Explaining Nigeria’s missing dollar inflows despite naira float (II)
Here are some of the apparent reasons while FPIs are not taking advantage of the Nigeria’s attractive debts market.
· Market liquidity: The most important consideration for a foreign investor is the security of his principal. Since the re-opening of the Nigerian inter-bank foreign exchange market, the market has not displayed sufficient liquidity to guarantee investors that they would be able to readily source dollars whenever they choose to exit. This concern, coupled with underlying expectation that the naira is not fairly priced will continue to keep the investor s wary of coming into the Nigerian financial market space.
· Market levels: Financial markets are known to follow trends. These markets have resistance and support levels. Overall, these factors are controlled by market demand and supply volumes. A cursory look at the Nigerian foreign exchange market based on the balance of demand and supply places the local currency at risk of further decline. The currency is expected to find psychological resistance at levels circa N400/$ to $500/$. It is expected that at these levels, demand will wane or lack effectiveness as consumers begin to run out of purchasing power. These levels would thus serve as the perfect levels for FPIs to enter the market and thus minimise exchange risk on the dollar capital they wish to bring into Nigeria, whilst simultaneously buying NDFs to hedge for exit.
· Inflation: Since January 2016, Nigeria’s inflation rate has steadily risen from 9.6% to 17.1% recorded for the month of August. Where inflation, is higher than return on investment, the incentive to invest is eroded (at least locally). However, some might argue that foreign investors are immune from the negative impact of local inflation since their return on investment ultimately gets externalised and it would thus be sensible to compare returns on their carry trade to inflation in the country from which the funds originated. Nonetheless, a rapidly rising inflation with no imminent cap in sight could further discourage foreign investment.
· Risk criteria: Nigeria’s most recent credit rating as at June 23, 2016 was released by Fitch as B+ with a stable outlook. On March 18, 2016, the country received a B+ from Standard and Poors with a negative outlook. Moody’s rating as at March 4, 2016 was a Ba3 with a negative watch classification. Foreign Portfolio investors are highly sophisticated and consider every possible risk factor in their target countries. For Nigeria, security challenge is a major risk factor considering the on-going hostilities in North-eastern Nigeria as well as the Niger-delta basin. The activities of the Niger-delta militants place a threat on the country’s future earnings capacity.
· Policy instability: It is very essential for regulators to assess the impact of their pronouncements on market volatility as policy instability also has adverse effects on the stability and soundness of the financial system. The investor’s biggest fear (even over loss of revenue) is the fear of eroding or losing his entire capital. Thus a country that cannot provide an ideal financial market with the characteristics of free entry and exit, timeliness and uniformity of information inter alia will not attract enough external investment flows.
In summary, it is hoped that the CBN will borrow a leaf from the G3 Central banks and seek to adopt a regime of policy stability in a bid to gain the confidence of the much anticipated foreign investors. That coupled with the fiscal strategy of reforming Nigeria’s consumption pattern and boosting non-oil exports will eventually serve as the needed recipe for rescuing a nation struggling in troubled waters.
We recall that after pushing through a landmark rise in December 2015, the US Federal Reserve chair Janet Yellen has since spelt out a “cautious approach” to monetary policy as a result of concerns about Chinese growth and low US inflation expectations. It will also be noted that the US Federal Reserve proactively waited until December 2015 when global markets were partially closed and less likely to react to the decision since the intention was not to trigger market volatility.
Since cutting its Minimum bid rate to zero in April 2016, the European Central Bank has adopted a wait-and-see mode that could see it wait until December 2016 before it would consider extending its monthly asset purchase programme by €20 to €80billion based on collated data outcome. The frequency of policy pronouncements from the CBN since June 2016 has been such that the markets have experienced excessive volatility which cannot be considered healthy for the Nigerian economy. This anomaly must stop and the apex bank must learn to imbibe the principles of deep consultation, data-dependent analysis and simulate possible effect (outcome) going forward.
There must be pre-set time periods for monitoring effect of new policies before further amendments are made. Since re-opening the foreign exchange market in June 2016, the central bank has issued several policy shifting/modification/clarification circulars and pronouncements some of which have actually been directly responsible for further naira depreciation in the unofficial markets.
On the fiscal side, the government must identify the quickest fix to end this crisis, i.e. the Niger-delta militancy which has seen daily crude output drop from 2.2million barrels per day (bpd) to about 1.5million bpd after hitting a low of 1.27million bpd. At a time when world crude oil prices have dropped so significantly, other oil producing countries have attempted to make up for this decline by increasing output significantly. Nigeria on the other hand, has suffered setbacks both on price as well as output. Boosting the non-oil sector output, encouraging domestic products consumption and the other measures currently being paid lip-service to will take several years to show any meaningful effect. However, if the government shows necessary resolve, it is possible to boost crude oil production within the next three quarters back to optimal levels in accordance with current OPEC quota and then possibly higher afterwards.
Finally, the government must enhance domestic spending and create jobs that would empower the masses. An “anti-corruption war” that places the populace under general suffering will not gain credibility and support. We must not forget that these FPIs do not form part of the core sources of foreign reserves for the country.
Instead, they are mere short term funds which do not belong to us and will always return to their original source. Should the CBN then continue to focus on attracting foreign investments, or look inwards for more sustainable means of long terms survival by providing support for the lagging non-oil export industry? Your guess is as good as mine.
O. H.
15.09.2016
