Seyi Fadipe, a chief executive officer in one of Nigeria’s leading investment financial advisory firms, was dismayed after receiving a call from one of his foreign clients.
The client gave her a sorry call, informing her to put on hold an ongoing investment deal, as he and his entourage will not be able to fly into Nigeria for proper inspection due to the imposition of restriction measures in his country, which restricted the movement flow of persons, goods and capital.
The deal was a multi-million-dollar investment in a local agricultural producing firm in the Middle Belt region of Nigeria, which Fadipe had been on since 2019, hoping to bolster her firm’s balance sheet and reward shareholders when it finally fell through in 2020.
“The suspended deal disrupted our business operations last year,” she told BusinessDay.
Whether it was the fear of contracting the virus, or the pandemic-induced global lockdown, business leaders, and fund managers had a fair share of the unprecedented year 2020, not just in Nigeria alone, but across the globe.
Total foreign inflows (direct investments + portfolio investments + other investment) into Nigeria plunged to $9.7 billion in 2020, the lowest in three years, according to data from the National Bureau of Statistics. And the huge collapse is not unconnected with the elevated risk in the global investment environment occasioned by the pandemic.
“The COVID-19 pandemic had several far-reaching effects on Nigeria’s investment landscape,” according to Toyin Sanni, an investment expert and CEO of Emerging Africa Capital.
Some of these, Sanni noted, include a reduction in disposable income, resulting in reduced demand for investment instruments, and a loss of jobs due to massive layoffs.
“Others include rising food inflation due to supply chain disruptions, among other factors, increased taxes on VAT from 5 percent to 7.5 percent during the year, and the decline in yields following the implementation of expansionary monetary policies by central banks across the world including Nigeria,” Sanni said.
Ijeoma Agboti, managing director/CEO, FBNQuest Fund, told BusinessDay that at the initial stages of COVID-19, investors were generally inclined to avoid aggressive new investment activity and took a wait-and-hold approach. “This, coupled with a dip in interest rates, was followed by a flight to yield and renewed interest in diversification and alternative approaches,” she said.
But it was not just about the coronavirus induced-lockdown alone, a host of factors including Nigeria’s poor FX management made an already bad situation worse.
Africa’s biggest economy resorted to rationing dollar sales after the pandemic and an oil war between Saudi Arabia and Russia, two of the world’s biggest oil exporters, sent prices tanking to as low as $12 per barrel.
Being that oil accounts for a significant share of Nigeria’s dollar revenue, the fall in oil prices squeezed dollar inflows, sending Nigeria’s external reserve to as low as $33 billion, and limited the central bank’s intervention capacity in the currency market.
The naira ran into troubled waters last year, suffering a two-time 19 percent devaluation, with rates weakening to N379/$ at the official window and N383/$ at the I&E window, which further eroded investors’ wealth.
It was undoubtedly a difficult time for foreign investors, importers and manufacturers. A large number of portfolio investors were unable to access the greenback as they sought to repatriate their profit out; while manufacturers found it increasingly difficult to obtain dollars for critical inputs.
The aforementioned scenario alongside negative real interest rates following spiralling commodity prices sent a red flag to the investing public and scared fresh capital from coming, particularly hot money.
NBS data show that not one single foreigner invested in Nigeria’s bond between April and December 2020.
Although Africa’s biggest economy recorded a handful of foreign participation in equities and other money market instruments to the tune of $755.12 million and $4.2 billion in 2020, respectively, the combined amount was the lowest since 2016, and they were funds from maturing bonds, rolled into these assets.
“The foreign exchange crisis made what was already a bad situation even worse, as it deterred fresh capital from coming in,” Johnson Chukwu, CEO at Lagos-based investment and financial advisory firm, Cowry Asset Limited, said.
According to Chukwu, the decision is quite understandable since no rational investor will bring in fresh money if the previous investments made are stuck.
But it was not all bad for Nigeria when it came to attracting investment last year, as the country recorded some gains concerning direct investment.
Although analysts argue the number could have been more but for the pandemic, foreign direct investments into Nigeria jumped 10.2 percent to $1.03 billion in 2020 from $934.3 million in 2019.
As expected, the bulk of these investments were in the form of private equity, accounting for 99 percent of the direct inflows.
Fintech players had a field day last year. Stripe acquisition of Paystack for $200 million and a $10-million fundraise by Kuda Bank were notable investments in the space, courtesy of the pandemic that made investments in financial technology even more paramount.
Outlook
It is barely one year since the index case of the virus was reported in Nigeria, and fund managers and CEOs have put the ugly scenario of last year behind, remaining optimistic about the prospects of the year 2021.
Although with a full-year contraction of 1.92 percent, the economy of Nigeria exited its worst recession since 1994, expanding 0.11 percent in the fourth quarter of the year.
Oil prices are also looking bright with Goldman Sachs betting on Brent crude, the international benchmark for oil, reaching $70 by the third quarter. There is also an increasing number of countries getting COVID-19 vaccines globally and continentally
In the domestic market, yields on treasury bills, bonds and OMO bills are reversing upwards, and it is expected to give some comfort to investors many of which parted with a negative return on their assets last year.
“We are bullish on the growth of investments in Nigeria in the year 2021,” Sanni said
According to her, the rollout of the COVID-19 vaccines, which has begun offers a path to a swift recovery and return to normalcy.
The equity market also is likely to continue its rally in 2021, despite seeing a pullback in early 2021. Appreciation in stock prices would be driven by the full resumption of business and commercial activities, which is expected to improve corporate earnings, and ample liquidity in the fixed income space, which is likely to find its way into the equity market given the low fixed income yield.
The fixed income market will also experience increased activities due to the N5.2 trillion budget deficit of the 2021 budget, she said. Interest rates will likely pick up in the year 2021 as a means by the CBN to attract FX inflows to improve the country’s reserve positions.
Furthermore, corporate bonds and commercial papers are likely to gain further momentum as investors scramble for alternative investment vehicles and businesses take advantage of the low-interest-rate environment to raise capital.
“A rebound in crude oil prices due to widespread distribution of vaccines improved global trade relations, and a weaker dollar should bode well for Eurobond performance in 2021. Eurobonds could also provide a much-needed currency and inflation hedge in 2021,” she said.
Agboti, whose firm manages billions of dollars of investor’s funds, said on the private equity side, mid-sized businesses and new ventures have been forced to look inward, revisiting their operating approaches, expense dynamics and repositioning themselves to attract capital. Hence, there has been notable uptick in venture capital funding, and the emergence of new ventures.
Nonetheless, she does not expect a significant improvement in foreign direct investment inflows in the medium term given macroeconomic headwinds.
“We suspect that the gradual resumption in economic activity on the back of easing in movement restrictions across countries may have contributed to the increase in FDI seen in Q3 ’20, an uplift from $385m to $407m quarter over quarter. Furthermore, this underscores the criticality of mobilised increased local capital into domestic investment opportunities. We believe that this can trigger a more sustainable economic growth pattern and can be achieved across asset classes – fixed income, equities, alternative investments, and others,” she said in a mail response to BusinessDay.
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