nurse keeps the needle in for far too long. And like a patient, Nigerians are in the hands of their economic managers, the nurse.

Let’s go back to the definition of recession, which we pulled from Google. A period of temporary economic decline. A period during which trade and industrial activity are reduced. First sentence — we know for a fact that the economic decline we are experiencing is temporary. But how long will it last? No one knows. But with what I see around me, it looks like this decline may last longer than it should. Second sentence — trade and industrial activity are reduced. Voila! Therein lies our solution. We need to increase trade and industrial activities! The economy needs to be shocked back into recovery. Fast.

Question. What are our economic managers doing to shock the economy back into recovery? The Honorable Minister of Finance said they are doing capital investments and diversifying the economy. Hmm. She was quite vocal about the N300 billion that would be injected into capital investments. Nigeria has been going everywhere to raise foreign bonds with no success. There is this Panda Bond that we heard so much about, which fizzled out unceremoniously. And then there is the $1 billion Eurobond we have also heard so much about, but has refused to materialize. What is going on? I mean $1 billion is just umm… N315 billion. No. Not N425 billion. No. It is N315 billion.

You might be wondering why I used the word “just” for that humongous amount of money. Yesterday, September 5, 2016, the CBN did an open market operations (OMO auction) for N90 billion, but it was subscribed to the tune of N127 billion. Just like that. In less than 30 minutes, the market snapped up N127 billion of Treasury Bills. Tomorrow, September 7, 2017, the Debt Management Office (DMO) will issue Federal Government Bonds worth N120 billion. I will wager $50 (at black market rate) that the issue will also be oversubscribed. In three days, over N240 billion will queue up to buy Treasury Bills and Bonds. But there is reduced trade and industrial activity, and Nigeria is looking for $1 billion. Can you see the disconnect I am seeing now?

This thing did not start today. In the last quarter of 2015 and early 2016, CBN refused to issue OMO. Treasury Bills were maturing and the funds did not have anywhere to go because there was no dollars to buy. What happened? Yields dropped into single digits and very low double digits across the yield curve. Oh, that means interest rates dropped to less than 10% for the shortest maturities and just to a little over 10% for the longest maturities. Interest rates were below inflation. CBN thought that by forcing interest rates down, banks will be forced to lend. Nothing happened. The banks kept cash, and were just looking at the money. Now inflation is up and interest rates are going through the roof.

The problem. There is so much money, but the money has refused to flow into economic activities. It is so bad that lenders would rather just sit on the money and lose purchasing power than send the money into the economy. There is a lot of investment going on, but there is no economic investment.
Let me make you cry a little.

Nigerian Customs says they have lost N600 billion to diverted vehicle imports in about three years. I have been hearing stories that Nigeria has only one port. That is not entirely true. Nigeria has a second port in Cotonou because three out of four cars on Nigerian roads are brought in from Cotonou. That is the diversion. What are the economic managers doing about this? They are increasing duties. Two weeks ago, a flash drive I purchased from Amazon was seized by Customs. (Nigeria doesn’t produce flash drives, so don’t ask me why I bought it from Amazon.) They said I have to pay for it to be released. I have being buying things from Amazon since 2007, and this was the first experience with Customs. Now, if I can use Benin Republic Customs to bring in my flash drive at a cheaper rate, why will I use Nigerian Customs? I think it is common sense. You cannot be patriotic to the detriment of your wallet. Markets don’t work that way.

CBN is quite miffed with the way Dollar has taken the Naira for a ride in the black market. But this is what you get when you ban things that Nigerians believe are essential, from “41 items” to rice.

Now, try and set up a shop anywhere in Lagos or Abuja. Believe me, before you generate N1.00 of revenues, at least two agencies would have collected some form of tax from you. In the event that you pay up the taxes, you have no idea when your shop will be marked for demolition.

Remember that we are in a recession, and what we need to do right now is to encourage economic activities. But we are going about it all wrong. We are increasing taxes, banning things, demolishing economic centres, and frustrating small businesses. We are only sinking ourselves further into the recession. The nurse has stuck in the needle, and she has refused to withdraw it.

Now, why would any investor in their right senses take their money from their bank accounts and invest it in any form of economic activity when the business environment is so acrimonious for small businesses? This is why Mrs. Adeosun is going all over the world looking for $1 billion, while Mr. Emefiele is busy commanding over N315 million every week right in her backyard. There is very little coordination going on, and this is needed so badly. Mark Zuckerberg can come to Nigeria 100 times and Warren Buffett can also visit 200 times; if we do not get our economic environment right for small businesses to thrive, the road to economic recovery will be very long and painful.

