S/African investors feeling heat of Nigeria’s economic pain

Investors, especially those from South Africa are feeling the deep heat of a severe short-term pain as Africa’s largest economy grapples with the impact of falling oil price, unprecedented exchange rate volatility and controversy over  delayed elections, a BusinessDay survey has revealed.

A weakening of the economy following collapse of global oil prices, terrorism in the country’s northeast and the persistent failure of government to diversify the economy away from a suffocating dependence on oil revenues, mean the appeal of Nigerian equities has been severely dented in the last six months.

Among the biggest losers is South Africa’s Tiger Brands, majority owners at Dangote Flour Mills, which has shed over 53% in the six months and most of this loss is blamed on the collapse of the naira, as well as rising competition in the sector.

Other firms like MTN, Games and Shoprite reel under the weight of a near 30% devaluation of the naira.

Despite high oil prices at over $110 a barrel in the preceding 30 months, Nigeria’s economy managers failed to prepare it for the downturn, leaving investors with  no other option but to head to the door, once panic in the foreign exchange market set in, as fears rose over funds repatriation.

Oil accounts for 80% of Nigeria’s exports and 70% of revenues but only a mere 15% of GDP, so it should have been possible to do a better job at shielding the economy from the vagaries of oil price shocks, according to Johan Stern, portfolio manager at South Africa’s Prescient Investment Management.

Having been hammered so hard, the South African investors are beginning to see a bright side.

Stern says despite the short-term pain, Nigeria “retains its ability to out perform South Africa.”

He adds that while there had been a rush to the door, with concerns accentuated by the surprise delay in the elections, “there is no reason to panic and it certainly doesn’t make sense to sell now when so much bad news has already been priced in.

“The banking sector, for example, has taken a battering and share prices are starting to look very attractive.”

In the midst of the meltdown, Stern says, “it is possible to have a good growth in Nigeria, even with lower oil prices.”

Whitey Basson, CEO of Shoprite, another South African giant with large exposure in Nigeria, admitted last week low oil price has caused a major upset in terms of the availability of dollars in Nigeria and Angola, but adds that although Nigeria relied on oil revenues, the country already had “a strong local economy”, particularly in the food market.

For others like Bryan Carter of Acadian Asset Management ,who is switching out of Nigerian bonds into forwards speculating on the future of the naira, the real question is not if but how to play well in Nigeria.

He told Bloomberg that while “the perception in the market has been really bad, the currency devaluation is behind us and it offers a rare opportunity.”

Acadian, owned by Old Mutual, is not the only money manager snapping up naira forwards.

Landesbank Berlin Investment, agrees that markets were too bearish on Nigeria’s currency and has been buying derivatives.

“Unfortunately, that was a little too soon. Now the rate is even more attractive. We are completely shunning local government bonds”, says Lutz Roehmeyer, who oversees $1.1 billion for the Berlin based investment firm of the German state lender.

For Kevin Daly of Aberdeen Investment, “if you are confident Nigeria can hold the line on the currency and it is not going to blow out, then you should take a long naira position in the NDF market. That’s where you are going to make the biggest bag for your buck.”

Foreign investors held 14% of naira-denominated government bonds last month, down from a high of 27% in 2013 according to estimates by Standard Chartered Bank.

Standard and Poor’s, the global rating agency which caused further stir last week, when it placed Nigeria on a credit rate watch, has a two man team currently visiting Nigeria for consultations leading to a review. The team met with some private sector leaders in Lagos on Monday.