Foreign investors’ frustration grows over naira, economic uncertainty

Foreign investors are growing increasingly frustrated with Nigeria’s handling of its currency and economy, leading them to cut investments.

Several months have passed since the Central Bank of Nigeria (CBN) last declared plans for a convergence of the multiple exchange rates, and with oil prices turning the corner there is no assurance that the CBN is still committed to that plan and whether it will even happen this year. The apex bank’s silence over the matter has not helped.

Although the backlog for FX repatriation is clearing, and the stock market has enjoyed periodic rallies, as local institutions chase returns in the face of very low real returns on fixed income, foreign investors remain largely shut out of the market due to the naira uncertainty.

Foreign outflows from the stock market quickened to the highest in six years in 2020, according to data by the Nigerian Stock Exchange. The foreign investors, who spoke with BusinessDay, all balked at the idea of returning to the market this year with the naira outlook still unclear.

Bloomberg economists predict a 10-percent depreciation of the naira against the dollar this year, following from a 24-percent decline last year. Other predictions are not far off but they all remain largely speculative with the CBN silent on the direction of the naira.

The lack of clarity around the naira is not the only worry on the minds of foreign investors. An economy reeling from its second recession in five years is also a drag, especially when the country can do much better with the right economic reforms.

The IMF expects growth to return this year but it will be at a tepid 1.5 percent, which is much lower than the growth forecast for sub-Sahara African peers.

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Nigeria’s weak economic growth renders it uncompetitive in the face of foreign investors looking at other frontier markets, posting high single-digit growth rates.

That is bad news for Nigeria that needs foreign capital if it is to reduce its dependence on oil for foreign inflows.

Yet, as these challenges chip away at an economy in need of investments and jobs, there is no strong sign that the authorities realise the enormity of the task before them.

As the government dithers, investors are growing impatient.

“Nigeria is of lesser interest these days since the mismanagement of the economy as well as the currency, by the government and central bank have for the second time in five years put the economy in a recession,” Mathias Althoff, a fund manager, said.

Althoff is one of the co-managers of Tundra Fonder AB’s $220 million fund, which reduced its holdings of Nigerian stocks by more than half within a year.

The Stockholm-based money manager’s fund had a 7-percent weighting in Lagos-traded bank stocks as of December, down from 15 percent in January 2020, a monthly statement shows.

After being among the top three countries in the fund, Nigeria now ranks sixth, with a greater emphasis placed on other frontier markets like Pakistan and Vietnam.

“It’s such a shame that it has come this far, when things could have been handled so differently,” Althoff said.

EFG Hermes, the Egyptian financial services company, said it expects 2021 to be a frustrating year for foreign investors.

“Nigeria is facing a slow-burning Balance of payment and fiscal crisis, but the authorities do not appear ready to make the difficult decisions necessary to put the economy and market on a sustainable footing,” analysts at EFG Hermes said in a note to investors.

“We remain Underweight on Nigeria, with only Guaranty in our FEM Top 15 list,” the analysts said.

Nigeria would be one of the most attractive frontier markets with the right reforms.

Frontier markets are the new emerging markets. Countries such as Vietnam, Bangladesh and Pakistan are about to repeat the economic success India and China have already had. The development is driven by a young, fast growing population, which thanks to education, is gradually becoming more productive.

Infrastructure investments, urbanisation, foreign direct investments and increasing political stability combined with economic reforms are vital in their charge to the top.