So now we know. Recession is not just a word. It is a noun with a very bad connotation.

I was in the UK a few weeks. I bought bottled water from a store and I got a couple of coins as change. One of them was a £2 coin. And then it hit me. I stared at the coin for a couple of seconds while different kinds of thought ran through my head. That coin, I mean that £2 coin was equivalent to the highest Nigerian Naira denomination — the N1,000 note.

Yes, I have been aware for several months that the Nigerian economy was in a turmoil, but this coin really brought it home.

Some of us who believe that the currency should not be controlled, especially at a time like this when we do not have any reserve to defend it, have received a lot of bashing. I have even been called names. But the damage started when we did not face reality on time. We kept the Naira at ridiculous levels — N197 — while the world lost its head. Oil prices tanked. Oil production was wiped out. The difference between the official price and the parallel market was enough for people who had access to official prices to retire early. The CBN, reluctantly, instituted a “flexible regime”, which allowed the Naira to depreciate for a while and then slammed the breaks at around N280. After a lot of pressure, when people got to know that the so-called free market was rigged, CBN let go once again, and yet a gain slammed the breaks at just around N310.

The Nigerian Government has already fixed the dollar at N290 for the 2017 budget and fuel price is hinged around the N285 levels. They clearly believe that the local currency should not stray too far from that level. Right now, everyone is tired and CBN is winning the war. Nobody is saying anything about rigging the currency market again. The lambs have chosen to remain silent. But markets don’t lie… the Dollar is now trading at N412 at the parallel market, almost N100 premium from what is obtainable at the official market. We are gradually going back to where we came from, but at a more depressed and painful level.

Many people have asked me what the fair value of the Naira is, and my answer remains, “I don’t know”. But all I can say is, given all we are seeing around us, the Naira still has some way to go.

Last week, I took a closer look at the forex futures market, and I was amazed at what I saw. The July 19, 2017 contract was selling at N231/$. Meanwhile, the spot rate is at N315/$. Yes, I know that I have stepped into gibberish-land, but I am not the only person seeing this. Foreign investors are seeing this but no one is taking the plunge. Why? Okay, I know I am running ahead of myself. Let me take a deep breathe and explain what this means.

Let’s go back to that spot rate. N315/$. This is the current rate in the interbank market, but that spot rate is rigged. So, let me make it a little bit more realistic and place the spot rate at N330/$. Now this is really conservative, because the truth is if you bring in $1 million into Nigeria today, you can comfortably sell everything at N400/$ at the black market and do all the magic you want to do with it. But let us behave ourselves and act as patriotic Nigerians. Okay, so you bring $1 million into Nigeria and tell GTB you want to sell to them at N330/$ — trust me, they will buy it off you in a heartbeat. Now, that $1 million will land N330 million into your bank account. Straight.

Stay with me. This is where it becomes really interesting.

Remember that we were talking about the July 19, 2017 forex futures contract selling at N231/$, right? Right. Now, as you are selling your dollars to GTB, you also ask them to get you the July 13, 2017 Treasury Bills. That bill is currently trading at a discount of 16.27% — this is equivalent to a yield of about 18.95%. When you buy the treasury bills, you will get back exactly N384 million on July 13, 2017.

Now, at the point of executing this trade, you also go long on the July 19, 2017 forex future at the ongoing price of N231/$. What this means is that you lock in to sell the Naira at N231/$ to the person or whoever is at the other end of the trade — most likely CBN. (Only CBN will bet in favor of a strengthening Naira in this economy.) Because you know you are going to get N384 million back on July 13, 2017, you lock in the N231/$ price now. This will give you an equivalent of about $1.662 million in less than a year from you. I mean, who will see this kind of opportunity and not jump into it? One would expect foreign investors to scramble all over themselves to jump into this trade. This is 66% US Dollar return in less than a year without breaking a sweat!

But it is not that simple. It gets really complicated. If you do not have a head for mathematics, just skip the next paragraph so you don’t get a headache.

