Nigeria’s lack of structural reforms means deep pocket foreign investors are under no illusion that they have seen the last of another big naira devaluation in the medium term and that is deterring large inflows of funds in an economy that could do with some investment.
Foreign concerns over the naira, which suffered a 40 percent devaluation in 2016, have remained despite a two-year stability, with memories of that devaluation still looming large on foreign direct investors who got their fingers burnt.
“Concerns over a devaluation in the mid-term have remained because everyone knows the current currency stability is not down to structural reforms, instead it’s as a result of higher oil prices and the CBN’s dogged commitment to defend the naira against all odds,” an investment banker, whose firm has over 200 foreign clients said.
“Petrodollars still account for a good chunk of dollar inflows, non-oil exports have stalled on the back of unfavourable policies and we still haven’t gotten our act together to tap our diaspora strength, which means we haven’t tackled our dollar supply constraints.
“Deep pocket investors will not bring billions of dollars into the country when they know a devaluation is never far away, the best Nigeria can get while these issues are pending are trickles,” the investment banker who spoke on condition of anonymity as he isn’t authorised to speak on behalf of his firm said.
The National Bureau of Statistics (NBS) reported that Foreign Direct Investment in Nigeria fell 50 percent to $243 million in the first quarter of 2019, from $490 million in the same period of 2014.
While there has been some improvement in FDI compared to 2016 when oil prices bottomed, the country is not back to the pre-oil price crash levels, compounding the woes of an economy stuck in a low-growth cycle and could do with increased foreign investments.
A law firm which advises foreign investors said a prominent question that comes up in its interactions with clients is what happens if oil prices fall sharply, which has become an even bigger possibility as the trade spat between the US and China heats up.
“The renewed pressure on the naira in the past two weeks on the back of falling oil prices and foreign portfolio outflows, has only served as a worthy reminder that the currency remains very susceptible to another big devaluation,” a managing partner at the law firm told BusinessDay.
Brent crude, Nigeria’s benchmark oil grade, has traded below the $60 budget peg for more than two weeks now. A barrel sold for $59 Tuesday, according to Bloomberg data.
The naira has flashed signals of weakness since the oil price slide, depreciating marginally at the Investors and Exporters window.
To stop the naira from declining sharply, the CBN has intervened in the market, pushing external reserves lower.
It has also had to dig out its playbook from 2016 where it resorted to dollar demand management by banning importers of some 42 items from buying dollars from banks. This time, it plans to add milk and food items.
The CBN’s bid to fight off the possibility of another naira devaluation has only fanned the worry of FDIs who are unsure of how sustainable the CBN’s approach to managing the naira is.
“FDIs are not going to take any chances on an economy that can’t guarantee long term stability and has shown a penchant for policy inconsistencies,” said Muda Yusuf, the director-general of a private sector advocacy group, the Lagos Chamber of Commerce and Industry (LCCI).
“It’s easier when you are a portfolio investor who can take his money out in the blink of an eye at the slightest sign that the naira is under pressure, but for an FDI it’s more complicated, which is why we must take structural reforms more seriously,” Yusuf added.
The CBN governor, Godwin Emefiele, has been quite vocal about his commitment to exchange rate stability but he can’t make promises about what happens next after his tenure expires by 2023, according to some economists.
The CBN’s dollar intervention is a more of a piece-meal approach to the problem.
The Nigerian naira shed 81 percent between 2015 and 2019, the most compared to peer African currencies, save for Egypt. The South African rand declined 28 percent in that period while the Kenyan Shilling fell 14 percent. The Egyptian pound however tumbled more than 90 percent to 16.5 Egyptian pound from 7.1.
“Egypt is endearing itself to investors with its structural reforms and is in a better place to ward off another devaluation in the next four years than Nigeria,” Wale Okunrionboye, the head of investment research at Lagos-based pension fund manager, Sigma Pensions said.
LOLADE AKINMURELE
