Nigeria is currently facing one of its greatest economic challenges since independence. Ever since the price of oil started falling in mid 2014 the economy has faced south in a spiral that has stunned the ordinary man on the street.
Gross domestic product has dropped to as low 2%, inflation rate is now 12.7% a situation economist refer to as Stagflation. To make it worse, Nigeria has grappled with fuel scarcity for the past few months and have virtually lived in darkness due to a power supply crisis that is so far unprecedented. For the locals in Nigeria, the change they anticipated seems more like a farce and people are now getting frustrated by President Buhari.
Unfortunately, Nigerians are not the only people frustrated by the current President and his policies. Foreign Investors are frustrated and have been the most vocal opponents of the economic policies of this government. They have used several foreign media outlets to vent anger and frustrations and have predicted doom and gloom for the country. They have also lived up to threats such as yanking Nigeria off the Emerging Market Bond Index. Recently, MSCI Emerging Market Index which foreign investors rely on to invest in our equities have also threatened to yank Nigeria off by the end of April.
Foreign Investors are right to be riled by this government for two major reasons, both of which are related to the foreign exchange situation. Firstly, because they do not believe that the Naira is appropriately valued they believe investing in the country at current rates over prices assets. For example, for every $100 invested in an asset, they get N20,000 based on official rates. However, looking at the black market rate, they believe that should have gotten them N30,000. That N10,000 difference is a discount they are not willing to take.
Secondly, even when they decide to invest their money they have no way of repatriating it. The money gets stuck in here as they queue behind more critical items on the CBN’s list of priority imports. And when, they can no longer wait, they are forced to buy dollars at the current open market price which results in humongous losses.
According to a report from Bloomberg, foreign investors are not even allowed to take dividends out which is probably what led to the threat to yank Nigeria off the Emerging MSCI Market Equities Index. With their monies trapped, these guys have no choice but to recycle the Naira in equities and other fixed income investing making them face further risk.
Some investors are also livid by the opportunity cost of not being able to pick up Nigerian equities especially with the very low valuation currently placed on most equities. Some blue-chip companies even reported dividend yield as high as 15% this year, unheard of in over half a decade. Yet investors, who ordinary would have invested, would have done so thus boosting the market value of the stock to reflect their intrinsic valuations.
For Nigerians who have funds invested in equities, either via private endeavor or through a pension fund, the situation will probably get worse before it gets better. Stocks will remain undervalued for months if Buhari continues with his economic policies and if they don’t begin to show its benefits. For now, Nigeria is in a state of economic flux without one sense of direction or a glimmer of hope.