The futures are Naira settled, and they are benchmarked against the official US Dollar price, which the CBN controls. This means that CBN, or the counter party, will pay you the difference between the future price of N231/$ and whatever the official price of the dollar is as at July 13, 2017. And it will be paid in Naira. So if the dollar trades at interbank at say N350/$, then you will get N119 for every dollar. Remember our treasury bills that matured with the sum of N384 million? Yes. We bought the future at N231/$ and we purchased $1.662 million worth. Now the official dollar price is N350/$. That N119 difference per dollar (N350 — N231) is what you get in Naira, and this amounts to N193.018 million [N119 * 1.662 (millions of dollars)]. When you add your N197.778 million from the trade to your N384 million and then go to the official market to buy dollars at N350/$, you still end up with $1.622 million.

So it doesn’t matter where the official price is as at July 19, 2017, you will still get enough Naira to purchase your $1.622 million at official price. That one is guaranteed. What is not guaranteed is if there will be enough dollars in the official market to meet your needs when it is time for you to get out. The official price of the dollar is whatever the CBN says it is. What if you are desperate to get out, and parallel market is already N600/$ while official is N350/$? Now all of a sudden you are no longer looking at 66% return in dollar terms. I will not bore you with the mathematics, but now you are facing a loss. A big loss.

So, you see, the market looks very inviting theoretically, but in practice, it looks like a trap. This is one major reason foreign investors are not interested in coming into Nigeria. This is what you get when you mess with the markets.

So for everyone who is wondering why we have “devalued” or “floated” but those foreign investors have refused to come, it is because our official forex markets are still under the tight control of the CBN. We have a market, but the market is not free, and we do not have the war-chest to accommodate the potential outflows when the foreign investors are ready to go.

The Naira has fallen. But there is a silence of the lambs.

“You know, I hawk bread in the morning between 6am and 8am and in the evening between 5pm and 7pm on Monday to Saturday. That time of the morning is when people usually prepare for breakfast just before going to work and that time of the evening is when people start closing for work and getting ready for dinner.”

I quipped in, “So you work for only four hours a day?”

“Yes,” she responded. “But at that time my work time dropped to two hours – one in the morning and one in the evening. I finish selling all the bread I can carry in only one hour, and by the time I get back to Baba Rashida to restock he would have finished selling. Some of my very loyal customers started complaining that they no longer get bread to buy because I finish selling before I can get to their houses. It was funny because some people who used to claim that bread was only for the rich people started patronizing me. Even Brother Sola who had been looking for a job for over two years got a job with Baba Rahida, the bakery owner, and his family started eating bread. So I thought to myself that if my bread can be finishing quickly like this, could I increase my profits by increasing prices? Then a loaf used to go for N100. I increased it to N120 and I lost some customers, but I was still able to finish selling my stock. The good thing was that my loyal customers were now able to get bread. Although I worked for longer hours now, but my profit was more. Ah, those days!”

I was impressed. “Does that mean that you continued to get bread from Baba Rashida at N80, but you now increased your price from N100 to N120 and you still finished selling your bread?”

“Yes”, she replied with a smile.

I sent an email to my Professor. He got back to me with a very long response. In summary, he said, Jumoke just explained the concept of demand-pull inflation. In this type of inflation, people have a lot of money to spend so there is an increase of demand for goods and services. This increase in demand for goods and services in turn leads to more employment as producers try to meet up with rising demand. But over the short term, it is difficult to expand the bakery once it starts operating at full capacity, so there is a fixed production of bread.

Because of increased demand, which kept leading to stock-outs, Olajumoke increased the price of her bread. But since people had money to spend, she was able to finish selling her bread day in and day out. Business was good. Profit margins were high. People worked overtime and everything was good.

A few months ago, I got talking with Olajumoke again. “Long time, no see! Where have you been? You didn’t even bother to call me.”

“It’s not like that oh, Manny”, she replied. “I have been very busy these days.”

“Busy doing what?” I asked. “ I thought you worked for only four hours a day?”

“See, a lot of things have changed,” Olajumoke said. “The bread business is no longer the way it was when we first met.”

My interest was piqued at this point, but thankfully my friend knew how curious I get at times so she did not let me come out with my question.

