Foreign Investors Now Reinvesting Trapped Funds in Equities Market

Yemi Adebowale with Agency Report

Still smarting from inability to convert their Naira funds into United States Dollars and repatriate same home, some foreign investors are now reinvesting their trapped Naira in the Nigerian equities market, reports the world’s leading investment firm for frontier and illiquid markets, Exotix Partners LLP of London.

“A lot of our clients have trapped naira sitting in Nigeria; so, now, we see recycling of that Naira back into the equities market. There is no point sitting in a foreign-currency line not knowing when you are going to get your FX. You may as well buy the stock that you like over the long-term and hold it,” Ali Khalpey, head of equities at Exotix said yesterday.

“While the amount of investor funds trapped in the country is unknown, it’s increasing. People aren’t allowed to take their dividends out. Clearly, that number is growing on a daily basis,” Khalpey added.

Nigeria risks being kicked out of the Morgan Stanley Capital International (MSCI) Frontier Markets Index by the end of the month because of the currency controls.

If the New York-based organisation decides to exclude Nigerian stocks, the country could see about $480 million of equity investments exit, Oscar Onyema, the chief executive officer of the Nigerian Stock Exchange, said in an interview on Tuesday.

With the backing of President Muhammadu Buhari, the Central Bank of Nigeria has rebuffed demands that it devalues the naira, a sore point for many in the market.

“There comes a point when he needs to understand that the whole country has already devalued,” said Kato Mukuru, Exotix’s head of equity research.

Exotix also reported yesterday that the Nigerian foreign-exchange controls were undermining political reforms by President Buhari and making Nigeria uninvestable for buyers who measure returns in dollars.

“The reorganisation of the state oil company’s structure, changes to the nation’s bureaucracy and Buhari’s efforts to curb corruption all point to root and branch changes to the country’s governance structures,” Hasnain Malik, head of frontier markets strategy at Exotix said in an interview in Nairobi, the Kenyan capital.

“All of that is a pretty powerful political and governance reform story. It’s undermined from a foreign institutional investor standpoint by a very repressive economic policy and specifically a currency policy,” Malik added.

The Nigerian central bank has pegged the Naira at 197-199 per dollar since March last year, and restricted trading in foreign currencies, making imports more costly for a nation that’s a net importer of refined fuel and food. Importers struggle to access foreign exchange at the official rate, with the naira falling to around 320 on the black market.

“If you’re a dollar-based investor, you can’t get over the fact that you could see either a major deterioration in the dollar value of your investment or your investment may be stuck,” Malik said.

The Nigerian stock exchange’s All Share Index has lost 14 per cent of its value this year alone. Share-trading volumes plunged to a seven-year low in the first quarter, as foreigners shun the market while they wait for a devaluation of the Naira and as the country’s economy grows at its slowest pace in 17 years.

“Volumes have recovered in the past two weeks as companies have paid out dividends and those who are prevented by the foreign-exchange policy from repatriating their funds are reinvesting,” said Khalpey.