As a frontier market, the countries of Africa represent tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.
Luckily, the ups and downs of the African currency markets aren’t one of them if you know where to look. AFKInsider has compiled news you need to slim down your currency risk.
News has been circulating this month that South Africa’s MTN Group predicts the naira will be devalued after the conclusion of the 2015 presidential election in Nigeria.
Andrew Bing, CFO of MTN’s Nigerian unit in Lagos, said the African telecoms giant expected declining oil exports and prices would mean the Nigerian central bank would face difficulty keeping the naira stable against the U.S. dollar.
Bing said in a Bloomberg report the predicted devaluation would consist of a 3-to-4-percent drop against the greenback and it would be impossible to avoid. “It has to happen, otherwise this economy in a year will be down the tube,” Bing said.
This is unfortunate for MTN as, among other things, it will make the company’s $3-billion planned investment in Nigeria more expensive due to higher import prices.
Questions about the strength of the Nigerian currency continue to arise following the abrupt dismissal in February of Lamido Sanusi, respected former head of the Nigerian Central Bank. He revealed strong evidence of massive corruption and fraud at the Nigerian National Petroleum Corporation with $20 billion disappearing from the books of the government-owned company between January 2012 and July 2013. He was fired shortly after by President Goodluck Jonathon and replaced by his deputy until a permanent replacement was chosen. Sanusi is now effectively forbidden to leave the country and the Nigerian security service has seized his passport.
His permanent replacement, Godwin Emefiele –former managing director of Zenith Bank — will become Nigeria’s central bank governor in June. Emefiele told the Nigerian Senate in March that a devaluation of the naira is not an option and would be devastating for the economy.
This may be unavoidable. Already this year the naira dipped to a record low against the U.S. dollar and Nigeria’s foreign-exchange reserves have accordingly declined 13 percent to $38.1 billion. Investors are concerned and, importantly, this downward pressure is not just due to anger and fear over Sanusi’s sacking.
That’s because the bad news coming from the all-important oil sector is likely to continue. The ongoing shale revolution in the U.S. – which has dramatically reduced the amount of oil the U.S. buys from countries like Nigeria – is about to spread to the rest of the world.
Africa countries — particularly in East Africa — are about to become major producers. Investment into Nigeria’s principal export sector is declining and with reserves recently reduced by the country’s petroleum ministry, the long-term economic outlook for the sector looks grim, especially onshore where insecurity and organized, mass oil theft is rampant.
Coupled with the desperate security situation elsewhere in the country — mass kidnapping and killing of children by fundamentalist radicals has apparently become commonplace –is there any wonder why some may be wary of holding naira in their portfolios?
If the naira looks set for devaluation, it is overwhelmingly due to the underlying fundamentals driving events inside Nigeria itself — and those don’t inspire confidence. After all, aside from getting one’s hands on easily extractable oil, why invest in a country that can’t protect schoolchildren as they attend their lessons?
So what does devaluation mean for the wider Nigerian economy? On the one hand the export price of goods manufactured in Nigeria will fall, which will in theory allow the country to export more of its goods to global markets. However, the question here is: what exactly does Nigeria have to offer the globe besides oil and Nollywood films? It is not a manufacturing power and cheap imports from East Asia will remain competitive even with a devaluation of its currency. Nigeria simply does not yet have a comparative advantage in this area.
What’s more, with oil exports declining alongside the value of the naira, total export revenues will likely decline — the reduced amount of oil Nigeria is able to sell will now also be worth less. In turn this will put pressure on government finances which will force the country to pay either higher interest rates to fund government debt, force a reduction in government expenditures, or both. In turn, what this means for growth and stability in the country is not likely to be good. Combined with the other macroeconomic effects a devaluation will cause — such as increased inflation due to higher import prices, higher interest rates for both consumers and producers, and increased dollarization of the economy — the potential exists for increased downward pressure to be put on both Nigeria and its economy in the short-to-medium term.
So, is Nigeria doomed? In the long run, no, nomatter how bad things get in the short run. The problem is that individuals don’t live in the long run. Perhaps banks, long-term institutional investors, and large companies have the strength and wherewithal to look past short-term issues, but average people don’t. They can neither suffer the loss if things prove bumpy nor easily hedge-out the costs of these risks into the future.
So, if you are an investor with lots of capital to spare and an appetite for lots of risk, perhaps Nigeria is still a good long-term bet. If, on the other hand, your capital is limited and your risk aversion accordingly higher, Nigeria is perhaps not the place one will be wanting to sink one’s capital at the moment. Certainly for individual investors there are better places in Africa to invest.
Jeffrey Cavanaugh holds a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider, Mint Press News and BAM South.
