- Nigeria’s Weaker than Expected Growth Chasing Investors
The sluggish economic growth rate in a period when developed economies expected to have peaked with little room for growth are doing better than an emerging economy with higher risk level is chasing foreign investors from the Nigerian market.
Nigeria’s economy expanded by 2.01 percent in the first half of the year, according to the National Bureau of Statistics, which was below the 3.1 percent recorded by the United States. Similarly, the U.S grew by 2.9 percent in 2018, while Nigeria, Africa’s largest economy with lower investment ratings, expanded at 1.9 percent.
Growing at a slower rate than the less risky US market makes Nigeria unattractive to investors who feel they need to be properly compensated for taking a risk by investing in an emerging market with numerous economic challenges.
This explains why Nigeria has struggled to attract foreign direct investment in recent years. Last year, Ghana, a nation of about 20 million people recorded more capital inflow than Nigeria, according to the United Nations Conference on Trade and Development (UNCTAD).
While embattled Egypt received the highest foreign direct investment in 2018 and expected to grow at 5.9 percent in 2019. Again, Nigeria will grow less than half of that number in 2019, around 2.1 percent to 2.3 percent, according to IMF.
Nigerian Stock Exchange (NSE), a key indicator of economic performance, has lost more than 10 percent in value this year as investors are skeptical of the current economic situation without an economic team months after general elections.
Egie Akpata, a director at Union Capital Markets, said: “For a big investor, there’s little motivation to take so much risk to invest in Nigeria when the return doesn’t promise to be higher than what is obtainable in a country like the United States.”
Since Nigeria plunged into economic recession in 2016, it has not fully recovered rather it is sustaining the initial recovery even three years later.
Big investors will rather invest in China (even with trade war) and other emerging economies growing between 5 to 6 percent. In the last 27 years, China has averaged 6.5 percent despite growing at 6.2 percent in the second quarter of the year.
That is a nation saddled with tariffs, consumer spending issue, household debt and weaker than usual sentiment.
“Big investors probably feel they are better off staying away from Nigeria and investing in other emerging economies with better economic indicators and stronger growth prospects,” Akpata added.
Despite the weak investment sentiment, Nigerian stock investors are to pay Value Added Tax (VAT) of 5 percent on every transaction performed on the NSE. This is expected to further weigh on the exchange performance given the current situation.
Until Nigeria constitute an economic team with a clear growth path, investors are likely to remain wary or even abandon Nigeria for other emerging markets with healthy growth in the near-term.
