IR’s Message on Nigeria: Economy is falling only to rise 2

 Our argument from last week is that economies are not like dominoes that only fall and never rise; rather they exhibit a boom bust pattern. That is they rise and fall.

We then took a look at two economies that have followed that trajectory, namely Russia and Valenzuela.  We then zeroed in on Nigeria.

Diezani Allison-Madueke, Petroleum Minister

On Nigeria, we said Bust has meant more than 50 percent drop in oil prices since last year’s peak in June. Beyond the downside of the oil cycle, which are considered exogenous are other value eroding factors including poor handling of monetary controls, fears that the Boko Haram sect would further cause damage to the social system and what is generally perceived as a bungling of the electoral process as government pushes national votes from February 14 to March 28.

Giving in to these debilitating events, Naira investments took a shave in value. The natural consequence was a herd effect as foreign portfolio managers headed for the borders in a move that saw a cumulative outflow of N793.17 billion. It was the first time in three years that Foreign Portfolio Investment outflow would surpass inflow, analysts say.

But there were also other intervening factors at work in that time including the CBN’s devaluation of the naira in an attempt to defend the national currency.

So in one fell but unsavoury swoop, the economy as summed up by Oscar Oyema, head of the Nigerian bourse was such that the “bearish sentiments prevailed for most of the year as foreign investors steadily withdrew from the Nigerian market due to currency risk and the recovery of developed economies, and the effects of the US Federal Reserve tapering of its quantitative easing policy.”

In an attempt to rein in bleeding of the naira, the Central Bank got cowered in what the investment community believed was an abdication of responsibility and a clear breach of confidence, allowed the powerful bloc of money traders to suspend trading.

One possible effect this move may have is to reverse the trust of international dealers on CBNs ability to regulate that market. That the market cannot be transparent is already there for all to see.

The graveness of the CBN poor handling only sank in when JP Morgan threatened to yank Nigeria off its Government Bond Index (GBI-EM), the MSCI index of emerging market bonds, of which the country makes up 1.8 percent.
The JPMorgan Government Bond Index-Emerging Markets (GBI-EM) indices are comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging Market governments.
Thankfully, the country’s Bonds are intact in the JP Morgan index despite attracting higher and higher yields. One source remarked that is likely because that the Nigerian authorities engaged the JP Morgan team in charge of the index and attempt to prevent an exclusion from the GBI-EM.
Hopefully, the economy, our economy will not replicate the disaster of the Thai economy of the middle to late 1990s, which dragged the whole of Asia into a recession. At that time, the Thai currency collapsed amidst burgeoning foreign debt and a depleted foreign reserve. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt among other not so salutary effects.
As emphasised earlier, it is when the economy is on this side, the downside that champions should emerge. IR can take that lead. As I have enumerated elsewhere, there is no better time than now to be advocates of the Nigerian economy. The logic here is that it is only when the economy you operate from is healthy with a good dose of foreign investment that local corporations can thrive. Local companies make up less than 50 percent of the Nigerian Stock Exchange.


    ...to be continued