“See, Manny,” she continued. “You know Baba Rashida used to buy imported flour for his bread. They said there is this dollar scarcity and the flour that he used to buy for N10,000 is now N18,000. To even make matters worse, cost of diesel has increased from N135 to N200, and he also has to pay more for electricity. Even Tajudeen that used to help him bring his goods from Apapa said they have increased price everywhere and transportation has gone up. NEPA people said they have orders from above to increase price of electricity. Everybody is just tired. Baba Rashida was servicing a loan he took from Diamond Bank, and they told him he would have to start paying more interest because the Ogas in the bank said the Ogas in the Central Bank have increased interest rates. Baba Rashida said the only thing that is stable now is his house rent. He said he couldn’t sell bread to us at N80 per loaf again. So he increased his price to N120. And people are not even eating bread like before again; people are just soaking garri nowadays. Brother Sola even lost his job too. So you can imagine that me that used to sell bread at N120, what will I gain now? You remember I used to make a gain of N40 per loaf when I increased price. Now there is no gain again. But I have to take care of myself too so I increased price to N150 but people were not buying like before. I had to bring the price down to N140 and then N130. Even at that N130, many times I don’t sell everything. So you see, I have to spend more time hawking bread. And I have to spend more money to buy the same amount of bread and I make much less profits than before.”

I told my Professor about this and I got another epistle from him. He said this is called cost-push inflation. This is different from demand-pull inflation in which lots of money is going after few goods and services. This time around, the cost of input into goods and services has gone up. So for producers to break even, they have to raise their prices. This situation is worsened when this is accompanied by a recession in which people are losing their jobs. They have less to spend so they reduce demand. Because of this, profit margins are squeezed. It is a bad combination when a rise in cost of production is accompanied by lower amount of money available to purchase these goods.

What is the solution to this? This is beyond monetary policy tweaks such as interest rate and foreign exchange manipulations. While it is a good place to start, this needs to be accompanied by structural or fiscal policies to help ease the strain in the rise of cost of inputs. For example Baba Rashida has been complaining about the rise in prices of flour. This price rise may not be due to only foreign exchange. If there are policies such as high and multiple tariffs and taxes, these could be tweaked to bring down prices of imported flour. The Government doesn’t have to build roads or increase electricity transmission capacity overnight – these are long-term projects that are not expected to yield fruits immediately. Little things like these pesky policies can be tweaked to ease economic activities and to jumpstart the economy. These policies have a positive impact within a very short period of time such as a few weeks.

“Thank you for this information Jumoke,” I said. “It was really helpful for my knowledge base.”

“Not a problem, Manny. I am no longer selling bread though.”

“Oh, really? So what are you doing now?”

“You don’t know? I met one photographer and one singer some time ago and I am now a m…”

The line went dead. Na wa for MTN.

“Hello. Hello. Jumoke! Hello.”

Disclaimer: This is a work of fiction. Names, characters, businesses, places, events and incidents are either the products of the author’s imagination or used in a fictitious manner. Any resemblance to actual persons, living or dead, or actual events is purely coincidental.

1. The drain on foreign currency savings as a result of subsidized dollars. Oil marketers can get dollars to buy petroleum products from CBN at N197 while the value on the streets is around N325

2. The total man-hours wasted on fuel queues weekly

The two costs above can be linked. What Nigerians save from buying petrol at subsidized dollars should offset the productivity they lose by waiting on the streets to buy fuel. But from the perspective of the Nigerian economy, both of them are losses.

We will start by first analyzing how much Nigerians save by buying fuel at current price (N86.50) - these savings also happen to be a burden borne by the foreign reserves. The Petroleum Products Pricing Regulatory Agency (PPPRA) template shows that the landing cost of one litre of petrol is N64.40 per litre while the retail price is N86.50. The Government, indirectly, collects a sales tax of N7.80 per litre. Fuel marketers purchase this product, using the Central Bank of Nigeria (CBN) exchange rate of N197/US dollar. Assuming that fuel marketers import fuel, using the parallel market rate, the landing cost of petrol would be between N91.53 and N117.68 per litre. This is based on the assumption that black market price could be anything between N280 - N360 per US dollar. By the time we add distribution margins of N14.30 and raise sales tax to N10, we should see fuel sell between N116 and N142 per litre, with an average of N130 per liter. Average black market price is between N120 and N200, depending on where you get it. Once again, the black market has shown an uncanny ability to determine the true value of a controlled good.

Using Monte Carlo simulation with all the variables above, one can arrive at a value of $1.87 billion savings made for Nigerians by providing subsidized dollars to petroleum marketers. Let me reiterate once again that these savings is actually a burden borne by the foreign reserves. To put it in perspective, the total Eurobonds issued by the Federal Government of Nigeria is only $1.5 billion. Nigeria blows more than this amount annually just to provide "cheap fuel" for its citizens. Is it worth it?

