With an absent president, a restrictive foreign exchange regime and slumping oil revenues, the opening months of 2017 proved to be a torrid time for investors in Nigeria.
As money managers fussed over a leadership void and an absence of wider structural reforms, the trading screens at the Nigerian Stock Exchange (NSE) reflected widespread investor frustration and indifference with Africa’s largest economy. Oscar Onyema, longstanding chief executive of the bourse, admits that the challenging early months of the year “significantly” impacted activities on the NSE.
“The market is very highly correlated with the economic direction of Nigeria, which is correlated to oil price movements. So we’ve taken a major hit,” he tells African Business at the London Stock Exchange’s Nigeria Capital Markets and Banking Forum.
However, Onyema – no stranger to the vagaries of the market during his six-year stint at the bourse – believes that the corner has now been turned again. With oil prices supported by coordinated OPEC output cuts, a belated dismantling of disastrous foreign exchange restrictions and a recovering president back from his London exile, Onyema says that renewed confidence is coursing through the Nigerian market.
“With the recovery in oil prices, not to pre-2014 levels, but certainly closer to the mean – that is good for Nigeria. Today output is back to about 2m barrels a day, which has really helped. Because of an increase in FX revenues, pressure on monetary policy from an FX perspective has gone down and the central bank was able to open the investors’ and exporters’ window, which has been very useful for foreign investors looking to access our market. All of these things coalesced to make our market very active and attractive.”
Those converging factors have led to a tangible recovery in the NSE’s fortunes – albeit from a low base. Onyema says N4bn ($11m) worth of stocks are traded daily. He points to a diverse influx of rights issues and special placements amounting to over $1bn this year – Union Bank and cement giant Lafarge Africa are targeting N50bn and N132bn respectively, while brewer Guinness Nigeria has already secured N40bn from investors.
The real sense of optimism is partly driven by a long-awaited government return to economic pragmatism. Nigeria emerged from its first recession in 25 years in the second quarter. After months of mounting criticism and investor fury, the administration of President Muhammadu Buhari has steadily began to dismantle the wildly unpopular foreign exchange restrictions that kept investors away in their droves.
Since it opened the investors’ and exporters’ foreign exchange trading window, the long overpriced naira has finally converged with the black market rate. Previously reluctant portfolio investors, while understandably weary of government backsliding, are once again prepared to stake out positions in the country. Onyema credits these and other government moves with helping to get the market back on its feet.
“On the fixed income side we’ve seen a lot of activity as the federal government tries to raise capital to finance its budget deficit and drive growth. Even with the new strategic shifts that the government is making with regards to reducing the domestic to foreign debt ratio, that reduces the crowding out effect and allows more corporates to issue debt in the market.”
While the administration appears to have learned from its mistakes, there remains a danger that policy decisions are being kept afloat by temperamental oil prices. A shaky détente at OPEC – where Nigeria and Libya are exempt from output cuts imposed on other members – is not likely to offer a permanent solution.
If Nigeria refuses to join future output cuts when ordered, or other members lose their resolve, the impact is likely to rebound on global prices, which have tentatively recovered to over $56 a barrel from $43 in June. Remove the incentive of higher oil prices, and government policy could again embrace restrictive FX policies – something that Onyema is keen to caution against.
Author: David Thomas