Devaluation is Not the Magic Wand for Investors

Foreign investors play a critical role in the growth of the economies of countries that host to them. They bring scarce capital, international expertise, knowledge and technology that help energize and build local businesses. While pursuing profit, they also create jobs and contribute to an increased Gross Domestic Product (GDP). It is for this reason that leaders who are serious about developing their economies court and entice them with incentives.

Nigeria has over time attracted a good amount of such international capital inflows. This has been mostly in the form of Foreign Direct Investment (FDI) – where investors obtain lasting interest in local businesses - and Foreign Portfolio Investment (FPI) – where they purchase stocks and bonds in the capital market. The United Nations Conference on Trade and Development, UNCTAD in 2007 reported that of the $1.3 trillion FDI inflow into Africa 2006, Nigeria accounted for 70% of the sub-regional total of Africa’s 11% total. In 2011, Nigeria emerged as Africa’s largest recipient of FDI flows with about $8.92 billion. Foreign Direct Investment in Nigeria averaged 1404.84 USD Million from 2007 until 2015, reaching an all-time high of 3084.90 USD Million in the fourth quarter of 2012.

However since the beginning of 2015, the investor traffic has witnessed a sharp decline. According to Trading Economics, FDI decreased from 1.03 billion USD in the fourth quarter of 2014 to 723.49 million USD in the first quarter of 2015. Also, foreign portfolio investors, who dominate the capital market, withdrew about N410. 49 billion between January and August 2015 according to a report of the equities segment of the Nigerian Stock Exchange (NSE). On both investment planks, the figures are falling.

Now, what is responsible for the dip in foreign investment? This question is attracting many answers both at serious policy platforms and events as well on line. Some analysts believe that the failure to properly manage local tensions and strains in the financial system resulting from plunging global oil prices is responsible. They tend to see the Central Bank’s foreign exchange management policies as responsible and the Governor, Mr. Godwin Emefiele as the culprit.

But putting the apex bank in the dock as the sole reason for foreign capital flight amounts to an unfair and simplistic reading of the situation. The CBN measures are not the cause but the response to the crisis. Nigeria failed to save during the golden era of high oil prices and there are consequences. Declining oil prices have led to over 60 percent reduction in the amount of forex the CBN earns to service forex demand. With inadequate foreign exchange reserves to augment the shortfall and a clear mismatch between supply and demand that left unmanaged could lead to the free fall of the naira, it is difficult to fault the CBN’s measures.

So, while it is true that the firm stance of Emefiele against the self-serving demand of the JP Morgan Index for floating the Naira led to Nigeria’s de-listing from the Index early this year and some capital flight as a consequence, it was an unavoidable price that the country needed to pay for the relative stability of the naira.

The good news is that it was mainly highly risk averse portfolio investors who aim for quick profit and are not interested in the long term that headed out. Although this group of investors are useful and contribute to market capitalization, they are not the priority investments that the country needs now – given the circumstance - to create long term growth and job creation. The opportunity cost of keeping them was far graver than losing them. They have far less positive impact to the economy when compared with those who invest directly into local businesses for the long term. Floating the foreign exchange rate to keep them in the country was simply not worth the price.

It is true that exchange rate volatility is a critical factor to investors and to some degree, it has had negative and significant effect on the inflow of foreign direct investment to Nigeria. However, it is not the only critical factor that most serious investors take into cognizance when making investment decisions. If a devalued exchange rate were to be the only factor, then Zimbabwe should have won the price as the most investment friendly country in the world.

One of the other key factors that investors consider is political risk which refers to the political decisions made within a country that might result in an unanticipated loss to investors. Adverse political actions can range from very detrimental, such as widespread destruction due to revolution, to those of a more financial nature, such as the creation of laws that prevent the movement of capital.

In general, there are two types of political risk, macro risk and micro risk. Macro risk refers to adverse actions that will affect all foreign firms, such as expropriation or insurrection, whereas micro risk refers to adverse actions that will only affect a certain industrial sector or business, such as corruption and prejudicial actions against companies from foreign countries.

