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AMCON has delivered – Sanusi

By on May 26, 2013

Governor of Central Bank of Nigeria (CBN), Sanusi Lamido Sanusi, recently addressed the press on the sidelines of the last meeting of the World Bank and IMF group in Washington DC, USA. He spoke on several issues ranging from what Nigeria is doing on financial reforms, and the controversy over the tenure of Assets Management Company of Nigeria, (AMCON), among others. Senior Correspondent, Efe Ebelo, was there. Excerpts:

Nigeria recently participated in the World Bank Spring meeting. What has Nigeria taken home from that meeting?

As far as financial reforms are concerned, three things are clear, we are back to conventional economics theory. For the world to come back to growth, we need to have financial repairs, we need to have fiscal adjustments and we need to have structural reforms. The MD of IMF actually singled out Nigeria as an example. After financial repairs has started, fiscal adjustments as seen by the building of buffers, taking advantage of the situation right now to build buffers in the event of a crisis.
The major take away is to continue on the financial side. On the fiscal side, we have to manage the deficits properly so   that it does not disturb the government’s balance sheet. The  work has started, 2014 will be more difficult due to the elections. On the structural side, you have seen the progress made on agriculture, PIB and power. I think the take away is for us to, try and fast track those and reduce dependence of the economy on imports.

What efforts are being made on mortgage refinancing?

There was a workshop on the housing sector organised by the CME (Coordinating Minister for the Economy) and chaired by the president and there were a number of interventions that the CBN has designed which is  being used as the guidelines. There is work being done on the Land Use Act, how to reduce the cost of building materials.  The issue of housing goes beyond finance, there is the cost of construction among others. In the housing sector, there  is a whole holistic plan to address the housing problem, which is the first time it is happening. Rather than just dealing with how to give people loans, we are looking at reducing the cost of ownership and are looking at how to deepen the market and provide liquidity for the lending institutions.

What has happened to the infrastructure fund proposed by the ADB?

The issue was ADB (African Development Bank) was planning to set up an infrastructure fund and was saying that suppose they issue a bond to raise money for infrastructure,  will Central Banks be willing to subscribe to it? Will that bond be eligible for investment? And we said ADB is already rated triple A, so it does meet investment guidelines. But ADB would have to show us a test for liquidity facility that would make it possible for us to ascertain what will happen in the event of anything like the U.S. government bonds.  We are aware that they are already putting some flesh into that proposal that would tell us exactly how that fund will work. We will support everything the ADB is doing to build infrastructure in Africa and we endorse what they are doing to improve that. But we want ADB not only to focus on infrastructure within  countries, but infrastructure that would link countries and facilitate economic integration so that we do not just keep repeating what our governments are doing.

What are your comments on AMCON? 

On AMCON, there has been a lot of noise. It was set up for a purpose which is the kind of thing everybody is saying European Central Bank should do to basically repair their balance sheets of European countries. Europe has not recovered  because its balance sheets has not been repaired.
We had a banking industry that has been over burdened by non performing loans and by a huge concentration that posed a risk to the system. Until the markets know that those assets had been taken off those banks, there would be no confidence. And if you notice in Europe what is killing them is that there is no confidence . You can put in all the money in the banks, if the people do not have confidence in the system, the economy does not recover. One way to restore that confidence was to clean up the  balance sheets of the banks.

What we did was to take all the non performing loans of these banks and transferred them to a vehicle . What that means is that the banks are now clean and healthy. But obviously we have transferred these risks to one vehicle. Now to say that the vehicle has risks would be tautological. If you take bad loans and put in one vehicle there is obviously a risk. If those loans were not bad, the banks would not have collapsed in the first place. All these bad loans, we have got money put in some institutions and we know that   AMCON has assets and we know that those assets even when fully sold, will not be enough to recover that money. So, the gap has to be filled by someone. What we have done in Nigeria which nobody has done is to gather all the Nigerian banks to contribute to a sinking fund so that the Nigerian banks with some contribution from the Central Bank will together fill the gap between what you recover from AMCON and what AMCON actually owes. So you do not have to come to the tax payers of Ministry of Finance for payment and this would be  done over a 10 year period.

Would you say AMCON has succeeded? 

Now in terms of AMCON having succeeded in what it was set up to do, it is amazing. Everybody is using AMCON as a model; the Spanish are talking about it, some others are coming to study it. If you look at the excerpt of the IMF, they actually said that model should be used by other countries.
It has worked. But that is  step one. The more difficult step now is to continue to manage AMCON so that  those risks do now crystallise because you have solved one problem, you still have to deal with it over a longer period of time. And everything we are doing now in terms of amending the AMCON  Act and putting in place a model is to make sure that in the next 10 years, between the banks and the CBN , they generate enough money to pay that debt without the government balance sheet. It is an on going process, it is not an easy thing. If it was easy Cyprus would not have happened, Greece would not have happened. So, we do not in any way underestimate the difficulty. Any institution that carries N4 trillion in principal of debt is a risk to any financial system. We are aware of the risk and it is a risk that we understand and we have the solution and it is not beyond our capabilities to manage. We have managed the difficult part of banking crisis and this will be managed. Just to assure Nigerians that this will be handled and that there’s nothing to worry about.
Finally, the use of technical term like moral hazard does not mean anything immoral, happened. A moral hazard is that if  the banks believe that there is an institution like AMCON that will continue buying their bad loans, you run the risk of having the banks taking unnecessary risks, that is the moral hazard. And also if AMCON believes that the Nigerian banks are going to pay for it’s debts, you run the risk of AMCON not exercising its best efforts to recover from its assets because it has someone to do that. These are the moral hazards and there is no disagreements at all with the IMF on that.