Is the stress of queuing up for 2 - 6 hours to buy fuel worth N43.50 per litre, the savings made from buying fuel at N86.50 worth it?

The Nigerian GDP as at 2015 stood at $568 billion. With an estimated population of between 160 million and 180 million, the GDP per capita stands at around $3,341. Assuming that Nigerians work for an average of 7 - 9 hours per day and between 225 and 275 days per year, it means that the average earning for a Nigerian is about $1.54 per hour. If Nigerians queue between 2 to 6 hours per week to buy fuel, it means each Nigerian loses an average of $402 per year on fuel queues.

From my analysis, Nigeria loses about $50.43 billion every year on fuel queues. This is only the quantifiable costs. One cannot put the associated costs of stress, reduced productivity, etc that follows many hours of staying on fuel queues in the Nigerian hot sun.

The total cost of the current fuel arrangements in Nigeria stands at $52.30 billion. For a $568 billion economy, this is a huge burden.

Now, let us address that pesky little issue that many Nigerians keep raising about how raising fuel prices will make things very difficult for everyone. From the analysis above, we can conclude that each Nigerian saves only $11.00 (N2,167) from buying fuel at N86.50 per liter and then sacrifices $296.65 ((N58,439.47) every year.

It is very certain that Nigeria cannot sustain the current fuel arrangements for too long. If crude oil prices stay at current levels for the next few years, Nigeria will be forced to review these arrangements. Hopefully, things would not have deteriorated beyond current levels.

Oil Price Performance Over the Past One Year

Inflation rose to 9.20% in the month of June 2015, which means we are just 80 basis points away from hitting the dreaded double digit inflation figure. But that is not the point of this post. How do we position our investment portfolio to weather the ongoing storm in the Nigerian financial markets? Sometimes, one of the worst investment decisions is to go contrarian because Warren Buffett said we should be greedy when others are afraid.

I will let the numbers speak for themselves.

NSE Performance Over the Past One Year

From the chart above, we can deduce that the market is currently somewhere around where it was in December 2014. A little analysis shows that the one year standard deviation of the Nigerian Stock Exchange Index (NSE Index) stands at 31%. This means that we have about 68% confidence that the market will not lose more than 31% of its current value over the past one year. I don't feel very confident in that figure. The market volatility is still pretty high, although the slope downwards from right after the election in April seems quite gentle. But I am not too convinced about that gentleness. It is at this time that the market reacts really rapidly to tiny shocks. And tiny shocks are currently in abundance.

But hold on a second! What is that funny looking pattern between November and March in that chart? It has everything to do with the election period. That was a period of extremely high volatility. This funny looking pattern made me take a closer look at the fixed income market and here is what I saw.

10 Year FGN Bond Performance Over the Past One Year

The chart here is the 10 Year Federal Government of Nigeria Bond (FGN Bond) price performance over the past one year. That same funny looking pattern also found its way here within that same November to March period. The election period did not spare even the fixed income markets in Nigeria. There seems to be nowhere to hide. The chart here looks even more jagged than that of the NSE Index but the standard deviation is only 15.4% - almost half of that of the NSE Index.

But here is the real difference. The 10 Year FGN Bond is just one fixed income security,while the NSE Index is made up over 200 equities. By the time you add more fixed income securities to the FGN bond, the standard deviation will drop below 15.4%. A basket of fixed income securities could actually have a standard deviation well below 12%. This means it is safer to hold a basket of fixed income securities than to have high exposure to the stock market.

I know I have gone all hard core on finance jargon. Let me make it simpler.

What all these numbers are simply saying is that it is better to do a tactical asset allocation switch at this time. Oops. I mean you should protect your portfolio if you are holding Nigerian assets because "Winter is here". My advice, which is what I am currently doing, is to reduce exposure to equities to the lower limit and raise fixed income securities to the maximum limit at this time. At least, until the storm is over.

Happy investing.

Performance of the Naira over the past one year

The question we need to ask ourselves is this: "After we have devalued the Naira (for the third time in less than seven months), what next?" I have asked many proponents of the devaluation theory this question and nobody has given me a satisfactory response. Nigeria has experienced so many devaluations over the life of the Naira and none of them has brought any succor to the Nigerian economy. None.