For example, a classic example of political risk occured after Fidel Castro's government took control of Cuba in 1959, hundreds of millions of dollars’ worth of American-owned assets and companies were expropriated. Unfortunately, most, if not all, of the American companies had no recourse for getting any of that money back.

Nigeria does not pose such a risk. Before the elections, the political risk was pretty high due to the uncertainty created by the elections and the fear that crisis might erupt. This was in addition to the probable feeling that the military campaign against Boko Haram insurgents in the North East would escalate and expand to other parts of the country. This of course caused a lot of foreign investors to divest their investments from Nigeria.

But with the successful conduct of elections, the political risk has been largely eliminated. With the successful transition from one democratically elected government that saw the incumbent People’s Democratic Party (PDP) concede victory to the opposition All Progressive Congress (APC) party, the atmosphere has cooled down drastically. The country is enjoying a relatively stable political climate and the President has in his utterances shown that he is committed to encouraging and creating a conducive climate for foreign investors.

More so, the ongoing fight against corruption is also sending the right messages to the world that the country is ready to run a transparent government that is based on respect for international best practices.
Another key consideration for serious investors is the economic risk. Foreign investors want to have a good measure of confidence that the country they hope to invest in has the capacity and willingness to pay its debts or maintain a hospitable climate for outside investment.

On this score too, the country is not doing badly. The Nigerian economy is no doubt facing serious challenges due to the steep fall in global oil prices, but the measures that have been taken by both the political, monetary and fiscal leaderships have given the global rating agencies some degree of confidence that the country will ride through the crisis without losing its ability to honor its obligations.  Latest statistics show that Standard & Poor's and Moody’s credit and sovereign debt rating for Nigeria remains stable at B+ and Ba3 respectively, while that of Fitch stands at BB-.

In addition, the macro – economic environment is still relatively stable with the inflation rate still within the single digit range of 9.6 percent. The International Monetary Fund (IMF) has also predicted that the country would witness a positive GDP growth rate of 4.1 percent in 2016 and 4.2 in 2017.

From the above, it is clear that besides the foreign exchange issues, the key other factors that determine investment decisions are largely positive. While it is true that some investors have left, it is also true that most others have stayed and even more are coming in despite the challenges.

Recently, a group of international investors, under the aegis of Greenstone Capital International Africa and Tacnero Global disclosed plans to invest $200bn in five African countries, including Nigeria. The group’s legal adviser, Greg Anumenechi, is reported to have said that the investors’ target sectors were agriculture, aviation, medicals, solid minerals, marine, power and petroleum. According to him, the investment plan tagged: AMPLE, will also be extended into real estate, industrial, Information Technology, parks, education and the development of Nigeria’s version of the Silicon Valley.

Also, the Vice President while addressing a group of international investors who are set to invest in the country said that “This country has practically what it takes to run a solid economy that is not dependent on oil, but on business and commerce.” And this is so true. Other visiting global investors were drawn from these companies: Russia-China Investment Fund, Renaissance, China Africa Development Fund, Invest Abu Dhabi, Actis, ECP, KKR & Co. LP, Old Mutual of South Africa and Emerging Capital Partners.

So if as we have, a relatively safe political environment, good legal framework for protecting investments, possibility of high yields and the economy presents a good potential for economic growth, it makes no sense to suggest that on account of the foreign exchange policies of the CBN alone, investors are either leaving or not coming into the country. It is beyond that. This wrong-headed fixation with the CBN as being responsible for investor flight simply cannot stand scrutiny.

Rather the view reveals a poor understanding of dynamics of the Nigerian economy and the forces, both local and international, that shape the economic trajectory of the country. Nigeria, like most other commodity dependent economies is facing tough times because it failed to make the best of the oil boom days. The long term solution to this reality must begin with a proper analysis of the real actors that have brought us to this challenging point. Blaming the CBN is not one of them.