How exactly will these debts be paid?

Today AMCON has debts with a face value of  about 5.7 trillion. Basically  these are zero coupon bonds which means that the principal amounts to about N3.9 trillion. N3.6 trillion of these are   held by CBN, which means about N2.1 are held by private sector banks.
This is how the refinancing will work. In December this year AMCON will pay off N1.1trillion, it has over N800 billion in assets, the tier two capital, Central Bank, contributions from sinking funds and on recoveries. That is enough to  pay off all AMCON bonds maturing in 2013 and also to call in all  the end  of this year, it will build that balance from recoveries to over a trillion.

That is enough to pay off all AMCON bonds maturing in 2013 and also to call in all holders of series 2,3 and 4 maturing at some point in 2014. In December, AMCON will issue a new bond of N3.6 trillion which we will invest in and that will be used to refinance our entire exposure at an interest rate of 6 per cent over 10 years . So that means the only   other creditor to AMCON will be those holding series 5 bonds maturing in October 2014 and AMCON will build up balances from the sinking fund and pay them off in 2014.

The result of this is that by October 2014, the only creditor to AMCON will be the CBN, every other person holding AMCON bonds will be paid off as at when due. This pay off will not be in the form of accretion or an injection of N1 trillion cash into the system.
We already compelled AMCON to hold its cash holding and  convert them into securities. So, these securities are going to be exchanged. What you’re going to have is that by December, the balance sheet of AMCON will reduce by N1.1 trillion as it basically hands over assets to, it’s existing creditors and then takes the bonds and cancels them. And by October next year, the balance sheet will shrink by another N1 trillion, down to N3.6 trillion. You have a situation where AMCON’s obligations are being extinguished, the CBN holds these bonds that will be paid off within 10 years in a manner that is manageable, that will not pose too much of a burden on the banks, our bonds will be structured in lots of 20 to 25 billion, so every time AMCON gets N 25 billion or N20 billion from recovery, it extinguishes a bond. Maybe, within 7 years actually it gets paid. With this,  it gives confidence to the system. There is no contingent liability of finance to anyone other than to Central Bank, we  supervise the banks, we will get our money back and we think we have a solution.

The Monetary Policy Committee has also commended the agreement reached between the CBN and AMCON on the settlement of outstanding AMCON obligations to all private sector investors by December 2014 and to repay the N3.6 trillion debts held by the CBN under a new refinancing and restructuring arrangement within a period not exceeding 10 years at single-digit interest rate. The committee noted that the repayments and refinancing arrangements would have no adverse monetary policy implications; but rather increase confidence in the financial system.

Also, under this arrangement, it is unlikely that banks will be required to contribute more than 0.5 per cent of their Balance Sheets annually to the sinking fund. By October 2014, the CBN will be the sole creditor to AMCON, holding bonds guaranteed by the Federal Government of Nigeria. The Federal Government will therefore have no contingent liability to any party other than the CBN, and the Bank will recover its debt from AMCON recoveries and contributions to the Sinking Fund by the banks. Since the CBN supervises and regulates the banks and AMCON, this exposure is considered a fair risk.

Why should inflation remain at single digit in the next few months, when we hope to see an expansionary  monetary policy? 

Holding policy is not a ritual. This is where we wanted to be, we always wanted to be there to have inflation at single digit, we wanted to have exchange rate stability, recovery in the capital market and also build up our external reserves. Now through a combination of tight monetary policy and some improvements in fiscal discipline, we have come here, so why do you want to change it?  We are not looking for a drain on our  reserves. These decisions are taken usually on a balance of arguments, internal and external.

For example a consideration around the level of portfolio inflow into the economy, is this too high to discourage it or not? Their argument is now redundant because there has been a slow down in the inflows due to some external factors. You have QE (qualitative easing) in Japan, lower interest rates in Europe and therefore there is money flowing into alternative emerging markets.

There is pension reforms in Ghana, that’s also attractive. And then there is a declining oil price, questions around oil output, that is what investors generally ….. They are increasing their presence in the Nigerian market. They have not taken their money out, and the reason why they have not taken their money out is that they believe we have that stability , we are not devaluing the currency and we are not taking any precipitate action. So without ……macro economy have addressed that problem .
Personally I don’t think we should change interest rates for the sake of changing rates, I think we should respond to situations. The government will spend money, we will keep monetary policy very tight , if the spending gets excessive, we will respond appropriately. The risks if there is any,  from the fiscal side, is that we may actually have to tighten policy further if this warrants. I don’t think that at this point in time, a reduction in rates is imminent.

On the structural side, that has been very clear, we know progress has been made in some areas, there is still a lot to be done. We need to implement reforms effectively in the power sector, we need to complete reforms in the petroleum industry. You cannot continue importing petroleum products, you cannot continue importing food to have inclusive growth. We have always said that  monetary policy and fiscal policy can only provide a stable, environment.

Ultimately it will be a combination of structural and fiscal policy that would provide growth. So it is about when the government begins to spend less on overhead and other expenditure and spend more on capital projects. We will begin to have the reforms that will bring private investments to those areas that will bring capital formation and investments, use of technology, that is when we will get inclusive growth. It is not something you get by tinkering with money supply or the rate of interest.





[Daily Independent]