Nigeria’s Investment Horizon Improving, Says Exotix Partners

A major global investment and finance firm, Exotix Partners, has said recent changes in Nigerian fiscal and monetary policies have brightened the prospects of Nigerian investment markets. In a new review of the Nigerian economy titled “It’s time for a re-appraisal”, Exotix noted that some analysts and pundits might have allowed the previous sentiments to blur their analytical edge to fail to see the improving dynamics of the Nigerian economy and investment space.

Exotix is a major global finance and investment company with considerable imprints in world and Africa’s commercial centres. It coordinates its global operations through five major offices in London, New York, Lagos, Dubai and Nairobi.

“Negativity on Nigeria appears to have no end. Six months ago, it was all about the failures of a misguided foreign exchange policy; now the narrative has moved on to the Niger Delta Avengers, the onset of recession, the poor state of Federal Government of Nigeria finances and any number of other concerns. Is it possible that investors have adopted a permanently negative bias on Nigeria?” Exotix rhetorically asked in the review.

According to the sovereign research report, Nigeria’s adjustment is progressing better than previously thought with the exchange rate now trading below its fair value on an REER basis even when N315/$ was used instead of N340-350/$; inflation has peaked in underlying terms and oil production is likely to have bottomed.

“While we are not under any illusions about the problems facing the market, we think expectations about the path of the foreign exchange rate –and the economy as whole –have become unrealistically negative. If anything, with the potential for a rebound in both the oil price, thanks to OPEC action, and production, thanks to a deal with the Avengers, we would argue that the balance of risk has actually been shifting in favour of the upside. However, the standard investor bias has become so negative, in our view, that they are unwilling to recognise the potential for an improvement,” Exotix stated.

The report noted that the changes in Nigeria’s forex regime, although very late, moved it closer to a market-determined free-float than Nigeria has ever been, and will continue to move in that direction.

“One of the least well-covered aspects of Nigeria’s adjustment is the turnaround in the external accounts. To most experienced Nigeria observers, the biggest surprise is the reversal in the net errors and omissions component of the BoP, responsible for inflows of $26 billion over the past four quarters. We think this reflects a combination of factors including: the rise of informal, non-oil exports which received a boost from the devaluation; the repatriation of savings from abroad, via the black market; an increase in unrecorded remittances; and the rise of informal or stolen oil exports. Not only do these inflows reduce Nigeria’s external funding needs, but they support the impression of an adjustment that has been underway for much longer than the market assumes,” Exotix stated.

The report pointed out that the extraordinary measures taken in order to attract capital have important implications for the investment landscape noting that in contrast to the recovery in 2009, when the policy response was centred around a large handout to the household sector through higher public sector wages, the approach in 2016 involves a similarly large transfer to banks in form of high yields on government paper, negative real interest rates on deposits, lucrative trading businesses in forex and attractive spreads on special on-lending facilities provided by the Central Bank of Nigeria (CBN).

Exotix also noted that for all the attention lavished on the problems facing government, its role in any economic recovery should be de-emphasised as the footprint of the Nigerian state relative to the overall economy has been in decline since at least 2009.

“On GDP/capita of $2,743 in 2015, it collected $117 per head in taxes and invested just $17. Even if public sector capital expenditures were doubled from current levels, we doubt the impact on overall growth would be significant. Any recovery would, by necessity, be investment-driven and private sector dependent,” Exotix pointed out.