The excitement over the new flexible exchange rate policy announced by the Central Bank is gradually waning as the attention of local investors has now turned towards their foreign counterparts. Logically, we all want to know when they will be reinvesting in Nigeria.
For the avoidance of doubt, getting foreign investors back into Nigeria will be the yardstick observers will use to measure the success of the new exchange rate policy. If they do not come back soon enough, the pain will only increase for you and I. The stock and money markets which we all invest in via our pension contributions rely heavily on foreign investments to help drive up value. The higher the value of your investments the better your return.
This is why an article from Reuters highlighting why foreign investors are not yet ready to return is quite poignant. These are some of the reasons given by analysts interviewed by Reuters;
Jonas David, emerging market specialist at UBS Wealth Management in Zurich.
“It is positive, it is a more credible and flexible exchange rate regime in the long-run, you will see an external rebalancing of the economy, a fiscal adjustment and so on…But in the near term, things will get worse before they get better.”
Kevin Daly at Aberdeen Asset Management.
“Right now you have negative real interest rates, so investors will not be enamoured with buying Nigerian bonds given where inflation is or where it is headed,” “You need (a yield) somewhere between 15-20 percent to make this attractive.”
Yvonne Mhango, Sub-Saharan Africa Economist at Renaissance Capital in Johannesburg.
“It will be at least 12 months before we see any green shoots,” “The pain has to cut in full through the economy.”
Robert Marshall-Lee, investment director at Newton Investment Management.
“(Naira devaluation) will lead to a consumer recession, a collapse in profits in companies…..When we see the market pricing the new reality and the stocks de-rate to reflect the new profit base, we will let that shake out happen. It might well over-correct which will give us an opportunity to buy.”
As you can see, it is quite difficult to please these foreign investors. They are no slackers. They are not oblivious to the fact that the economy is still reeling and that things are likely to get worse before any improvement takes place. They know that the introduction of an exchange rate float always causes more pain in the near to medium term, and they appreciate how devastating that can be for an economy.
The message this passes across is one of investor patience and resilience. The economy will turnaround and things will improve, however that will take quite some time. More companies will declare losses and some may even fold up. It is a risky economy right now and new investments have more chance of dying than living. Should you decide to invest in stocks, make sure you know what you are going into and what your investment time frame is. Foreign investors are not coming back just yet, so the bullish trends we are seeing now are more likely to recede than increase.
For the ordinary Nigerian, foreign investors are basically asking for an increase in interest rates. Since inflation rate is now at 15.6% and expected to increase after the float, they believe the rates at which the CBN borrows money from the market (via treasury bills) should equally increase to at least above 16% or even 20%. If that happens, then banks are likely going to jack up borrowing cost to as high as 30%. The signs are there already, with the CBN mopping up over N1 trillion cash from the economy. This creates a liquidity squeeze making lending by banks more strenuous.
We still suggest caution, and that you devote more attention towards news and analysis on the economy. It is the single most important thing right now. You never know….who will.