Potential investors in the Nigerian economy have been advised against holding assets in the country despite rising oil prices.
Nigeria which is the major oil-producing country in Africa has been described as a turn-off for investors due to fuel subsidies that have crept back into the economy and the ununified exchange rates in the country.
Speaking to Bloomberg, Phoenix Kalen, the London-based director of emerging-markets strategy at Societe Generale, said, “The narrative on Nigeria continues to be conflicted notwithstanding the recent favourable surge in oil prices. 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.”
The government subsidising petrol which is seen as the only benefit rendered to Nigerian citizens has been a bone of contention for investors in the economy. Last year in April the Nigerian National Petroleum Corporation (NNPC), declared that they have removed subsidies and that was final but the rising oil prices have conflicted with the government’s decision as it is not reflected in the petrol pump price.
Last week, the Central Bank of Nigeria (CBN) 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.
Simon Quijano-Evans, the chief economist at Gemcorp Capital LLP told Bloomberg, “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. 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.
Nigeria external reserves have also been on a decline, falling by 4.6 per cent in the space of one month. Inflows from international investors through the Nafex window totalled $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.
Simon Kitchen, head of macro strategy at Cairo-based EFG Hermes Research said, “Foreigners were assured that they would be able to repatriate money invested in Nigeria, but they were not able to do so in 2020. The credibility gap means that investors will be looking for high potential returns — on fixed income and stocks — to favour Nigeria over other markets.”