Nigeria Stocks Are a Risky Investment
Nigeria's economy is still a mess. Unfortunately, it may be a while before things right themselves.
Like many energy-rich countries, Nigeria's economy got hit hard when oil prices plunged to $26 a barrel in February last year. To put the size of the move in perspective, oil was trading at more than $100 in mid-2014.
Unfortunately, the rebound in crude prices hasn't helped Nigeria much -- the list of problems for the country's economy is so long it is hard to know where to start.
"Last year was quite a mess," says Nicolas Jaquier, an economist for emerging market debt at Standard Life Investments in London. "It was a perfect storm."
[See: The Best Energy Stocks to Buy for 2017.]
In addition to the low oil prices, he points to lost production in the oil fields and a lack of an appropriate action by the country's central bank. The result was that the country fell into recession last year, shrinking an estimated 1.5 percent. That's been a rare thing for Nigeria. For the last two decades, the country saw continuous economic growth right up until 2016 when things changed, according to World Bank data.
Currency policy. Other countries that rely on petrodollars to grow haven't had the same problems, in large part because they adopted a different currency policy.
For instance, Russia which is heavily dependent on oil revenue for its budget, let its currency, the ruble, slide. That devaluation helped offset economic losses from weak energy prices by making non-energy exporters more competitive on the world market. The weaker ruble made the goods cheaper when looked at in terms of dollars.
Nigeria's central bank did not follow such a plan with its currency, the naira. "The central bank is under the control of the government and decided to keep the currency high," says Robert Marshall-Lee, head of emerging markets and Asian equities at Newton Investment Management.
The official rate, around 315 naira per dollar, isn't even close to the black market rates of around 500. It's a sign that the central bank picked the wrong exchange rate.
The result has been a stunning shortage of dollars in Nigeria, and that makes repatriating profits from the country close to impossible. Why invest if you can't get your winnings back home? Instead, investors are sitting on the sidelines.
Investors are "waiting for the currency to reach market levels," Marshall-Lee says.
War. On top of the policy mess, terrorism is costing money and lives.
"Militant groups continue to bomb oil pipelines," analysts say in recent report from Brown Brothers Harriman, a New York-based financial services firm. "Oil Minister [Emmanuel Ibe] Kachikwu estimated that Nigeria lost as much as $100 [billion] in oil income from supply disruptions last year."
[See: The 25 Best Blue-Chip Stocks to Buy for 2017.]
In addition, there are mass kidnappings, and the response by the security services hasn't always been appropriate. "The army killed over 100 people [last] month when it mistakenly bombed a refugee camp that it mistook for [Islamist extremist group] Boko Haram," BBH says in its report.
Unrealized potential. All that bad news may have you wondering why anyone would consider Nigeria as a suitable place to invest. The truth is that the country has the potential to do well.
The latent opportunity isn't being realized because the economy has been hampered by excessive regulations and bureaucracy. Lifting the regulations and eliminating the bureaucracy would lead to substantially higher GDP, according to a recently published report.
"There is a strong, positive relationship between [ease of doing business] scores and prosperity," states a March-dated research paper by Steve Hanke, professor of applied economics at The Johns Hopkins University, Teja Polisetty and Jason Yin, both students at the same university.
The problem is that Nigeria scores exceptionally badly on the ease of doing business metric. "The government is larded with corruption and incompetence," Hanke told U.S. News & World Report. "It's just one damn thing after another."
How hard is it to operate in Nigeria? Getting electricity, trading across borders, registering property and paying taxes all place at 180 or worse out of a total of 189 countries in the ranking, the authors say in the report.
"Although Nigeria is on the bottom of the pack [...], there is great potential for prosperity by slashing regulations," they say.
If Nigeria could just make doing business a bit easier, then the economy would be richer.
What needs to change? Nigeria is burdened by inappropriate monetary policy, incompetence, corruption,and the presence of terrorists wreaking havoc on pipelines.
Corruption and government incompetence aren't new for Nigeria or indeed many other countries. So, while those things may hamper real economic growth going forward, what is keeping investors on the sideline now is the central bank's currency policy.
[See: Oil ETFs: 8 Ways to Invest in Black Gold.]
Until that changes, it makes sense for investors to stay away.
More From US News & World Report
