Investors to take short-term position as politics closes Nigeria reform window

The Nigerian reform window will start to close during 2018 with elections planned for February 2019, pushing investors to take a short term position on the country, emerging and frontier markets investment bank, Renaissance Capital says.
Nigeria is the market most debated in Frontier says RenCap which has concluded that the market is a three-to six-month trading overweight given the extent of Frontier funds’ underweight the country.
Other factors under watch by investors include President Muhammadu Buhari being frequently absent for health treatment, debt service of 62 percent of revenues which could be a major constraint on investments in infrastructure to support longer-term growth and risk of inflation remaining sticky in 2018 if pre-election spending requires monetisation of the deficit.
“Corporate stories may not stack up against peers in Argentina, Vietnam, Egypt given the sluggish economy,” RenCap strategist Daniel Salter says.
“We therefore see Nigeria as a three-to six-month trade, supported by the rebound in oil and investors being still very underweight and likely to increase positions,” Salter said in an email note to BusinessDay.
Taiwo Oyedele, head of tax and regulatory services, PWC, said elections in many countries in the world come with certain economic risks and often increases the level of uncertainty for investments.
“It is sad that in our own case the risks are sometimes so high as to totally discourage new investments while existing investors may even seek to exit our market. This affects the economy negatively and can only be addressed by ensuring strong institutions, and respect for contracts and due process regardless of changes in government”, Oyedele said in a response to BusinessDay questions.
In the Frontier Market (FM), Ivory Coast, Senegal and Bangladesh are the fastest growers (all at or above 7% YoY); while Bahrain, Nigeria and Lebanon are forecast to have the slowest growth.
The International Monetary Fund (IMF) growth forecasts of 0.8 percent in 2017 and 1.9 percent in 2018 are still negative on a per capita basis; according to Sub-Saharan Africa (SSA), RenCap economist Yvonne Mhango.
Nevertheless in the FM space Kuwait, Oman and Nigeria are forecast to have the fastest growth accelerations, while Morocco, Slovenia and Romania are forecast to have the worst slowdowns.
The investors’ and exporters’ (I&E) forex window which has now been operational for six months enabling international investors to invest and repatriate capital has allowed MSCI to terminate its review of Nigeria for potential removal from MSCI Frontier.
Index providers have marked the currency down from the official exchange rate to the I & E window rate.
RenCap says the macro story is recovering with Purchasing Managers Index (PMI) above 50 for the last nine months, 2Q17 GDP being positive year on year YoY (after five quarters of negative growth).
“Oil at $60/bl is a positive as is Nigeria’s oil production rebound (provided that pipeline security can be maintained following the Niger Delta Avengers’ suspension of their ceasefire agreement) and should help sustain the currency window, alongside high interest rates and a current account which has been in surplus for the past three quarters,” RenCaps Salter says. .
Inflation peaked in January at 18.7 percent; and it’s expected to come down to 15.4 percent by year-end, and to 11.3 percent at end 2018.
Uche Uwaleke, Associate Professor and Head, Banking and Finance department Nasarawa State University expects the political temperature to heat up from 2018.
The government should be well aware of this risk (political risk) and begin in earnest to put in place measures to mitigate them including but not limited to ensuring the security of lives and property as well as demonstrating a commitment to providing critical infrastructure even at the expense of campaign funds, according to Uwaleke.
“Increased spending by politicians as we approach election year will likely increase inflationary pressure with grave implications for monetary policy which is likely to be tight towards the end of 2018. Capital importation which has been more of short term portfolio investments may shrink due to the likely exit of foreign investors, a development that could lead to a bearish run in the stock market. If international crude oil price is favourable, the effect on external reserves may not be significant otherwise, the relative stability currently witnessed in the forex market will be at risk. Politically-induced insecurity could complicate matters for the economy,” Uwaleke said.