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Overseas investors watched with eager anticipation as Nigeria’s new president, Bola Tinubu, gave his inaugural speech in Abuja’s Eagle Square last month.
The 71-year-old inherits an in-tray overflowing with tasks that demand his urgent attention. But what foreign investors were especially keen to hear about was how he intends to breathe life into Nigeria’s economy — in particular, whether he had anything to say about the severe lack of foreign exchange that has hamstrung international investors.
Tinubu did not disappoint: “I have a message for our investors, local and foreign: our government shall review all their complaints about multiple taxation and various anti-investment inhibitions. We shall ensure that investors and foreign businesses repatriate their hard-earned dividends and profits home.”
Soon, Tinubu suspended the much-censured central bank governor Godwin Emefiele. Tinubu had been critical of Emefiele in his inauguration speech, stating that interest rates must be lowered and Nigeria’s multiple exchange rate systems should be unified.
The president’s comments, as well as the removal from office of Emefiele, will be warmly received by non-domestic investors who have left Nigeria in their droves in recent years. The problems they have encountered come not from a lack of investment opportunities, but from not being able to get their money back, and out of Nigeria.
As oil prices slumped at the beginning of the Covid-19 pandemic, the central bank imposed foreign exchange restrictions in an attempt to ease a dollar shortage. This made it extremely hard for foreign investors in Nigerian stocks to repatriate funds when they sold holdings. As a result, international investors have stayed away, evidenced by the participation rates of foreign investors within the Nigerian stock market.
In 2014, foreign investors dominated the Nigerian market, accounting for 57 per cent of all trading. By the end of 2021, this had fallen to 22 per cent and, by the end of 2022, to 16 per cent. Latest figures from the Nigerian stock exchange show foreigners accounted for 4 per cent of Nigerian equity trading as of April — a statistic that one international fund manager described as “deeply worrying”.
“The poor political environment, turmoil in the currency markets, along with the foreign exchange problems, make the situation very problematic,” says veteran emerging markets investor Mark Mobius.
Some international fund managers have stopped investing. Allan Gray, the South African wealth management group, has not invested any new money in Nigeria for the past three years.
Rami Hajar, a portfolio manager at Allan Gray, says the capital controls have had “a material impact on investor confidence” with many “unwilling to bring capital into the country as they lack the confidence that they will be able to get it out . . . thus, despite the fact we believe equity valuations in Nigeria are attractive and, in some instances, highly attractive, we have sought to redeem funds when the opportunity has presented itself.”
Andrew Schultz, head of frontier markets at Investec, the South African bank and wealth manager, agrees: “Investors need to be confident that they can get their money out before they will put it in.” He adds that the problems in Nigeria “escalated when the Covid-19 crisis hit and the central bank stopped supplying foreign exchange”.
Emefiele was in charge when that policy was implemented. Nigeria is Africa’s biggest oil producer and relies heavily on crude sales for its foreign exchange. But, when oil prices fell during the onset of Covid-19, so did Nigeria’s FX reserves and Emefiele began rationing supply, with overseas investors finding themselves a long way down the pecking order.
Emefiele was responsible for several other hugely unpopular policies, including a botched redesign of the naira, which led to a chaotic banknote shortage in the build-up to the presidential election. It was little surprise that investors were buoyed and Nigeria’s sovereign dollar-denominated bonds jumped on the first full day of trading after news of Emefiele’s suspension broke.
“We believe the changes signal a new era of focused, predictable monetary policy and a shift towards non-interventionism in the foreign-exchange regime,” Barclays economist Michael Kafe told clients following the suspension. He said it indicated that Tinubu was “keen to pursue all the difficult reforms at the early stages of his term”.
Gregory Longe, portfolio manager of Africa frontiers strategy at Cape Town-based Coronation Fund Managers, is equally optimistic. “The suspension of the central bank governor is a significant step,” he says. “Emefiele has implemented numerous unorthodox monetary policy measures that have negatively impacted the banking sector and wider economy. We may finally be getting closer to a return to normality.”
