Nigerian Stock Exchange All Share Index (ASI) dipped by 1.20% on Tuesday’s trading to close at 26,034.93. Market capitalization broke the support of N9 trillion to close trading at N8,996,233,455.00 for the first time since December 31, 2012 when it closed at N8,974,448,519.04 (N8.9 trillion). That was the last time the market capitalization of the stock market traded below the N9 trillion market.
Today’s new low indicates a growing negativity surrounding the Nigerian economy and portends an even larger problem. Stocks are a bell weather of what the economy might look like going forward as investors flee risky investments for safer securities. The currency crisis facing Nigeria and the recent announcement by the CBN Governor wherein he revealed a major structural crisis in our foreign currency management may have spooked investors even more.
The CBN Governor had informed reporters that the fall in oil prices implies “that the CBN’s monthly foreign earnings has fallen from as high as US$3.2 billion to current levels of as low as US$1 billion.” Coupled with that the demand for forex has risen significantly to about N917 billion per month ($4.5 billion) compared to N148 billion in 2005. The Governor did not provide reason for this huge demand. At $4.5 billion a month and only $1 billion in inflow, Nigeria’s reserve may not last more than 9 months. Also, by banishing BDC operators to the autonomous market the CBN may have finally admitted that it cannot control the demand for forex in the country. This move will perhaps pave the way for an official float of the currency as BDC operators are more likely to source forex at rates other than the CBN rates.
With every piece of negative news about Nigeria’s currency situation hitting raw nerves, the searchlight will beam on Nigerian companies who also rely heavily on forex to pay for their inputs. From the financial services sector to the consumer goods sector, oil and gas, construction, forex is a major component of the cost. Tiger Brand for example, in their latest result declared that exchange rate loss cost them about N4 billion in 2015. The result is a spike in operating expenses, higher receivables and a decline in profits. Investors see these as signs of a major impairments of their investments and are probably exiting the little they have in the market.
The unending drop in oil prices is also a major factor in the minds of investors with analysts believing a $20 price for crude is no longer out of reach. Nigeria’s is highly dependent on crude for its survival and is yet to fully develop or execute any actions required to diversify the economy away from oil. The CBN’s admission of a major drop in its currency inflows buttresses this fact. Except any miracle by way of a reversal in the price of oil or a sudden announcement of a devaluation, we may just have seen the start of a major stock market crash.