Stocks and Oil fuel boom

Rise in value of listed companies
As ever, Nigerian economic reforms may be held up by impending elections. Both houses of parliament are likely to delay legislation in the run-up to the 2015 polls, particularly as the ruling People’s Democratic Party (PDP) has lost its majority in the lower house following the defection of some MPs.

The country has a history of big spending increases prior to previous polls but in this instance, the 2014 budget has been constrained, by political disputes and continued oil theft rather than economic prudence.

Oil theft and associated problems in the Niger Delta continue to hamper government finances. Ministers now widely quote a figure of 400,000 b/d of oil being stolen, although part of this could be production that has been shut-in by associated damage to oil industry infrastructure, rather than oil that is actually stolen for resale.

Finance Minister Ngozi Okonjo-Iweala said: “Of course I’m worried about elections but we’ve put in place a tight fiscal framework. Our country needs macroeconomic stability.”

Perhaps the most positive indication of international enthusiasm for Nigeria is the rising value of the country’s listed companies. The value of the Nigerian Stock Exchange (NSE) All Share Index increased by 34% in 2012 and then by a massive 47% last year, as foreign investment poured into the country fuelled by cheap money in the US and Western Europe.

At a January press conference, NSE chief executive Oscar Onyema said: “While the NSE’s focus from 2011 to 2013 has been on restructuring, improving technology, product development, and advocacy for changes to policy, in 2014, we will shift gear to drive innovations centred on increasing global visibility in the Nigerian capital market, developing a larger footprint on the continent, and ultimately, targeting emerging market status. We believe that these steps are critical to NSE becoming the foremost securities exchange on the continent.”

The proportion of NSE stock value held by foreign investors reached 70% last year but could fall over the next 12 months as quantitative easing programmes in North America and Europe are reduced.

Any outflow of capital from the NSE could see further pressure placed on the beleaguered naira. Indeed, the CBN is now weighing up how to defend the value of the national currency. The most recent devaluation was in November 2011, since when the CBN has tried to keep the national currency within a band of 150-160 to the US dollar.

However, it had fallen to 167 to the dollar by early March and the lack of reserves makes it increasingly difficult to defend without raising interest rates, which already stand at 12%, in line with many other African economies but far higher than those on offer in the industrialised world.

ower interest rates would certainly help to encourage investment in the non-oil economy. Melissa Verreynne, an economist at NKC Independent Economists, says: “At some point, the authorities will have no choice but to devalue. A 100 basis point increase in the policy rate will not be enough to attract foreign investors – there are too many other factors working in the opposite direction.”

Banking sector reforms over the past decade have greatly improved the reputation of Nigerian banks but the de facto sacking of central bank governor Lamido Sanusi in February undid at least part of this positive PR.