Everything changed for investors in Nigeria this week.
(Bloomberg) — Everything changed for investors in Nigeria this week.
Less than a month into his tenure, President Bola Tinubu has begun implementing a raft of reforms long sought by bankers, economists and multilateral lenders to revive Africa’s biggest economy from almost a decade of torpor. The changes have been radical: removing a fuel subsidy that cost the state $10 billion a year; dismissing the nation’s controversial central bank governor and devaluing the naira; and initiating an overhaul of Nigeria’s chronically inadequate power industry.
The response has been a rally in Nigeria’s dollar bonds, while stocks surged to a 15-year high as investors bet the policy shift marks the start of an overhaul of how the economy is run, even as many expressed caution about the government’s ability to implement everything. The reforms suggest a return to economic orthodoxy in a country that refers to itself as the Giant of Africa, mirroring similar shifts in countries like Turkey and Colombia where markets have similarly rallied as authorities signaled giving up on some economic policies unpopular with investors.
“This is exactly what you want: move quickly on difficult reforms while you’re still in the honeymoon period,” said Amaka Anku, Africa director at Eurasia Group. “It shows determination and creates momentum and goodwill which is boosting domestic and international confidence and will have ripple positive effects for investment.”
Nigeria’s longest-dated bond has gained more than 5 cents on the dollar this week to 75.36 as of 11:30 a.m. on Friday in London, the highest level since January. That’s the biggest increase in emerging markets, capping a run of gains since Tinubu’s inauguration that led Morgan Stanley strategist Neville Mandimika to say the debt has become expensive.
For now, the negative impacts of the adjustments are being shouldered by the currency, and by Nigerians themselves. The naira closed at 702.19 per dollar on Thursday on the FMDQ Securities Exchange, from 465 on the day Tinubu took office, while the price of gasoline rose to about 500 naira a liter from 186 naira.
That combination is likely to signal pain for ordinary Nigerians, who are already dealing with widespread unemployment, soaring inflation and rampant insecurity.
“It is actually reality catching up,” Cheta Nwanze, of Lagos-based SBM Intel, said. “It is us getting to a more realistic state of things so that we have a more fair idea on the amount of work that needs to be done in order to cover the gap.”
Happy Markets
Nigerian stocks and eurobonds extended gains on Thursday that began after the June 9 ouster of Godwin Emefiele, who had headed the Central Bank of Nigeria since 2014 and still had a year of his term left.
Investors interpreted his dismissal — and subsequent arrest — as evidence that Tinubu will take a more market-friendly approach than his predecessor Muhammadu Buhari. The ex-governor – already unpopular with the new president’s allies – was widely blamed for a multiple exchange rate regime that hobbled the economy.
“The fuel subsidy removal and FX reforms will go a long way toward improving the fiscal and external accounts and reduce distortions that had been building for a number of years,” said Gordon Bowers, a London-based analyst at Columbia Threadneedle Investments. “These were considered the bare minimum reforms that need to get done, so it’s positive that Tinubu can now focus his attention on growth and productivity-enhancing reforms to meaningfully lift Nigeria’s potential growth rate.”
By Friday it was still unclear what price the new administration would allow the naira to settle at. But a report seen by Bloomberg, prepared by a Tinubu advisory committee, said his administration should target a rate of 550-600 per dollar and allow commercial banks to act as primary dealers “through a willing-buyer-willing-seller model.”
The currency is expected to fall more before stabilizing at a significantly weaker level. The exchange rate needs to be adjusted to about 700-750 naira per dollar, JPMorgan analysts said in a note last month.
Questions still linger about the ability of the government to sustain momentum.
“There is still some room to run on the back of Tinubu’s ambitious policy shift,” said Patrick Curran, a senior economist at London-based Tellimer. “However, investors will need to see positive real rates and evidence that naira has cleared the market and that they will be able to repatriate their earnings before local-currency debt is back in play.”
Tinubu is working with his chief of staff, advisers, an interim central bank chief and an informal team of trusted confidantes, having appointed no ministers yet.
Energy Reforms
The president’s team is also pushing for major changes in the country’s oil and gas sector that would reduce the role of the state energy company which was pursuing expansion under Buhari.
The Nigerian National Petroleum Co. should become a minority shareholder in projects it controls, such as oil blocks and refineries, in order to raise billions of dollars and boost crude output, which fell to multi-decade lows last year, according to another advisory report compiled for Tinubu.
Last Friday, Tinubu signed legislation that’s expected to set off the biggest shakeup of the West African nation’s chronically inadequate power industry in almost two decades.
Further reforms will be necessary to get Nigeria’s economy back on track. Anku warned that the administration will need to “focus on the harder, more long-term stuff, especially boosting revenue generation.”
While markets rejoice, Tinubu’s actions are causing short-term pain in Africa’s most populous country, where 40% of people live in extreme poverty and inflation hit an 18-year high in April.
His decision on inauguration day to immediately abolish fuel subsidies – while widely seen as a fiscal necessity – tripled the price of gasoline, sending transportation bills skyrocketing. Devaluation could also make life more expensive for ordinary Nigerians.
The consumer inflation rate could already climb as high as 29.8% in June, from 22.4% in May, as rising gasoline prices lift the cost of food and transport, according to Rand Merchant Bank analysts. That could force the central bank to raise its policy rate to 22% in the second half of the year, from 18.5%, they said.
Although Tinubu already persuaded the country’s main labor union to call off nationwide strikes, previous efforts to end the subsidies were abandoned in the face of social unrest and widespread protests.
(Updates with markets reaction in fifth paragraph and details throughout)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.