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The prospect of selling state-owned assets to raise dollars to shore up a shrinking external reserve and restore a fully functioning foreign exchange market has been making the rounds in Nigeria lately, but the government’s thinking that it can dictate the terms of a sale, even when in position of weakness, may make a deal unlikely.
Insecurity of oil and gas infrastructure in the Niger-Delta region of Nigeria and a world awash in a glut of oil assets puts Africa’s second largest economy on the back foot going into price negotiations for the assets, analysts say.
What’s worse is that the $15 billion in circulation, to be raised from asset sales, may fail to douse the dollar crisis in Nigeria- where imports of goods and services gulp $4 billion monthly, even amid pent up dollar demand.
“This figure ($4 billion) assumes that import demand is fully met,” say analysts at Lagos-based investment firm, FBN Quest, in a note to investors at the weekend. “In reality, a backlog has developed on import of goods and services (such as dues to the airlines) as well as payments to the offshore portfolio community. A programme of asset sales to generate US$30bn-US$35bn would cover six months’ imports and clear the backlog according to our estimates.
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“However, the assets recommended for sale would not currently raise this figure ($30bn-$35bn). We fear, therefore, that this latest initiative to kick-start the FX market and the broader economy will remain a proposal,” the note penned by Chinwe Egwim, a fixed income research analyst, stated, adding that authorities could rather seek to expand the Eurobond issuance programme.
“Under this scenario, we think that portfolio players would return in greater numbers, other autonomous FX inflows would recover strongly and the exchange rate would enjoy stability in a fully functioning market,” said Egwim.
Nigeria has an average 55 percent stake in joint ventures run by Royal Dutch Shell Plc, Exxon Mobil Corp., Chevron Corp., Total SA and Eni SpA. These account for about 90 percent of Nigeria’s oil production and generate roughly two thirds of government revenue.
The state also owns 49 percent of the Nigeria LNG Ltd, a multibillion-dollar company which operates Africa’s biggest liquefied natural gas plant. The company’s total revenue from 1999 to 2015 was US$90.3billion while the figure for the last five years was US$48.54billion. Dividend paid to NNPC (FGN) from 2004 to 2015 was US$15.3 billion, while the figure for the last five years was US$8.74billion.
The sale of such stakes is tipped to help the country raise US$15 billion that is needed to revive the economy. Nigerian industrialist and Africa’s richest man, Aliko Dangote, and some government officials have also re-echoed this amount consistently.
“Some legislators have not grasped the fact that the authorities would be selling from a position of weakness and not be in a position to dictate terms,” said Egwim.
Oil exporting countries from Saudi Arabia, to Kuwait and Russia are all preparing to sell down stakes in state owned oil companies, in the wake of plummeting oil prices.
Saudi Arabia has appeared the most vocal, as the country mulls a five percent sale of state oil company, Saudi Aramco, to bolster its external reserves.
Nigeria has shown less urgency, even though its external reserve, less than US$25 billion, is only four percent of Saudi’s US$572 billion.
Time is running out for policy makers who have a mandate to rejig economic activity after output contracted by the most in 25 years, pushing the country into recession.
The last time Nigeria sold oil joint-venture stake was in 1993, after it resisted Chinese interests in oil assets in 2009 when oil traded well above US$100 per barrel.
The investors had offered US$50 billion for a similar menu of state owned assets.
“Naturally, Nigeria will only want to sell oil assets, when the oil price is at US$147 as it was in mid-2008, said Charles Robertson, chief economist at investment bank, Renaissance Capital, by email.
“But no buyer would be wise to buy at that price. Buyers who buy at too high a price have to take on so much debt to buy a company that they don’t have enough spare cash to invest and improve the company,” Robertson added.
What is important for the government, according to Robertson, “Is that it gets the best naira price for these assets, and that could be achieved if the currency was at a freely trade market rate.”
The lack of transparency in Nigeria’s market is signalled by a poor run of turnover results. Trading activity in the Spot FX market between the banks and their clients during the week ending Sep. 23, 2016 stood at $332 million, with an average daily turnover of $66 million, a seven percent decline, compared to the average weekly turnover from the preceding week.
This is the lowest level yet in at least 13 weeks.
Experts say the CBN will have to take the difficult but essential step to truly free the Nigerian FX market, “as that is the only way for it to achieve its objective of stabilising the local currency.”
Contrary to Rencap’s Robertson, who thinks an asset sale at this time may be perfectly timed because, “Oil will average $45 for the next 10 years, so if you can sell an oil company now, when oil is already $45, that looks reasonable,” Tiffany Odugwe, a research analyst at Lagos based investment firm, Cardinal Stone begs to differ.
“Now is probably not the best time to get real value from an oil asset sale,” according to Odugwe, who thinks rather than sell assets, Nigeria should quicken the debt programme as a means of injecting liquidity in the FX market.
“It’s not the best time because investors can sense the country’s desperation to raise dollars. Nigeria will be selling from a position of weakness and may be unable to secure a fair price,” Odugwe said.
Ayodeji Dawodu, a research analyst at Investment One, also thinks a sale is ill timed.
“The timing, with oil prices at about half their 2014 levels and insecurity in the Niger River Delta, where militants are sabotaging oil and gas infrastructure, may not be right,” Dawodu observed.
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