In a meeting last week with personnel from one of the bigger investment banking outfits operating out of the United States of America, I was gifted an insight into the source of the often annoying dissonance between “foreign analyst’s” perception of the economy, and my sense of it.
The background to the meeting was that this person, previously of the International Monetary Fund, and just back advising one of Africa’s many leaders, had been appointed to head the African economy desk of the investment bank, and wanted to run his outlook on the Nigerian economy by key domestic stakeholders. By some stroke of good luck, I got invited to the parley.
We had a chance to ask questions. But more importantly to run our own view of the economy by him. And that dissonance showed up once more. He had this “all is for the best in the best of all possible worlds” reading of the Nigerian economy. And truth is that you do not have to be an economist to know that much is amiss with taking Dr. Pangloss’ view on the Nigerian economy.
Take the power sector. It is difficult to quarrel with a transfer of much of the resources here to the private sector. In government hands, we saw much of the assets needed to assure steady power supply deteriorate until there was almost nothing left. With pricing right, the incentive for the private sector to invest in new capacity is there. But, is pricing right? Do we, in a publicly owned transmission infrastructure, have the best of all possible options? Already, we are beginning to hear that the due diligence performed by the new investors did not throw up as much facts on the industry as would have been necessary to make informed decisions.
We may then reach the point where government will have to offer more concessions to the private operators than they currently have. In the alternative, private operators will spend more money than their initial models suggested. Either way, we push the break-even point on these investments further in time. How will the banks who put up money respond to calls to restructure their lending in the light of these new developments? Besides, is it a positive fact that more loans than equity was involved in the transfer of these assets to the private sector? Of course, the multiplicity of questions counsel caution. Essentially, that we take a longer view of the prospects for the sector.
The investment banker on the other hand had a view on the economy no deeper than the second half of next year, by which time, he planned to put a sell advice on domestic financial assets. Until then, because the Central Bank of Nigeria (CBN) is expected to keep rates well above inflation (ensuring strong yields for portfolio investors), Nigerian financial assets are recommended for their investment banking clients.
Then it hit me! The experience with the foreign investment banking community is analogous to the focus of most companies in the United States (just before the corporate implosions heralded by Enron) on the three months reporting horizon (so beloved of analysts), and which saw companies resort to all manner of legerdemain to smoothen their earning streams and meet the pre-quarter guidance on performance which they themselves issued. This was also the thinking behind the structuring of organisations’ incentives around near-term performances.
Incidentally, there is obvious movement in public policy thought in these parts down the path trod by businesses in America a couple of years back. Growth is the name of the game: rising output numbers; lower inflation; and stable exchange rates. These are the metrics that excite investment bank analysts, and the ratings agencies. And they thus attract much of our policy makers’ attention. They may not be those that deliver welfare gains to large numbers of the domestic population. In truth, the policy direction may not be sustainable over horizons longer than a year. But so long as we can meet the quarterly growth expectations of these stakeholders, nothing else matters.
As with businesses in the US, we may have to take another look at the structure of local incentives that drive public policy making. A stronger focus on longer-term development challenges, and the investments in capacity needed to realise this might not be such a bad thing. Investment bank types, and ratings agencies’ analysts may worry, but the commonweal stands to gain a lot more.