Rand recovers with Lira, but risks remain for the Naira

As uncertainty continues to grow in Nigeria’s political landscape weakening investor appetite, the year-to-date decline of the Nigerian Stock Exchange (NSE) All-Share Index worsened to 7.4 percent yesterday continuing a downward trend that has been experienced for days.

The market had shed 2.89 percent to hit a 10-month low last week and the downward trend seem set to continue this week, with the market going down by 0.13 percent. The NSE ASI closed lower at 35,399.28, while market capitalisation lost N17 billion to end at N12.9 trillion. Twenty-six stocks lost value, with only 14 recording gains.

The poor performance of the Nigerian stock market came as fellow African economic powerhouse South Africa felt the rout of Turkey’s lira, with the rand losing 10 percent of its value earlier on Monday to 15.7000 per dollar, its weakest since June 2016.

Over the last six weeks, the Turkish Lira has fallen nearly 45 percent against the dollar, following President Erdogan’s election win, strengthening his absolute power.

Mike Harris, founder of Cribstone Strategic Macro and formerly head of research at Renaissance Capital in London opined that it may be too late but Turkey still has a chance to save itself. “The Lira crisis was not inevitable. Government debt is low, corporate debt (albeit in the wrong currency) was not unsustainable, exporters are competitive, banks are strong, and financing is ample when there is confidence in the outlook. It’s late, but policies to restore confidence can work.”

A deputy governor at the South African Reserve Bank had said there would be no need for a central bank intervention just yet, but it is expected that the government will be watching the situation in Turkey and other emerging economies closely and act fast if need be, to forestall crisis. By Tuesday morning, the rand had recovered gaining more than 2 percent to trade at 14.0800 against the dollar at 0705 GMT. Government bonds also rose. The lira also recovered on Tuesday on the back of the central bank’s promise of liquidity.

Warrick Butler, executive head of rand trading at Standard Bank, however, told Reuters that it would be premature to rejoice. “I don’t think this volatility is going to stop just yet,” he said.

“If sanity returns in some small way, then there is a very good chance that we will trade back below 14.0000 (to the dollar), but don’t hold your breath.”

While frontier markets such as Nigeria are not immediately concerned with the trend in the emerging markets, there are worrying signs.

As International Finance and Investment Securities expert Ikpenmosa Uhimuavbi noted, it is almost customary that financial crisis happens every decade.

“We saw one in 1998 to 2000, another in 2008 to 2010, we are expecting another between 2018 to 2020,” he told TheNerve Africa.

“This can take any form. It is important for government to take this seriously. National wealth is at stake!”

Investors are generally wary of frontier markets due to risks such as volatility, illiquidity, corruption and opacity. Even those that manage to invest due to possible massive returns, are often very careful, selling off when they notice any potential risk. The cold feet currently being developed by investors ahead of Nigeria’s 2019 elections is evident in the market.

“The internal wrangling between the two major political parties in Nigeria is playing very well into the exit strategy of most investors. The perception of political uncertainty is enough to trigger a mass exodus,” Uhumuavbi said.

However, he noted that if for any reason, a melt down in emerging markets returns and continues, it will spread to frontier markets like Nigeria, “because our country is vulnerable”.

While he admitted that the managed float if the naira could absorb a little of the shocks. He noted that “the foreign reserve is still small compared to the degree of Nigeria’s external exposures and dependence of import”.

As Nigeria’s central bank strive to keep the naira strong using the country’s external reserves as a buffer, the reserves have dropped to $47.25 billion in July from $47.63 a month earlier. If the dollar continues to strengthen and oil prices remain at their current levels, the central bank will struggle to keep saving the naira.

While it continues to fight to keep the naira strong, Uhumuavbi urged the government to help the central bank “to build a fire wall around the Naira”.

Analysts say such action without an equal effort to diversify the economy only spells greater doom for the country.