Nigeria: Market boom, policy bust

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Higher fund allocations to Nigeria might be justified, but the timing isn’t.

The upsurge in portfolio investments to Nigeria, particularly over the past six months, is characteristic of those emerging markets now benefiting more from global liquidity than from domestic policy improvements.

Nigeria has Africa’s largest population by far and it will soon be the continent’s biggest economy. It is blessed with a youthful population and copious natural resources. It deserves a bigger allocation in global securities portfolios.

But these factors have long been the case, while Nigerian government bond yields have fallen to record lows at a time when the country’s star-studded federal administration appears to be losing ground.

Strikes and protests around the partial removal of petroleum subsidies a year ago, combined with Islamist terrorist attacks, have shaken this administration to the core. Now Islamist rebels have almost brought about the collapse of Mali, a regional neighbour.

In this atmosphere, the federal government in Abuja will be feeling even less confident about pushing through potentially destabilizing reforms. It would be unsurprising, for example, if president Goodluck Jonathan ruled out further decreases to the subsidies in 2013 – as local press reports suggest he has done already.

This is still a crucial time for a government that is halfway through its mandate. As research from local brokerage FBN Capital points out, by 2014 the country will be back in election season, and then any wide-ranging reform would be political suicide.

Last year’s upheavals emboldened legislators apparently opposed to reform, even in Jonathan’s own party. The suspension last spring of Arunma Oteh, the head of the Securities and Exchange Commission, was an early sign. The president had Oteh reinstated, but the legislature has since passed a 2013 budget without allocating funds to the SEC.

In the summer, the House of Representatives threatened to impeach the president himself, according to local press reports. In December, the House speaker threatened to order the arrest of the central bank governor, Lamido Sanusi – a man who, like Oteh, has seen his previous efforts to clean up the financial sector result in threats to his life.

Now Ngozi Okonjo-Iweala – coordinating minister for the economy and one of the candidates for the World Bank presidency last year – appears to be finding it difficult to see her reforms to the fiscal framework implemented. State governors appear to have blocked seed capital for a new sovereign wealth fund, for example.

Nigeria was able to build up its foreign exchange reserves by some $8 billion in the second part of last year. However, as research from Citi points out, that is more because of foreign portfolio inflows than government savings.