No Policy Direction Fuels Investors’ Exit | Independent Newspapers Limited
Newsletter subscribe


No Policy Direction Fuels Investors’ Exit

Posted: May 5, 2016 at 4:35 am   /   by   /   comments (0)


Bamidele Ogunwusi



Federal Government’s lack of “clear economic policy direction” is said to fuel investors’ exit from the country, analysts have said.

Investors in the Nigerian capital market have been exiting the country in droves. Just last week, over 74 exited equities and FGN Bonds as the Nigerian Stock Exchange (NSE) figures show.

NSE figures on Tuesday revealed that monthly foreign outflows outpaced inflows, which was consistent with the same period in 2015.

Foreign outflows decreased by 40.20 percent from N31.84 billion in February 2016 to N19.04 billion while foreign inflows increased by 40.77 percent from N10.94 billion in February 2016 to N15.40 billion in March 2016.

Consequent upon the spate of outflows, domestic investors outperformed foreign investors by 28.48 percent as total foreign portfolio investment (FPI) transactions decreased from 36.48 percent to 35.76 percent over the same period.

Published data on forex disbursement last week showed that investors divested $6.97 million through Stanbic IBTC Bank Plc, representing over 50 percent of $12.91 million total funds disbursed by the lender.

The investors see foreign exchange (forex) policies of the Central Bank of Nigeria (CBN), especially its reluctance to devalue the naira, unfavorable to their investments.

Investors’ preference precluding Nigeria is not a coincidence or a chance move, experts say. Much can be pinned on government’s lack of “clear economic policy direction”.

Explaining that several factors are responsible for the herd movement out of Nigerian equities and bonds, Ogho Okiti, CEO of Time Economics says, “While flexible/stable currency arrangements are often a consideration, there are other considerations that would have made the outcome indifferent, given the exogenous shocks, the decisions and expectations of the Fed actions, outlook for emerging economies in general given the slowdown in China, and the lack of a clear economic policy direction in Nigeria.”

Reacting on the NSE Tuesday figures, Matthew Ogagavoriua, a financial analyst and a stockbroker, said it calls to question the stance on openness and transparency.

“What has happened is that we have a government that is opaque. The government has not been upfront with its economic policy direction. What we have seen so far has been a management of foreign exchange regime that lacks openness and transparency. Any foreign investor knows that it will be too long for Nigeria to be forced to do the right thing”, he said.

According to him, a situation as that portrayed by government lends itself to a currency slump among other negative effects.

“When that happens, the value of the naira to the dollar will drop. They don’t want to be caught in that condition. They know it won’t be long. What we are currently doing is not a sustainable economic model when you artificially force the hands of demand and supply to fix price where people get foreign exchange at the discretion of the CBN.

“We are artificially rationing a commodity that determines the commodity that determines the exchange of value in our economy. Today we have not even told the world whether we really want to operate a market that is driven by demand and supply which the whole world is doing but we have a leader who believes in command and control, who believes he can artificially hold price from responding to demand”, he noted.

Cyril Ampka, an Abuja based analyst, said the foreign portfolio investors are not encouraged because of the decision of the current government not to devalue the naira.

“The Buhari’s government can only do this for a short time but it will not last. The only way out is to devalue the currency. What we are saying is that allow the naira to find its true value. There is no science behind the two exchange rates we are having in the country”, said Amkpa.

Amidst devaluation uncertainties and shortages of forex, most foreign investors remain cautious about entering the Nigerian market whilst currency and reinvestment risks linger.

Dr. Okiti adds a twist to the story by highlighting the role of inflation in determining the strength of the naira.

“There is no doubt that the consideration of Nigeria’s policy on exchange rate is a consideration in portfolio investment decisions. So, this is no different. The situation would have been made worse by the rising rates of inflation, which continues to weaken the naira in relation to other currencies, especially those of low inflation.”

Okiti further situates the problem on a wider context and a rising dollar value.

“However, this alone does not explain the portfolio divestment in Nigeria in the last year. First, Nigeria is not the only country that has become vulnerable to portfolio divestment in the last 18 months. As emerging markets face exogenous shocks, and their risks escalate, foreign investors have returned to “base” for capital preservation. This has especially followed the expectation of a stronger US dollar and US rate hikes, which went up in December 2015 from 0.25 percent to 0.5 percent.

“To be specific to Nigeria, during the 2008 – 2010 crisis, despite devaluation, and despite relative size of international reserves, the crisis, also emanating from the fall in oil prices, was accompanied by significant portfolio investments.”

Retreating investors from Nigeria’s economy want to see a more ‘workable’ foreign exchange regime in place, one that does not lend itself to forex shortages and weaker growth.

They say they are not pushing for devaluation, that all they want is a workable foreign exchange regime that will ensure sustainability in the long run.

Most companies that spoke to Independent say dearth of dollars as a result of plummeting oil price is forcing them to buy the greenback at black market premium. They say this has pushed up operating costs and prices of goods and making business difficult to operate in the country.

The naira has been under intense pressure since the start of the oil price rout in mid-2014. Scarcity of dollars at the interbank market has pushed the cost of the greenback to an all-time high at the unofficial black market.

“We need to be clear; foreign investors are not seeking a ‘devaluation’ and this is likely a misrepresentation of the issue. They do want to see a more workable foreign exchange regime in place, one that does not lend itself to forex shortages and weaker growth, significant currency misalignment with fundamentals, and therefore the risk of a large and sizeable devaluation that might offset any gain from their investments in Nigeria”, said Razia Khan, Managing Director, Chief Economist, Africa Global Research at Standard Chartered Bank, London.

She noted: “The only way to credibly reassure against a sizeable devaluation is to put in place a forex regime that reassures on the extent of currency misalignment.  This means demand and supply should ideally play some role in the determination of the forex rate.”