The inability of foreign investors to access dollar at ease is hurting the growth of the equities, fixed income and the debt market, and this, in turn, will limit recovery of the Nigerian economy.
Africa’s biggest economy is grappling with an exchange rate crisis caused by the double whammy of the coronavirus pandemic and plunge in oil revenue. That has crippled dollar inflows, pressured dollar reserves and dampened investor sentiment.
Investors in Nigeria’s assets are unable to convert their naira asset to dollars as they seek to exit over perceived heightened uncertainty in the economy.
In a webinar Wednesday, capital market regulators as well as operators expressed dissatisfaction in the country’s FX regulations, saying it is hurting the growth of other markets and further dampening investor confidence.
“Without a liquid FX market, other markets won’t work whether it is equities, derivative or even the repo market,” said Bola Onadele. Koko, Chief Executive Officer, FMDQ Group.
“If it is not easy for investors to bring their money in and take it out, Nigeria’s investors base will keep shrinking and the country will be deteriorating as its people will become poorer,” Onadele. Koko said.
Read also: Naira heads to N480 on black market as dollar shortage persists
The webinar drew participants from across the board, including regulators like the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE), as well as private sector people.
According to them, the pace of recovery of the Nigerian economy from the economic and health crisis of the pandemic depends on how well confidence can be restored in the market by solving the exchange rate crisis to attract the needed private capital.
To lessen the impact of the COVID-19 induced shock on Nigeria’s reserve which would weaken the naira, the Central Bank has opted to ration dollars supplied to the market. Yet, over $5 billion is sitting as unmet fx obligation with the CBN.
The apex bank for the second time this year devalued the naira in its official window to N379 to a dollar last month, as it seeks to converge the rate at which dollar is traded in the official window with that of the NAFEX. In the parallel market, it is sold around 480 against the dollar.
The decision to unify the exchange rate came as a condition given to Nigeria in order to access loans from both the International Monetary Funds (IMF) and the World Bank.
With inflation reaching a 27-month high of 12.8 per cent in the month of July, both domestic and foreign investors of Nigerian assets are left with nothing to cheer as real yields in Nigerian assets are currently trading in their negative trajectory.
Yields on fixed income assets, particularly Treasury bills reached lower lows at 1.3 per cent after a raft of policy by the CBN restricted domestic non-bank investors from participating in OMO bills.
While a low-interest-rate environment has spurred some sought capital raise by both corporate and government, which Onadele. Koko said is still low compared to what is expected, it has left investors with little or no value for their money
The FMDQ boss noted that no investor will invest in an environment where interest rates are low to the extent that real returns on the asset are negative.
He explained that in Nigeria’s quest to attract capital, it has taken domestic investors for granted for too long.
“Nigeria must learn to attract, respect and retain private capital if it wants to do well,” Onadele. Koko said.
He pointed out housing and agricultural revolution, infrastructure development, privatisation and sales of assets, capital market utilization and market-oriented principles, as some of the strategies Nigeria must adopt that will help in turning the tides.
These aforementioned strategies he said must be backed by the right leadership, philosophy, and architecture.
Aside from the hurt felt by foreign investors who are waiting on the sideline, the acute dollar shortages mean manufacturers looking for dollars to buy raw materials abroad for the production of goods and services, are unable to get.
Oscar Onyema, CEO, Nigerian Stock Exchange, said unifying the foreign exchange windows would aid post-Covid recovery by boosting the confidence of both foreign and domestic investors in the government’s commitment to economic sustainability.
He also pointed that ensuring a regulatory forbearance focused on pandemic alleviation schemes such as reduction of taxes burdens for already compliant organisation particularly those listed, delayed implementation of any new taxes at the federal, state and local levels; targeted interventions for local companies most hit by the pandemic; and a fast track of other investment attractive legislation such as the recent CAMA 2020, the pension reforms and the ISA, are some of other government policy-induced measure that will help speed up recovery.
The Nigerian stock market which is down around 6 per cent since the start of the year, due to portfolio outflows, have seen a huge shift of investment from equities to the gold Exchange Traded Funds (ETFs), as the fund is up 50 per cent, according to Onyema.
The market has also seen an increase in right issues, special placement and bond issuance as companies move to raise capital to shore up their buffers in order to withstand the hit from the pandemic.
Lamido Yuguda, DG, Securities and Exchange Commission, while reacting to the low-interest rates on assets said there has been a massive gap between what pension fund administrators are lending to banks and what the banks are in turn lending to businesses.
He advocated for more market resilience in the coming headwinds, greater use of technology, consideration of emerging risk, more attention to market development, implementation of the capital market plan as some of the viable ways to salvage the situation.
“The capital market can finance a large part of the country’s infrastructural deficits. However, to achieve this, the right policy framework must be put in place,” he said.
