Business
Foreign investors on edge as economy loses traction
Foreign investors in the Nigerian economy have been on the edge in recent times due to the effects of ill-defined and lack of well thought out plans for the economy, Business Hallmark checks have unveiled.
Indeed, very deep anxiety has grown such that a significant chunk of those with persisting investments have been letting out signals that they are very uncomfortable with the situation and may be leaving if things remain unchanged.
This much was reflected in the question thrown at the Labour Party Presidential candidate, Mr. Peter Obi during his appearance at the policy think tank, Chatham House, United Kingdom a few days ago by a former Ambassador of Britain to Nigeria, Mr. Paul Arkwright.
Whereas Obi gave a first class and most relaxing response to the ambassador’s inquiry, however, the reality is that he has not yet become President and his answer is too futuristic.
On a close circuit, many investors acknowledge the fact that Nigeria’s investment environment is highly volatile and is therefore no longer as attractive to even domestic investors let alone foreign.
“Who will bring his money here with this level of insecurity among other challenges’’, said a former Managing Director of a bank.
There is a consensus that the high volatility in Nigeria is not only scary but may have caused the closure of some businesses.
Recent research shows that of the N178.21b worth of investments of foreigners in Nigeria’s equities market, they took out N171.38billion in the ten (10) months leading to October 31, 2022.
Market observers are also aware that insecurity and other macroeconomic challenges in Nigeria have continued to hamper investment in the stock market, with foreign investors pulling out N1.64 trillion from the market in three years. While foreign investment outflow was N642.65 billion in 2018, they withdrew N523.42 billion and N481.93 billion during the corresponding period in 2019 and 2020.
The Nigerian Exchange Limited (NGX) data also show that foreign investors withdrew N30.79 billion in January, N39.05 billion in February and N20.28 billion in March 2021, while domestic investors pulled out N86.35 billion in January, N69.28 billion in February and N93.31 billion during the same period.
On his part, Obi had enumerated the conditions he must change to attract investors to include provision of insecurity, fight and eradicate corruption, provision of power and, in fact, enthroning enabling environment for businesses to thrive.
On a broader note, experts explain that there are, in fact, three big risks that investors add when they enter international investing which are high transaction costs, currency volatility and liquidity risks.
Of course, Nigeria appears to be in deeper challenge than what has been enumerated above.
What investors are looking for
Investors are ever looking for where to put money and not fear they could lose their investments quickly. Therefore, they consider the best place that there business can be secure in addition to making the most returns. All over the world investors have sought to see good transport system and infrastructure; Size of economy and growth rate of the country; Political stability; Raw Materials; Tax, Vat & other Government Duties; Labour skills; Salary & Wages and Return on investment before taking a decision to invest.
NIGERIAN ECONOMY
Despite that recent nominal GDP growth was put at 2.55 percent and is expected to hit 3.4 percent cumulatively in 2022, in real terms, almost every sector of the economy seems distraught and uncomfortable given the tough macro-economic environment.
In fact, analysts are still not comfortable with the macro-economic environment which is still littered with slow business activities, a high Inflation rate, slow GDP growth, a slump in foreign investment, exchange rate depreciation, and rising energy prices among others.
In fact, there is a consensus that since markets are very volatile, a situation could arise when the stock prices tend to fall even in upbeat economic situations and vice versa. They maintain that if the GDP is rising and the economy looks upward, the same sentiment is likely to be reflected in the stock market prices as well, but not necessarily in the short term.
However, they warned that investing in the market is more challenging when you have high inflation, rising interest rates, and supply constraints caused by the Ukraine conflict and lockdowns in China.
‘’It’s hard to succeed in the market when you’re feeling the higher prices at the grocery stores, gas stations, and others, they added
Unfortunately, these conditions are pervasive and even worse in the Nigerian operating environment.
The examples include the high inflation rate which has hit the roof top at 22.7 per cent in 2022; high unemployment at more than 40 per cent; underemployment above 22 per cent; and high insecurity caused by the Boko Haram sect, insurgents, kidnappers and bandits. It is much more difficult to transact business in Nigeria presently.
At the same time, Diaspora remittances, of course is now lower than the $23.55billion it attained in 2020 while investors both domestic and foreign are scared stiff to bring their resources here after exiting Nigeria.
Also remarkable is the country’s heavy debt burden at almost N44.6 trillion and expected to hit N77 trillion and above if the N23trillion the CBN’s overdraft to the federal government is securitized. Of the budget of N21.8trillion for 2023, the budget deficit stood at N11.3trillion as over 100 per cent of revenues are now used to service debts. Experts fear that we are again plunging into another round of debt trap as the country witnessed before 1999.
At the same time, insecurity has not only hobbled agriculture, many parts of Northern Nigeria have been taken over by bandits such that not much business activities can subsist.
