Nigeria has attractive bond yields and a fast growing economy with a young population. For investors, it’s missing a key ingredient: a functioning government.
According to Bloomberg, more than a month since taking charge of Africa’s largest economy, President Muhammadu Buhari is yet to choose ministers; an announcement the 72-year-old former military ruler said he may postpone until September. That’s left the continent’s biggest oil producer and most populous nation without a finance chief to steer a Treasury he said is “virtually empty” amid calls for a currency devaluation.
Investors’ actions in the capital markets are an answer to that political void. An index of naira bonds declined 2.6 percent in dollar terms over the past month. That compares with average losses of 0.2 percent across 31 emerging markets. And while Nigerian rates of 14.9 percent are the highest among those nations, foreigners are staying clear until they know Buhari’s plans for the exchange rate and budget, according to Barclays Plc and Rand Merchant Bank.
“You can’t ignore the yields on offer in Nigeria, except for when there’s a lack of clarity on policy,” Ridle Markus, an analyst at Barclays, said by phone from Johannesburg on July 2. “It creates further uncertainty as to what the cabinet will look like, what decisions the finance minister will take.”
Oil Damage
Nigerian stocks dropped 9.2 percent since April 2, the day after Buhari’s win over Goodluck Jonathan in a presidential election, the seventh-worst performers globally among 93 primary indexes tracked by Bloomberg. He was sworn in on May 29 following a campaign in which he promised to crush Boko Haram’s insurgency and clamp down on corruption.
Attacks in the northeast and the central city of Jos last week and on Sunday have claimed about 200 lives, capping the deadliest period under the new government.
So far Buhari has articulated few ideas on how to revive an economy ravaged by an almost 45 percent drop in Brent crude prices over the past year, Angus Downie, head of economic research at Ecobank Transnational Inc., said by phone from London on July 2. Nigeria’s government relies on oil for roughly two-thirds of its revenue.
Growth will decelerate to 4.8 percent in 2015, about half the average of the past decade, according to the International Monetary Fund. That’s still faster than the global average of 3.5 percent and 4.3 percent for developing nations.
Some Nominations
The naira fell 21 percent between the end of June 2014 and Feb. 12 to a record low of 206.32 against the dollar. That prompted the central bank to extend foreign-exchange trading curbs to prop up the currency. While those have steadied the naira at an average of 199.03 since March, they have left it overvalued, according to investors, including Investec Asset Management and BlackRock Inc. The currency was little changed at 198.90 per dollar as of 4.15 p.m. in Lagos on Monday.
Still, Nigeria’s population, where 44 percent of its 177 million are under the age of 15, according to data compiled by Bloomberg, augurs well for long-term growth. In the euro region, less than 16 percent of people are under 15, while in the U.S. the figure is 20 percent.
A delay in naming a finance minister means it may take longer for investors to find out whether currency restrictions will be removed, according to Joseph Rohm, a money manager at Investec Asset Management, which oversees about $110 billion.
Currency Devaluation
“We need a devaluation and strong appointees in the government for the market to go up,” Rohm said by phone from Cape Town last month.
Bonds and equities surged after Jonathan conceded defeat to Buhari, easing investors’ concerns about a disputed result in a country that had never seen a peaceful change of power from one party to another. Yet, as well as plans for the currency, investors now want to know whether the government will remove gasoline subsidies and how it will diversify the nation from oil.
“We’re still sitting in the dark,” Zoran Milojevic, a trader at New York-based brokerage Auerbach Grayson & Co., said by phone. “The only positive thing is that Nigeria didn’t spiral into a civil war. That’s not enough to push the market.”
Average bond yields have climbed almost 100 basis points from 13.91 percent since May 14.
They probably won’t rally until Buhari outlines how he will improve Nigeria’s economy, says Ronak Gopaldas, an analyst at Rand Merchant Bank, a unit of FirstRand Ltd., Africa’s biggest bank by market value.
“People thought by now they’d have some kind of clarity,” Johannesburg-based Gopaldas said by phone on July 1. “They’re looking for a decisive message about what Buhari’s going to do to arrest the economic decline. It’s something that needs to be done sooner rather than later.”
Credits: Bloomberg.