A big bang reform in Nigeria leading to billions of dollars of inflow – similar to Egypt since late 2016 – is unrealistic. But even without that, there are signs of improvement.
GDP, FX reserves, trade and the current account are all looking better
There are chinks of light in Nigeria’s outlook. Headline GDP may have risen in 4Q16 and the IMF expects full-year GDP to turn from -1% in full-year 2016 to 1% growth in 2017. The fall in exports slowed to just -7% by December, the trade deficit halved in 2H16 and the current account is on course to return to a surplus. Rising oil prices and a deal with the Delta militants have addressed both the oil price and volume challenges that hurt so much in mid-2016.
FX reserves have risen over 20% to $29bn and a more comfortable Central Bank of Nigeria (CBN) has this week announced changes to its FX policy and injected more dollars into the local market. Since Monday (20 February), the parallel market FX rate has strengthened 4% from NGN520/$ to NGN500/$.
We think NGN450-500/$ would attract investors even without $20bn of cheap IMF-led financing
One of our Real Effective Exchange Rate (REER) models – the 22-year model which corresponds to a period when oil averaged $55/bl – implies fair value for the naira at NGN370/$, which via inflation should become NGN400/$ by end-2017. At the parallel rate of NGN500/$, Nigeria has the cheapest currency in Africa, and even at NGN450/$ it would still rival Egypt at EGP15.8/$ (the third cheapest in Africa). Given this, a full float of the currency would likely attract billions of dollars to Nigeria, similar to how Egypt has attracted $9bn since its float in November.
This would be even more likely if the authorities were prepared to seek a maximum World Bank and IMF support package of $20bn at very low interest rates. But we were literally laughed at in one meeting (in a kind way) for suggesting there was a 10% chance of this happening. Nigeria still blames the IMF, rather than the collapsing oil price, for the pain of the 1980s, and at best a $2.5bn package of World Bank and African Development Bank (AfDB) funding is realistically on the table.
That does require a narrowing in the spread of the official and unofficial currency rates. Our Africa economist Yvonne Mhango forecasts that we will see the interbank rate averaging NGN381/$ and the end-year rate at NGN447/$ – levels which may attract some investment, if Nigeria wants these flows. Without a more realistic interbank exchange rate (or a surge in oil prices), we believe Nigeria will remain un-investable for most. At present we doubt cross-over EM investors will put money into Nigeria, but some frontier investors may be prepared to invest for the long term at the exchange rates Yvonne Mhango is assuming.
Nigeria has acute reform needs but has successfully beaten back Boko Haram
While many criticise Nigeria for not following the reformist path of Russia, Argentina or Egypt, at a headline level, volatility has been reduced, and Nigeria has also avoided following the destructive policies of Venezuela, Angola and Zimbabwe. Nonetheless, the fall in commodity prices will have nearly halved per capita GDP between 2013 (when oil was high) and 2017.
There is an acute need to cut the cost of interest payments, and increase budget revenues, while improving electricity supply and infrastructure (helped by China). On the positive side, there has been very important progress in addressing the existential threat from Boko Haram. And we still believe that many talented individuals in government would be a credit to any government, and will be able to demonstrate improvements by late 2017, for example in the Ease of Doing Business.
Opportunities emerging due to the rising oil price and doubling of production from 2016 lows
The vast majority of Nigerian and foreign potential investors ignored Nigeria in 2016 due to exchange rate difficulties, but rising oil prices and production (double the 0.9mbpd 2016 lows) suggest some opportunities may emerge in 2017. A best-case scenario is very unlikely, but some frontier investors may well be able to find value in the country at an oil price of $55/bl and an exchange rate of NGN450-500/$