Flood has disabled a substantial part of the farms as millions of people have been pushed out of their homes. The World Bank just noted that Nigeria’s revenue to GDP ratio hovered between five and six per cent last year and remains the lowest in the world.
These days almost everybody is aware that Nigeria is the poverty capital of the world. Recently, the world bank recorded that over 133million Nigerians are multi-dimensionally poor. The Naira which exchanged at N220/$ by June 15, 2015 has depreciated by about 100 per cent to N750/$ this December 31, 2022.With the above scenario it is difficult to expect any magic at the equities market.
With the above conditions still pervasive in Nigeria’s operating environment there are mixed feelings about the prospects of the equities market this year.
Analysts’ Views
Business operators in Nigeria are of the view that given the increasing level of insecurity, kidnapping, recurrent farmers-herders clashes, unemployment, weak naira and GDP growth, rising inflation and dwindling revenue, there are more than enough challenges to scare investors generally.
They said that government must evolve enduring strategies to stop investment outflows.
In his own view, Dr. Afolabi Olowokere of Analysts data and services resource believes that with global economic growth which is projected to slow down; inflation which prompts monetary policy tightening; war in Ukraine which causes economic damage and the impact of Covid -19 pandemic which still lingers, that Nigerian will remain challenged.
An investment and financial firm, Cowry Asset Management Company’s review of activities in the market observed that the total FPI transactions in the local bourse rose to N2.08 trillion in 10 months (Oct. 22) and up 34.6 per cent year on year from N1.54 trillion in the same period of 2021. This showed an upbeat in investor activities in portfolio investment through equities trading.
“Thus, analyses of the trading data polled from the NGX showed that year-to-date, domestic investors accounted for the bulk of transactions which printed N1.73 trillion with a share of 83 per cent, while foreign investors’ participation remained low at 17 per cent (N350 billion).
“Since the capital flight triggered by the pandemic, foreign participation is yet to attain pre-pandemic levels; this is due in part to legacy issues of FX liquidity amid the fragile macroeconomic landscape. Thus, the performance highlights of transaction trend point that foreign portfolio investors’ activities have continued to dwindle from the N1.22 trillion reported in 2018 to N435 billion in 2021.
Another analyst who pleaded anonymity, told BH that it was dicey to predict the market given the numerous challenges the country has been facing. He stated that gloom was lingering given the extent of Nigeria’s problem which will definitely challenge the new government who ever wins.
In his view also, the Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr. Muda Yusuf, said the investment prospects in the country had plunged due to insecurity.
Yusuf stated, “With the terrible news about kidnapping, Boko Haram, and all, how many investors want to come here? The only class of investors that would come are, one, those who would only come for a short term, maybe they are trading and would want to dump their products and go back. For those who want to invest long-term, not many of them would want to come in because the risk is high. Second, we would only be able to attract investors who have a high appetite for risk and not all investors have the same appetite for risk. These have made us lose investors that don’t have a high appetite for risk and attract those with a high appetite for risk.”
Similarly, the Director-General, Lagos Chamber of Commerce and Industry, Dr. Chinyere Almona, had earlier in the year warned that policy inconsistencies and rising insecurity in Nigeria were two of the major factors driving away investors.
“Some investors make pledges or applications to establish businesses or invest in Nigeria and later renege on their applications for reasons that may not be far from policy somersault, worsening insecurity between the time of announcement and real investment, and the cumbersome registration and regulatory procedures,” she said.
The Vice President of Highcap Securities, Mr. David Adonri recently blamed the foreign investors’ decline in the stock market to scarcity of foreign exchange among other macro-economic challenges.
“Foreign investors are not investing again in Nigeria’s stock market, leading domestic investors to dominate the market. The decline in foreign investors’ confidence in the economy of Nigeria is also another key issue.
“If you consider the debt area, a lot of foreign investors usually invest in Nigeria’s public debt. As it is now, a lot of them have stayed away over looming fear that the government may not be able to service those debts.”
He said that foreign investors are critical to the development and growth of any economy.
“With more foreign investors, you will have more foreign currencies in an economy. What is happening now is that our macro economy has been mismanaged by the debt crisis. The federal government needs new debts to service existing debts. It is a worrisome situation for foreign investors and it is contributing to their exit from the stock market,” he explained.
Recently also the MD, Head of Strategy at EFG Hermes Research, Mr. Simon Kitchen revealed that foreign investors were finding it hard to get their foreign exchange out of both frontier markets.
“In Nigeria, foreign exchange is a long-standing problem. Foreign Exchange has been scarce since 2020 and foreigners are just impossible to take money out of the Nigerian economy if they sell stocks. In Kenya, it has become a problem.
“What it means is foreigners just aren’t putting that money in and so I think, from a foreign investor point of view, it is absolutely critical that authorities in these two countries fix the FX situation,” he averred.