The problem Nigeria has right now is more structural and cultural than economy. There is the theory that once Naira is devalued, we will be forced to look inwards to produce those things we import because they will become too expensive.. This idea dwells in the realms of theory, not reality. It would be better to check the pulse of these Nigerians before prescribing this pill for them. I asked on my Twitter timeline a few days ago that Nigerians should stop buying imported goods and buy made in Nigeria goods. I got a few responses that only confirmed my suspicions. Someone told me he'd rather continue to buy imported toothpaste rather than buy Nigerian made toothpaste because he doesn't want his teeth to rot. Another said imported rice tasted better.

Some months ago, I went to a pharmacy shop to buy Actifed, a pill for allergies and cold, and the pharmacist told me they had two types: one was imported and the other was produced in Nigeria. The imported one was twice as expensive as the Nigerian made one. The pharmacist told me that the imported one sells faster than the locally made one. Guess what? They were both made by GlaxoSmithKline. Now this is very interesting. If CBN Governor says he is not going to give us dollars to buy UK made Actifed again, what is wrong with that? The question we should ask ourselves is why do we prefer UK made Actifed to Lagos made Actifed even at double the price? If the Lagos made pill is not as effective as the UK made one, we should make our complaint to Consumer Protection Council and the NAFDAC.

But nobody will do that because we all love imported goods. If Naira is devalued to 500 Naira to the USD, Nigerians would simply stop importing high end goods. They will go to China, import Tumy Hilfinger products and re-brand them as Tommy Hilfiger somewhere on Lagos Island. Abandoned goods in the UK can become luxury products in Nigeria, just as one traffic hawker once tried to push me to buy a UK used Blackberry on the Third Mainland Bridge sometime in 2010. We have an insatiable desire for imported goods and several cycles of devaluation over the years have proven again and again that this will not stop.

The solution to this problem is that Nigerians need to re-orient themselves. We need to hold ourselves to high standards and force ourselves to be mutually accountable. We need to encourage ourselves to produce goods locally. By banning certain things from being purchased using the Nigerian reserves, the CBN is effectively raising tariffs on such goods. Another thing we should also remember is that many Nigerians actually use these goods as avenues to round-trip the USD because of the inherent loopholes. They go to the bank with papers declaring they have goods to import and buy the USD at 198 Naira and then go to the streets to sell to the Mallam at 230 Naira. The CBN may not have mentioned this explicitly but this was actually becoming a problem.

The strange thing is that since the CBN started this banning of things, the foreign reserve has actually crept up by almost $3 billion in just about 40 days! Check out the tail end of the chart below:

Nigerian Foreign Reserves over the past one year

The chart shows that this strategy has been working despite oil prices being in the doldrums.

Another thing we should be pushing our Government for is to diversify the revenue base as quickly as possible. We should stop looking for mineral resources and such stuff. Nigeria depends on the most volatile asset ever in the history of human kind. Oil prices have no understandable fundamentals behind them. The price goes beyond demand and supply - it is driven by politics, whims and caprices of Governments in the West and Middle East.

In summary, my take is: Stop disturbing Godwin Emefiele. Let us put pressure on our Government to diversify our revenue base as quickly as possible and we should try as much as possible to use Lagos made Actifed and toothpaste for starters.

Pressure of multiple returns
Jason has talked about this – a 3x return is not a good one for a good VC, except we are talking late stage $100M+ investments. You know what is sexy? 20 – 50x returns.
So the key question for VCs is How big can this startup get? How fast can you get to a $100m-for-real valuation?

This statement is like placing all VCs into a tight pigeon hole. This is what an article in The Guardian addressed. There are many VCs that have woken up to the idea of social impact. Social enterprises hardly ever generate those sexy returns quoted above. Organizations such as NESST and Impetus  don't give a hoot about your sexy returns if you don't fit with their ideas for social enterprise. At the end, a 2x return may be what a VC might just be looking for.

To end this, Opeyemi's last words on his piece are the words I would love to use to end this article because I couldn't agree more.

Except you are in the business of fundraising, I suggest you face your work – hacking/growing your business to traction – whichever metrics matter (revenue, users or transactions). To get funded by most of the VCs you’ve seen around – local/foreign (I’m not mentioning names), you actually need to be the bride that everyone wants to be with.

