Nigeria’s widening FX margin of 60% pushes foreign investors to Egypt

 …Against 15% 


THE wider margin of over 60 percent between the official rate pegged at N197/$ and the parallel market rate currently at N320/$ in Nigeria’s foreign exchange market may be shifting the focus of foreign investors to Egypt, with a spread of 15 percent, National Daily has learnt.

This is because the Federal Government’s insistence on a fixed naira-dollar peg is hurting foreign as well as local investors.

While the foreign investors feel they are not getting the real value for their investments, their local counterparts, particularly, exporters, are feeling short changed and are currently groaning under the pressure of an unfavourable business climate.

Some industry operators describe the present situation as a major short-change on the producers who are reeling under policy summersaults, while foreign investors are discouraged by the higher spread and unpredictability of the forex market.

Consequently, some analysts see the currency distortions as creating a big challenge for foreign investors in Africa, particularly in Nigeria, on account of the persistent fall in commodity prices.

For instance, following the sharp drop in oil prices, the Federal Government’s revenues dropped to N345.095 billion or ($1.73 billion), in February, down from N370.388 billion or ($1.86 billion) in January.

Analysts at Renaissance Capital agree that equity investors have been seeking alternative markets such as Egypt – the second largest economy in Africa, after Nigeria.

This, they say, is despite the fact that there are currency troubles in Egypt which is currently experiencing a 15 percent spread against Nigeria’s 62 percent.

Moreover Egypt is the fastest growing of the top three economies in Africa – despite a perfect sandstorm of negative hits to Egypt’s dollar revenues. Exports are hit by lower oil prices, remittances are down, Suez Canal receipts are down and tourists receipts are down nearly 40 percent.

“We think these headwinds should ease by year-end. With further subsidy reform and currency adjustment, Egypt might win more favour from investors later this year”, Charlie Robertson, Chief economist, Renaissance Capital, said in an emailed statement.

However, analysts say foreign exchange reforms specifically; liberalisation of the inter-bank market, will serve to encourage investors.

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Razia Khan, managing director, chief economist, Africa Global Research, Standard Chartered Bank, London, noted that one concern of late, is the rising importance of the parallel market, with more transactions being pushed to this market.

Looking at the Ethiopian model, Ethiopia is single-handedly trolling the global financial community and everything it believes in and is the world’s 7th fastest growing economy of the past 15 years. It focuses on capital controls, state directed lending, distorted incentives, big current account deficits, a rejection of the evils of speculative market capitalism and it works, Charlie Robertson says.

Massive investment in infrastructure, a big boost in electricity supply (and it’s nearly all hydropower) and none of this funded by exports of oil, gas, or other hard commodities, and apparently it is happening with low levels of corruption, he added.

“OK, so it doesn’t prevent a drought and that is a significant challenge for the country this year but the long-term developmental success of this model is impressive, perhaps even stunning”, he further said.

Could this model also work in Nigeria? Charles asked, adding that perhaps an overvalued currency and capital controls might produce the rapid 4.5-10.5 percent growth in Nigeria that the World Bank expects for Ethiopia in coming years.

Nigeria has better loan/deposit ratios than Ethiopia today so in theory, Nigerian banks could be forced to lend below the inflation rate (as happens in Ethiopia) to support investment in infrastructure.

“I suspect the Ethiopian model requires a level of control and strictness (is that a word?) over the economy that I previously thought was only possible in a small country like Rwanda, but Ethiopia has 90m. Could Nigeria clamp down on dissent and impose strict capital controls that Nigerians would not be able to avoid? I doubt it but… I might have doubted Ethiopia could do this well if I’d been shown this model 10-15 years ago”, Robertson said in April 12, 2016.