As if the uncertainty over the current state of health of President Muhammadu Buhari is not enough political risk on its own, an escalating face off between the National Assembly and what is left of the Presidency is compounding even that political risk.
In the business world, risk is often preferred to a state of uncertainty. Risk is often described as a situation where you have a clear knowledge of the likely outcomes of a situation. Often the example given is when you toss a dice, you are certain of six outcomes. In that situation, you can measure your risk and determine if it is worth taking that risk.
A state of uncertainty is when you cannot determine the outcomes of a particular situation. In this case, you are completely stepping into a dark hole and you are not sure of what will hit you or where it will come from. When faced with such situations, most investors will rather not make an investment decision and even when they are forced to make one, they will always ask for very steep returns to compensate for the higher risk of investing in an uncertain environment.
Investors could be said to be facing high levels of uncertainty in the Nigerian political and economic environment this is showing in the cost of debt or the returns that investors are asking on their capital. As at Friday, the yield on Nigeria’s 364-day treasury bills (t-bills) stood at 22.51 percent and was about the fourth highest among 14 major African markets monitored by Standard Bank Research.
It was only lower than the T-bill rates for Mozambique, which stood at 28.63 percent, Angola at 23.15 percent, and Malawi at 23.15 percent. South Africa, Africa’s second largest economy, after Nigeria, despite its on-going political troubles, has a 364-day treasury yield rate of 7.51 percent while Egypt, which has faced even more political upheavals than Nigeria in recent times, has a 364-day treasury bill rate of 20.98 percent.
However, it is the spread in yields between Nigeria’s 91-day treasury bill and the 364-day treasury bill, which indicates that the country is paying a high premium for the rising uncertainty over its political and economic future.
The yield, as at Friday morning, July 7, on CBN issued 91-day treasury bills stood at 13.50 percent compared to the 22.51 percent for the 364-day treasury bill. This results in a spread of 9.01 percent. This is the highest spread among 14 major markets tracked by Standard Bank Research.
It is also twice higher than the average spread in the monitored money markets in Africa. The spread in Egypt is less than three percent. In South-Africa, the spread is actually negative, meaning investors are getting less for their long-term funds than for their short-term funds. This could also be interpreted, for South Africa, to mean that investors are optimistic that whatever challenges they have now are temporary and therefore expect that things could normalize in the long run.
Investors are obviously not having similar optimism about Nigeria. An investor recently told BusinessDay in London “Your high yields are meant to be a compensation for your bad policies.” Basically, the country is bearing significant economic cost for bad policies and rising level of uncertainty. Many investors have stayed out of the country because rising economic and political uncertainty. Those taking the risk of coming in are asking for higher returns.
Based on the average spread in other active African markets, yields on Nigeria’s debt instruments could actually be lower if investors were bit more optimistic about the future of the country. Even at a five percent spread, the country’s 364-day yield could drop to about 18 percent, if we put in place, the right policies and reduce the “economic and political noise” in the environment.
The obvious economic noise is the multiple exchange rate system in the country, which has made it difficult for companies to appropriately price their capital. The risk of the multiple exchange rate system has been significantly reduced by the introduction of the special window for investors and exporters where prices are more market determined. But this economic noise can be eliminated if there was a single official exchange rate instead of four different rates.
The obvious “political noise” is the uncertainty on the state of health of President Buhari and what a possible future without him represents for Nigeria’s political future. In the last week, the escalating face off between Acting President Yemi Osinbajo and the Senate has compounded this risk.
The political “bad blood” that could be generated by this face off could impact negatively on the capacity of the Acting President to govern effectively as the Senate has already indicated that they would no longer be considering requests for confirmations from him.
The political dimensions and outcomes of this face off, which cannot be readily predicted, raises the uncertainty in the political environment and consequently economic cost, which is seen in the cost of funds for businesses and the cost of debt for the government.
Anthony Osae-Brown
