This reinforces relative caution on Nigeria’s equities” — Tellimer

By JULIUS ALAGBE

The recent immigration Visa restriction on Nigeria by the United States of America due to the current state of insecurity in the country has raised some economic challenges. Rising insecurity in the country and certain government fiscal and political policies had led to negative risk rating by global rating agencies in the last quarter of 2019.

Such negative ratings have had significant risk challenges for investment and foreign exchange inflow into the country especially the longer term, more stable direct foreign investment, DFI. This has been compounded by the travel alert and resident Visa restriction on Nigerians which further heightens the political risk factor of the country.

Nigeria is now high on terrorism index countries and the ban is directly related to the lax travel and security process at the airports which poses significant risk of permitting potential terrorists into other countries.
Most experts believe that this has lowered the nation’s credit rating, as well as limit forex inflow; it has also raised the unfavourable trade balance, Broadstreet experts told BusinessHallmark in a chat. They said that Nigeria’s political outlook is creating more challenges for the economy and until this is addressed, the economy will continue to struggle.

Mr. Hasnain Malik, Strategy and Head of Equity Research at Tellimer, an emerging market focus financial services firm headquartered in London, in a research note said the restriction would add risk to foreign exchange rate. Most importantly, remittances to Nigeria would be affected if the decision is not upturn in a short term.

The medium to long term effect would be drastic on remittances and foreign exchange.
Recently, the Central Bank of Nigeria discredited report of plan to devalue the local currency as a number of analysts’ reviews show that naira is overvalued. But experts insist that the current situation, compounded by the Visa ban, may have put a spanner in the apex bank’s work and on the long run makes devaluation inevitable because of its adverse effects.
Nonetheless, some currency traders who spoke with BusinessHallmark confirmed that trading patterns indicate that naira has been largely stable. But added that this is could derive from the strong perception of CBN’s ability and readiness to defend the naira.

According to them, the CBN multi-tiered FX exchange has curb arbitrage and achieved greater feat in convergence, though at the expense of accretion into the external reserves.
BusinessHallmark research shows that the nation’s external reserve has dropped off from peak period in 2019 of $46 billion to $37.85 billion on last week.

Analysts however predict that FX level would further nosedive on the back of scarce foreign investment in the economy. It would be recalled that U.S. recently applied restrictions on the sort of immigration visa which can lead to permanent residency, and possibly citizenship, for Nigerians.

Tellimer’s Malik said in the medium-term, prolonged U.S. immigration restrictions would add a new risk for the Nigeria FX rate. He relates this to the importance of remittance inflows to Nigeria and the position of the U.S. as the single largest source of those remittances accounting for about 30% in 2018.

“This reinforces our relative caution on Nigeria’s cheap equities”, Tellimer said.
More important than oil

Malik sees remittances as a major contributor to the current account balance in Nigeria, amounted to 5.4% of GDP in at the end of 9 month in 2019 fiscal year.

“Remittances are even more important than oil revenues; they were 60% larger than oil revenues in 2018 and 5.7x larger than foreign direct investment in the same period”, he stated.

Tracking the growth, remittances grew 10% in 2017 and 2018 before declining by 0.5% in 9-month of year 2019.

“Already, Nigeria’s FX rate is moderately over-valued and vulnerable. FX reserves have been in decline since mid-2019.

“The real effective exchange rate implies an over-valuation on an absolute basis as well as relative to history”, Malik reiterates.

Equities: Cheap for a reason

In the review, Tellimer’s Head of Research observed that Nigerian equities have under-performed frontier peers on a one-year view – despite a significant bounce year-to-date – and look cheap at the index and stock-specific level.
“But the lack of macroeconomic growth catalysts and structural reform, persistently high inflation, and moderate FX rate risk keep us cautious”, he said.

Meanwhile, Malik stressed that the authorities in Nigeria have responded by appointing a committee with ministerial leadership to address these shortcomings – the reason given for the restriction by the U.S. is insufficient security screening and information sharing in Nigeria.

The restriction excluded Business, medical and tourist visas. Apart from Nigeria, the other countries included in the new U.S. restricted list are Eritrea, Kyrgyzstan, Myanmar, Sudan, and Tanzania. The existing restricted list includes Iran, Libya, North Korea, Somalia, Venezuela, and Yemen.

The Trump administration has argued that these countries affected have had problems with a range of issues, from failing to update passport technology to insufficient exchange of information on terrorism suspects and criminals. Of the new nationalities facing visa restrictions, Nigerians account for the most immigration to the U.S. In 2018, the U.S. issued more than 8,000 immigration visas to citizens of Nigeria.

Afrinvest had said it expects currency pressures in 2019 ahead of the elections and the weak prospect for higher oil prices and capital inflows. But analysts at the firm despite three consecutive quarters of negative current account balance, the worst since second quarter of 2015, said the exchange rate was stable for most of 2019.

“The stability was supported by weekly FX sales by the CBN in the various foreign exchange markets. In 2020, we believe the dark clouds are gathering, indicating further currency pressures and an imminent devaluation”, Afrinvest opined.

The firm revealed that aside from weak oil prices and capital flows, which would be the fundamental drivers of currency movements, there has been an aggressive liquidity build-up in the economy.

“The latter is due to an expansion in credit and large amounts of OMO maturities without high-yielding investment outlets. In our view, this could lead to increased demand for imports, which would depress the current account balance”, analyst said.

Afrinvest also projected could be higher FX demand as the case for diversifying investments into dollar assets is compelling given negative real returns domestically.
Analysts expect currency stability in the first half of 2020 and 10% devaluation to ₦396.00/US$1.00 in the second half of 2020 if capital inflows remain weak and oil price falls below US$60 barrel per day.