The Nigerian Naira rebounds from obscurity
Nigeria is a bit of a mess. Its GDP shrank -1.3% in 4Q 2016 inflation is high at ~18% as of April 2017. However, there are numerous positive signs on the horizon and we finally feel optimistic about Nigeria. FX reserves in Nigeria are the highest they have been in two years, crossing $30bn in April.
A new FX window for all, or most
The Central Bank governor, Godwin Emefiele has done a reasonably good job of maintaining the integrity of Nigeria’s central bank through challenging circumstances. He assumed office in 2014, post-oil crash and was hoisted in a situation where reserves were rapidly dwindling, foreign investment was plummeting and the government was changed in 2015. However, he has maintained his approach and philosophy that an emerging markets’ central bank governor must do more than control monetary policy for inflation. He is the former CEO of Zenith Bank, one of the largest banks in Nigeria and clearly comes from a place of pragmatism rather than ideology.
To that end, Nigeria introduced a new FX window in late April and the results have been very reassuring. Nigeria prior to the FX window operated five difference exchange rates for each type of market participant, as vague as exporters and Muslims going to Saudi Arabia for Hajj, which materially increased the cost of capital associated with investments in Nigeria as it became exceedingly difficult to value NGN-denominated assets. The government actively tried to stop depreciation, unlike other oil-producing countries. They abandoned the peg in 2016, and we have seen the rate go from ~120 NGN per USD to over 315 NGN/USD today. However, the black rate market is above 400. The new FX window has hovered around 385 NGN/USD since it was first introduced.
How does it work
The FX window essentially acts as a way for certain types of people and companies that have a reason for needing foreign currency to conduct currency transactions in a market where the Central Bank is willing to intervene to provide liquidity if needed. The FX window is maintained by authorized broker/dealers that must operate within their Foreign Currency Trading Position limits (FCTPL). Authorized dealers can enter FX hedges such as forwards, swaps and futures. Three weeks in, the government has remained on the sidelines watching the market find itself, the quote is provided by FMDQ and is called NAFEX.
Trades are done over the phone, but there appears to be a concerted effort to move towards Reuters as a trading platform as soon as practicable. Investors initially were concerned that the Central Bank would step in and manipulate rates, but they have complied to date, remained committed to a fair and free market. This could of course change if NGN continues to depreciate.
Liquidity has been there for those who need it, a surprising result for foreign investors who decided to fully commit and deployed investments into Nigeria rapidly. Equity markets in Nigeria have rallied 12% since the FX window was introduced, and investor interest in Nigeria has materially increased. Forecasts are that FX inflows are up +97% since the introduction of the window.
The fall in oil dampens a recovery for Nigeria, but with stability in FX reserves, we think Nigeria will be able to withstand any depreciating pressure past 400 NGN.
Nigeria stocks are trading at an 11 P/E and are deeply discounted on a book value basis. Years of poor growth, government instability, and weak natural resource prices have repeatedly chipped away at earnings for Nigerian companies. Stable banks and telecoms can be had for low double-digit P/E levels.
Expectations are for 1% GDP growth in 2017 and we think Nigeria can handily beat this number. If Buhairi can stay healthy or stay out of the way, we think that growth may be as high as 3% and certainly agree with IMF versus the World Bank. Unemployment has been a source of controversy as the methodology was revisited in 2015. The key change is that employment of as little as 20 hours per week is now considered as full-time whereas 40 hours or more was considered full-time previously. Thus, unemployment went from 24.2% to 7.5% in 2015. A great overview of how the survey is conducted is available here, it is important to note that Nigeria has a materially stronger institution for gathering census data than most West African countries.
We think unemployment will rebound as 2016 was very difficult on Nigerians, with unemployment going from 7.5% in Jan 2015 to 13.9% by the end of 2016. While much of it is just words, there is a material change in tax efficiency, the ease of lending capital, and hiring/firing people in Nigeria since 2014. These much-needed reforms have positioned the country well to receive capital from developed markets where valuations remain at near-record highs.
If you are interested in investing in Nigeria, please see our post on how to do so here. In USD terms, the equity market remains at near-2001 levels. However, transaction costs remain expensive (~1.5% each way), but there are several ETFs such as NGE which provides you with exposure to Nigerian equities. The ETF is currently trading with a 2.7% dividend yield, but keep in mind that it has a 1.1% expense ratio.
Any questions, please let us know. If you want to read PWC’s thoughts on the FX window, please see here.