Investments in Nigeria Are Going Nowhere Anytime Soon – U.S.News

Raging inflation, less oil revenue and terrorism exact a toll on the nation’s economy.

While the media has been focused on the U.K.’s political theater of the absurd, elsewhere serious economic problems have been developing.

A case in point is Nigeria, where the once booming economy has fallen on hard times and looks set to get even worse following events in late June. The country has both the largest population in Africa and the biggest economy on that continent, according to data from the World Bank. But those data points belie an economic malaise.

June 20 saw the naira, the Nigerian currency, plunge in value from 199 to 285 compared to the U.S. dollar, according to data from Bloomberg.

A barrel load of problems. The fall came when the country abandoned a pegged exchange rate it had operated since early 2015 in favor of a floating rate.

The country, which relies heavily on oil revenue for government funding, has been wracked by a barrel load of problems, the first of which is that the oil price is half what it was two years ago.

In addition, there is double-digit inflation, a lack of dollars (which prevents investors easily repatriating profits) and domestic terrorism, including bombing of oil pipelines, putting a further dent in government coffers.

Things could get worse. Not everyone is convinced that allowing the naira to float freely will actually make things better, and could exacerbate a bad situation.

“The naira is going to sink further, and it’s a formula for a disaster,” says Steve Hanke, professor of applied economics at The Johns Hopkins University. “Capital flight will accelerate so disrupting foreign direct investment.”

The weak currency, which looks set to get even weaker, will likely scare new investors away and current investors will be increasingly likely to pull their money out of the country. And the country’s growth will slow without the investment dollars.

Hanke suggests an exchange-rate system known as a currency board, such as that used in Hong Kong, would be better for Nigeria. Under such an arrangement the local currency is backed at least 100 percent by a reserve currency such as the U.S. dollar, helping establish credibility with international investors. The country operated such a board from 1912 through 1959.

Still, such an arrangement seems unlikely anytime soon.

Dollars are the major issue. For any country to grow there needs to be an inflow ofinvestment money, usually dollars. Unfortunately, floating the naira does doesn’t seem to have solved that issue. That’s because moving money out of Nigeria remains problematic.

“It’s disappointing; investors are still having problems getting hold of dollars,” says Win Thin, global head of emerging market currency strategy at Brown Brothers Harriman in New York. “I don’t think investors will rush in knowing that there are still problems getting money out.”

He notes the wide discrepancy between the official exchange rates and the black market rates to buy dollars as emblematic of problems in moving cash across the border.

Win thinks the current situation could drag on for a while. “I don’t think we’ve heard the last of this,” he says.

Not everyone is quite as pessimistic.

“Because the naira is now weaker, Nigeria will become more attractive to investors,” says Giyas Gokkent, senior economist at the Institute for International Finance.

The costs of producing goods and services in the country are now cheaper in dollar terms, making the country more competitive on the world market. That advantage could easily be wiped out if the central bank doesn’t squeeze the inflation out of the economy.

 For some investors, the question may come down to the oil price. If they see a strong rebound in the cards, then there may be a case for piling into the country now despite the problems, while the oil market remains subdued and the currency is weak.

Risk seekers only. Investing in stocks listed overseas can always be fraught with problems, and more so in emerging markets like Nigeria. For anyone wanting to place a bet that things end happily in this chapter for in Nigeria, there is a way to participate using securities in the United States.

Investors might want to consider the Global X MSCI Nigeria exchange-traded fund (ticker: NGE), which holds a basket of stocks in the MSCI All Nigeria Select 25/50 index. It is listed in the United States and trades just like a stock.

It has annual expenses 0.93 percent or $93 per $10,000 invested. That said, the fund is quite small, totaling $23.8 million recently.