In response to biting macro challenges, induced by acute FX shortage, we understand the Nigerian government is contemplating selling some of its state assets to provide FX liquidity the economy so badly needs at this time. Although finer details on specific assets planned to be sold are not yet public, the rationale and merits of the proposed sale have formed subjects of discussions most recently. Our views are summarized below:
Asset sale is attractive on dearth of policy alternatives: In our view, there are not many policy choices open to the Nigerian government with regards to restoring liquidity to the Nigerian FX market today. Portfolio inflows have been delayed, and are not likely to rebound sharply in the near term given Nigeria’s heightened sovereign risk occasioned by weak macro backdrop; global risk aversion and possible hike in the US Federal Reserve rate. Most importantly, the shift in global oil price regime suggests that EM flows are likely to be capped in the foreseeable future. In effect, past policy errors and delays in key decisions around the domestic currency appear to have derailed the short run equilibrium path of the Naira. To kick-start a process of recovery, the economy needs to respond in the same manner as it has been shocked.
We believe the more objective issues to address are transparency and valuation. On the latter, Nigeria would have to be prepared to sell these assets at near distressed values given the country’s weak fundamentals at this time. Negotiating asset sales in a receding economy creates an automatic cap for valuation even if asset-specific upsides are substantial. This is especially so for earning assets. The issue around transparency is even more contentious but largely addressable in our view.
The Buhari-led administration has gained substantial credibility in anti-corruption drive relative to previous administrations. Hence, very few would question the government’s political will to ring fence the proceeds from such sale. Even if we relax this assumption, the sale can be structured in a manner that routes the transaction through the Nigeria Sovereign Wealth Fund with co-management by global and local fund managers. In our view, if the bidding process is transparent, and proceeds are well managed, it should be of little concern who the eventual buyers are.
Success could catalyse policy alignment via monetary policy U-turn: Whilst the ensuing FX liquidity injection from an asset sale is not expected to be a silver bullet, it could potentially restore parity to the exchange rate at the interbank market, hence narrowing the arbitrage between the parallel and interbank rates. Immediate dollar injection to the FX market would likely return to the fore broader growth considerations on the monetary policy side, with the MPC likely to be more open to soften its tight monetary policy stance as the need for foreign portfolio inflows would no longer be pressing. This can only be positive for an economy in dire need of growth triggers and looking to diversify its revenue base away from Crude.
More than just a sale, could unlock private investment: Beyond the short term impact of the sale of these assets on the FX market is the longer term possibility of the opening-up some of certain previously government controlled sectors of the economy to private investment, which effectively modifies the government’s market role from a participant to a regulator, solely tasked with quality control, ensuring local content, and putting in place mechanisms to create an enabling environment for market players to compete. This, to our mind, constitutes an even more important theme for the Nigerian growth story at this time and would be similar at least in part, to the liberation of the Telecommunications sector that has now become one of mainstay of the Services sub-sector in recent times. We note that a similar model has been adopted in other frontier markets (notably India) and has recorded good success to date.
Long term solution needed to boost the supply side of FX and fiscal revenue: Despite the obvious merits of an asset sale, we deem it fit to mention that a more sustainable solution is needed to close the gap between FX supply and demand. On the demand side, we think fiscal disincentive to import demand could have the dual benefits of conserving FX reserves and boosting government revenue, as opposed to the artificial scarcity as currently being experienced with the ban on 41 items. To address supply shortfall, maintaining crude oil production at a minimum level of 2 million b/d remains a critical factor. Hence, seeking a quick political resolution of ongoing sabotage of crude oil pipelines will be a defining factor in the short term.
To break dependence on petrol-dollar inflows, fiscal reforms targeted at expanding the tax base as opposed to increasing absolute taxes are preferred options given already depressed aggregate demand. Nigeria faces a long route to revenue diversification, and that journey looks likely to be prolonged as we are yet to see a coherent blueprint with milestones needed to propel a structural transformation of the Nigerian economy. While plausible asset sales will likely provide some reprieve, long term and lasting economic benefits will only be possible with the aforementioned in place.