Despite no cabinet and a deadly Boko Haram comeback, Nigeria's Buhari still has cards to play

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Nigeria has attractive bond yields, a fast growing economy with a young population. Now it needs a functioning government and clear policy direction.

IT has been a tough first month for Nigeria’s new president Muhammadu Buhari since his inauguration at the end of May, with a bloody Boko Haram resurgence and political uncertainty as the president is yet to name a cabinet.

Still, Nigeria has attractive bond yields, a fast growing economy with a young population. The country can also pat itself on the back for a peaceful transition, which was really no mean feat. For investors, it’s missing a key ingredient: a functioning government.

More than a month since taking charge of Africa’s largest economy, the 72-year-old former military ruler said he may postpone a cabinet announcement until September. That’s left the continent’s biggest oil producer and most populous nation without a finance chief to steer a Treasury he said is “virtually empty” amid calls for a currency devaluation, with critics nicknaming him “Baba Slow”.

Naira bonds high

Still, at 14.9% Nigerian naira bonds yields are the highest among 31 emerging markets, though the uncertainty over the cabinet and insecurity has pushed an index of naira bonds down 2.6% in dollar terms over the past month, compared to average losses of 0.2% in other emerging markets.

But foreign investors are going slow until they know Buhari’s plans for the exchange rate and budget, according to Barclays Plc and Rand Merchant Bank.

“You can’t ignore the yields on offer in Nigeria, except for when there’s a lack of clarity on policy,” Ridle Markus, an analyst at Barclays, said by phone from Johannesburg on July 2. “It creates further uncertainty as to what the cabinet will look like, what decisions the finance minister will take.”

Oil damage

Nigerian stocks dropped 8.9% since Buhari’s April 2 win over Goodluck Jonathan in a March presidential election, the third-worst performers globally among 93 primary indexes tracked by Bloomberg. He was sworn in on May 29 following a campaign in which he promised to crush Boko Haram’s insurgency in the north east and clamp down on corruption.

The new government suffered the deadliest week since taking office last week after attacks in the Borno state claimed at least 200 lives.

So far he has articulated few ideas on how to revive an economy ravaged by an almost 45% drop in Brent crude prices over the past year, Angus Downie, head of economic research at Ecobank Transnational Inc., said by phone from London on July 2. Nigeria’s government relies on oil for roughly two-thirds of its revenue.

Growth will decelerate to 4.8% in 2015, about half the average of the past decade, according to the International Monetary Fund.

But that’s still faster than the global average of 3.5% and 4.3% for developing nations.

The naira fell 21% between the end of June 2014 and Feb. 12, when it dropped to a record low of 206.32 against the dollar. That prompted the central bank to extend foreign- exchange trading curbs to prop up the currency. While those have steadied the naira at an average of 199.03 since March, they have left it overvalued, according to investors, including Investec Asset Management and BlackRock Inc.

Still, Nigeria’s population, where 44% of its 177 million are under the age of 15, according to data compiled by Bloomberg, augurs well for long-term growth. In the euro region, less than 16% of people are under 15, while in the U.S. the figure is 20%.

A delay in naming a finance minister means it may take longer for investors to find out whether currency restrictions will be removed, according to Joseph Rohm, a money manager at Investec Asset Management, which oversees about $110 billion.

Looking for clarity

Bonds and equities surged after Jonathan conceded defeat to Buhari, easing investors’ concerns about a disputed result in a country that had never seen a peaceful change of power from one party to another. Yet, as well as plans for the currency, investors now want to know whether the government will remove gasoline subsidies and how it will diversify the economy from oil.

“We’re still sitting in the dark,” Zoran Milojevic, a trader at New York-based brokerage Auerbach Grayson & Co., said by phone. “The only positive thing is that Nigeria didn’t spiral into a civil war. That’s not enough to push the market.”

Average bond yields have climbed almost 100 basis points from 13.91% since May 14.

There probably won’t be a rally until Buhari outlines how he will improve Nigeria’s economy, says Ronak Gopaldas, an analyst at Rand Merchant Bank, a unit of FirstRand Ltd, one of Africa’s biggest banks.

“People thought by now they’d have some kind of clarity,” Johannesburg-based Gopaldas said by phone on July 1. “They’re looking for a decisive message about what Buhari’s going to do to arrest the economic decline. It’s something that needs to be done sooner rather than later.”

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