Nigeria `Uninvestable' Due to Currency Policy, Exotix Says

  • Dollar-based investors recycling `trapped' naira into stocks
  • Currency policy overshadows `root and branch' political reform

Nigerian foreign-exchange controls are undermining political reforms by President Muhammadu Buhari and making the country “uninvestable” for buyers who measure returns in dollars, Exotix Partners LLP said.

The reorganization of the state oil company’s structure, changes to the nation’s bureaucracy and Buhari’s efforts to curb corruption all point to “root and branch” changes to the country’s governance structures, Hasnain Malik, head of frontier markets strategy at London-based Exotix, said in an interview in Nairobi, the Kenyan capital.

“All of that is a pretty powerful political and governance reform story,” he said. “It’s undermined from a foreign institutional investor standpoint by a very repressive economic policy and specifically a currency policy.”

The Nigerian central bank has pegged the naira at 197-199 per dollar since March last year, and restricted trading in foreign currencies, making imports more costly for a nation that’s a net importer of refined fuel and food. Importers struggle to access foreign exchange at the official rate, with the naira falling to around 320 on the black market.

“If you’re a dollar-based investor you can’t get over the fact that you could see either a major deterioration in the dollar value of your investment or your investment may be stuck,” Malik said.

Plunging Volumes

The Nigerian stock exchange’s All Share Index has lost 14 percent of its value this year alone. Share-trading volumes plunged to a seven-year low in the first quarter, as foreigners shun the market while they wait for a devaluation of the naira and as the country’s economy grows at its slowest pace in 17 years. Volumes have recovered in the past two weeks as companies have paid out dividends and those who are prevented by the foreign-exchange policy from repatriating their funds are reinvesting, said Ali Khalpey, head of equities at Exotix.

“A lot of our clients have got trapped naira sitting in Nigeria, so now we see recycling of that naira back into the equities market,” Khalpey said. “There is no point sitting in a foreign-currency line not knowing when you are going to get given your FX. You may as well buy the stock that you like over the long-term and hold it.”

While the amount of investor funds trapped in the country is unknown, it’s increasing, Khalpey said.

“People aren’t allowed to take their dividends out,” he said. “Clearly that number is growing on an daily basis.”

Nigeria risks being kicked out of the MSCI Frontier Markets Index by the end of the month because of the currency controls. If the New York-based organization decides to exclude Nigerian stocks, the country could see about $480 million of equity investments exit, Oscar Onyema, the chief executive officer of the Nigerian Stock Exchange, said in an interview on Tuesday.

With the backing of Buhari, the central bank has rebuffed demands that it devalues the naira, a sore point for many in the market. “There comes a point when he needs to understand that the whole country has already devalued,” said Kato Mukuru, Exotix’s head of equity research.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE