Analyst: Nigeria, Kenya Missing from $150m Frontier Market Inflow

Kayode Tokede

An analyst at EFG Hermes Research has disclosed that Nigeria and Kenya are missing from the $150million frontier markets inflow in the last three weeks over the scarcity of foreign exchange.

Speaking recently at the company’s virtual media roundtable event, the MD, Head of Strategy at EFG Hermes Research, Mr. Simon Kitchen disclosed that foreign investors are finding it hard to get their foreign exchange out of both frontier markets.

He noted that stocks in both African countries are the cheapest since the global financial crisis that happened in 2017/2018, stressing that their valuations are too good to ignore.

According to him, “In Nigeria, foreign exchange is a long-standing problem. Foreign Exchange has been scarce since 2020 and foreigners are just impossible to take money out of the Nigerian economy if they sell stocks. In Kenya, it has become a problem.

“Nigeria and Kenya together make up more than 10per cent of that frontier market index and that means that the $150 million that came in the past three weeks,  $15 million should have gone into Nigeria and Kenya markets.

“What it means is foreigners just aren’t putting that money in and so I think, from a foreign investor point of view, it is absolutely critical that authorities in these two countries fix the FX situation.”

He expressed optimism about Nigeria’s foreign exchange market in 2023 amid the change in political leadership with the forthcoming general elections.

He stated that, “The change in leadership could create an opportunity for the new government to draw a line under the years of orthodox policies and take the right decision in fixing the foreign exchange crisis and fix finances on a sustainable growth.”

He noted that once foreign exchange challenges are tackled, Nigeria would witness an inflow of foreign funds.

On how to drive stock market growth, he urged pension funds in Nigeria and Kenya to invest more money in stocks, calling on regulators to change incentives.

Speaking also, the Director, Sub-Saharan, EFG Hermes, Ronak Gadhia highlighted that pre/post-election friendly business environment in Nigeria could drive banks’ Return on Equity (ROE) and credit growth.

“The Nigerian Banks around the back end of 2019 have witnessed earnings and ROE come under significant pressure. That’s because of the unorthodox policy of the Central Bank of Nigeria (CBN) and also the macroeconomic challenges in Nigeria.

“We have seen some recovery this year but if we do see a more business-friendly environment come through next year, which then translates to a more friendly CBN, then, in turn, we should continue to see asset yield increase further which will have a positive effect on banks’ margins.

“Banks could benefit next year if the CBN eventually devalues the local currency. We have found out that most banks have a long position on the dollar. If the naira wants to devalue, we should see significant revolution gains for the likes of Guaranty trust and Zenith bank.   

“Of course, we see a friendly environment, we should start to see credit growth. It might not happen immediately, because obviously, banks will be very conservative given the economic shock that Nigeria’s economy will face because of these reforms. Over a period of 12-18 months, we should start to see credit growth and drivers for banks’ earnings and profitability.”