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Attractive returns lie in wait for investors taking a long-term approach to the Nigerian financial market, despite impending elections, according to Ike Onyia, the chief executive officer of Lagos-based asset management firm, FBN Quest Asset management.
“Nigeria is going to witness elections next year and there is an expectation for a slowdown, but I say it is an opportunity for investors to take good assets at good valuations,” Onyia told BusinessDay from London.
The downside risk of impending elections is tapering an over-optimistic outlook for Africa’s largest economy, which narrowly exited recession in the second quarter of 2017 after five straight quarters of contraction between the first quarter of 2016 and the 2017.
The economy will probably grow 2.6 percent this year, according to a BusinessDay survey of 15 economists, but there’s a caveat.
“We are positive about Nigeria in 2018 because of its stronger growth outlook, improved external position and prospects of lower interest rates,” Yvonne Mhango, sub-Saharan Africa chief economist at Russia-based advisory firm, Renaissance Capital, said.
“The downside risks to our outlook include a deterioration in the oil sector’s outlook and escalation of political instability in the run-up to the February 2019 elections,” Mhango added.
Though the country’s budget deficit is forecast to widen, Renaissance Capital is comfortable with the financing gap “because it will still be lower than the IMF-recommended 3 percent of GDP, and it does reflect an increase in capex spend, which is positive for growth.”
Election years are typically characterised by political uncertainty with investors likely to hold back from a country’s financial markets, unsure of the outcome of elections in that country.
“Elections anywhere in world go with a lot of uncertainties, irrespective of how matured the democracy is and Nigeria is no different, so as election approaches investors will rather stay on the side-lines, which will moderate the bullishness and investors will want to hold their investments in safe assets such as fixed income instrument,” Johnson Chukwu, CEO of Lagos-based advisory firm, Cowry Assets, said.
“Also, there is going to be lot of foreign exchange holding, as investors are also likely to hold their instruments in foreign currency, so we should expect depreciation in naira as election year approaches.”
Chukwu added, “The central bank might tighten liquidity as the election approaches to mop of excess cash flow as a result of election campaigns; leading to increase in interest rate which will make also make fixed income more attractive for investors.”
“The equity market will moderate before the end of year, and fixed income will be most beneficial,” Chukwu concluded.
A foreign currency crisis brought on by the oil price rout since mid-2014, saw Nigeria fall out of favour with foreign investors and contributed to the nation’s first economic recession in a quarter of century in 2016.
Rather than allow the naira currency weaken, in line with oil prices, as Russia and Kazakhstan did, Nigeria resorted to capital controls.
The move sent foreign investors fleeing and stoked pressure on the naira, which went on to shed 40 percent of its value against the dollar last year.
The situation is however starting to look up once again for Africa’s largest oil producer, though slowly, following a fragile exit from recession in the second quarter of 2017.
Oil prices have inched higher, as OPEC’s production cuts drain the supply glut which dampened prices. Brent crude rose 0.57 percent to USD$69.3 per barrel, Thursday, according to Bloomberg data, after rising three folds from a record low USD$28 per barrel in January.
To Nigeria’s advantage, it was exempted from any cuts to its crude oil output, and this has combined with higher prices and stability in the Niger-Delta to boost the inflow of petrodollars, greasing the illiquid foreign exchange market in the process and calming the nerves of some foreign investors.
The creation of a so-called “Investor and Exporters (I & E) window,” in April 2017, has also boosted dollar supply to the market and paved the way for foreign buying of Nigerian stocks which have since rallied to a three-year high. Some $28 billion worth of transactions have been done on the window, according to FMDQ data.
In perhaps a threat to the oil price rally, U.S. oil production surged above 10 million barrels a day in November for the first time since 1970, according to Energy Information Administration data.
At 10.038 million barrels a day and rising, the U.S. may soon challenge oil giants Saudi Arabia and Russia for the crown of world’s biggest producer. West Texas Intermediate crude is trading above $64 a barrel, a price that could spur even more drilling.
LOLADE AKINMURELE & DIPO OLADEHINDE