The Index experienced a bullish run in the last quarter of 2013, then took a breather and resumed in the second quarter of 2014. However, it looks as if the market has started taking another breather. Now, the question on every stock investor's mind is this: what is the way forward?

As we all know, nobody can accurately predict what the market will do tomorrow, but there are pointers, and other variables, that can tell us what to expect in the near future. The market doesn't always respond to these variables, but as investors, we need to device strategies to help us determine the way forward in optimizing our portfolios.

So this is the time to insert a caveat: what I am going to write about is just my opinion, and the strategy I intend to deploy in managing my personal portfolio.

Over the past one year, the NSE Index has gained 13.4%, largely because of the bull runs evidenced in the chart above; however, the market has actually lost 0.29% year to date. That is a brief review of the performance. So, how does this all stack up? Let's dig in a little deeper into the numbers.

The Nigerian stock market has the largest share in the MSCI Frontier Markets Equity Index, at least until Saudi Arabia is added. Strangely, the NSE Index is cheaper than the MSCI FM Index. The NSE Index has a price to earnings ratio (PE) of 11.9x, but the MSCI FM Index has a PE of 13.9x. While the NSE Index has a price to book value (PBV) of 2.4x, the MSCI FM Index has a PBV of 2.8x. And lastly, the NSE Index has a return of equity (ROE) of 19.4%, while the MSCI FM Index has an ROE of 16.5%. On a relative basis, the Nigerian market is looking cheaper than the stock exchanges in other frontier markets. If the NSE Index is stripped off from the MSCI FM Index, the difference in valuation will actually become much wider because of the weight that Nigeria occupies in the Index.

Now, I decided to take a closer look at other stock markets across Africa, and my findings were startling. Nigeria looks undervalued compared to the other markets across Africa.

South Africa
PE - 15.4x
PBV - 2.2x
ROE - 15.1%

Kenya
PE - 12.5x
PBV - 2.5x
ROE - 28.4x

Ghana
PE - 13.1x
PBV - 1.3x
ROE - 13.2x

Dow Jones 
PE - 15.1x
PBV - 2.5x
ROE - 18.3%

Apparently, the NSE Index is quite cheap at this time. But is this the right time to plunge into the market? I don't think so, because I believe the market is still going to become much cheaper than it currently is.

Inflation currently stands at 8.2%, but the minimum yield on Nigerian Treasury investment is 10.2%. That is a minimum of 200 basis points real returns on fixed income investment. Why should investors plunge into the stock market when they can get to preserve the purchasing power of your funds at zero risk? Another reason why I believe the market will still become cheaper is the current volatility the NSE Index has displayed so far. The weekly standard deviation of the NSE Index over the past one year stands at 1.95%, while that of the FGN 2022 Bonds stand at 1.08%, which means that the stock market is still quite volatile and this volatility is likely going to drive it down a little further than current levels.

Another major concern for the stock market is election fears. The presidential elections is less than six months away from now. A lot of politicians would be keeping liquid cash at the moment to fund elections, and this may make them to sell down assets to meet up with electioneering needs. With rising liquidity will come rising inflation, and in order to curb this inflation, the Central Bank may be forced to tighten liquidity by conducting more frequent open market operations (OMO auctions). Frequent OMO auctions may force interest rates to rise further from current levels, and thus increase the real returns on investment for fixed income.

A lot of investors are also likely to stay by the sidelines until the elections are over, and this will lead to reduced appetite in the stock market over the next six months. The stock market is not likely to decline in a straight line; I expect a little bump towards the end of 2014 and early 2015, before it continues its downward trend until the elections are over. The outcome of the elections will also determine how soon the stock market would recover. If the incumbent government is returned, I expect the market to trade sideways for a few weeks that may last up to six months before a massive rebound. This sideways will be informed by the traditional noisemaking that will be made by the losing side(s). If, however, there is a change in government, the market is likely to experience an immediate decline as market participants take off to examine the policies of the new government, and the recovery may not happen for at least one year. The return of the incumbent will guarantee a continuity in policies and the market will react positively to this.

The last question is the likely impact of terrorism in the North Eastern part of the country. I believe that this threat will be contained just before or immediately after the elections in February 2015, and the chances of a degeneration into an upheaval of the general economy is less than 0.05%.

In summary, despite the cheapness of the Nigerian stock market, I am going to tactically remain underweight for the next six months. But this does not preclude me from cherry picking some very juicy opportunities as they emerge.