Nigeria Wastes Oil Rally as Policy Muddle Deters Investors
(Bloomberg) -- Nigeria isn’t making it easier for foreign investors to buy into its high-yielding assets.
A series of policy missteps in recent weeks highlighted some of the uncertainties investors face, and raised concerns that Africa’s biggest economy is missing an opportunity created by rising oil prices to attract much-needed foreign currency.
First, the country allowed fuel subsidies that have been a drain on state coffers in the past to creep back by allowing pump prices to stay low as the price of crude rose. Then the central bank devalued the naira, without providing any guidance on its currency-policy goals. And last week, the monetary authority u-turned on a decision to bar foreigners from investing in its short-term bills, leaving them wondering whether it’s worth the risk of putting money into an economy from which it’s notoriously difficult to extract it.
Investors, the International Monetary Fund and the World Bank have clamored for reforms to simplify Nigeria’s multiple exchange rates, curb inflation and remove barriers to capital flows. While higher oil prices and a weaker naira are a welcome windfall to an economy battered by the coronavirus pandemic, the concern is that they’ll reduce pressure to implement structural changes, leaving the country vulnerable to future shocks.
“We have seen time and again in emerging markets that those countries who seize the opportunity for reform also are able to weather crises better,” said Simon Quijano-Evans, the chief economist at Gemcorp Capital LLP. “The reluctance to sustain reform at better times is a lost opportunity that only comes to the fore when macro shocks appear.”
Instead of unifying its exchange regime, Nigeria’s central bank has intervened in the market and introduced several short-term policies to stabilize the naira including import restrictions, targeting exporters and introducing incentives to boost remittances. That’s put pressure on reserves while failing to solve persistent dollar shortages, according to Societe Generale SA.
“The narrative on Nigeria continues to be conflicted notwithstanding the recent favorable surge in oil prices,” said Phoenix Kalen, the London-based director of emerging-markets strategy at SocGen. “We currently do not recommend holding Nigerian assets. Unification of the multiple exchange rates and a shift toward a more market-based approach to financial markets are necessary elements to rekindle foreign interest in Nigerian assets.”
Nigeria forex reserves have fallen 4.6% to $34.8 billion from its January peak of $36.5 billion. The official exchange rate, used as a basis for budget preparation and government transactions, differs from a closely controlled exchange rate for investors and exporters known as Nafex. Daily turnover at the window on Tuesday was $110 million.
Inflows from international investors through the Nafex window totaled $117.5 million for the first two months of the year compared with $3.5 billion for the same period in 2020. The dollar scarcity in the country keeps fueling the black market, where the naira weakened to 484 per dollar, compared with the official rate of around 410, according to abokifx.com, a website that collates street rates in Lagos.
The difficulty in repatriating money is deterring investors such as Erik Renander, a portfolio manager at Emerging Markets Investment Management Ltd, known as Duet Group, which has stopped buying Nigerian securities. That’s costing the government, which has to offer a premium to lure investment.
“Foreigners were assured that they would be able to repatriate money invested in Nigeria, but they were not able to do so in 2020,” said Simon Kitchen, head of macro strategy at Cairo-based EFG Hermes Research. “The credibility gap means that investors will be looking for high potential returns -- on fixed income and stocks -- to favor Nigeria over other markets.”
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