Foreign investors are side-stepping Nigerian stocks as Africa’s largest economy is widely expected to devalue the naira after presidential elections set to be held this weekend.
“The risk in Nigeria of a currency devaluation is high,” said Ayodeji Dawodu, head of Africa sovereign and credit research at Banctrust Investment Bank Ltd in London. “It is very evident in the differential between the official rate and the black-market rate.”
The currency trades at about 755 naira per dollar in the informal market, while the official rate is about 460.
Nigeria operates multiple exchange rates for different transactions, and all three leading presidential candidates, Atiku Abubakar of the PDP, Bola Tinubu of APC and Peter Obi of LP, have pledged to end that.
Foreign portfolio investments into Nigerian equities fell to a 16-year low in 2022, according to data from the stock exchange.
Total domestic transactions accounted for about 84% of the total transactions carried out in 2022, whilst foreign transactions accounted for about 16% of the total transactions in the same period (see table below).
The transaction data for 2022 shows that total domestic transactions are circa N1.945trillion, whilst total foreign transactions are circa N379.23billion.
Slowing economies have left some emerging and frontier markets with unsustainable debt burdens and shortages of dollars.
Now, currency pegs and managed exchange rates have come under strain, and distortions in countries including Nigeria have led to the adoption of multiple exchange rates.
“Currency devaluation makes a number of equity markets in the smaller emerging and frontier universe untouchable,” said Hasnain Malik, a strategist at Tellimer in Dubai, naming Argentina, Egypt, Ghana, Lebanon, Nigeria, Pakistan, Sri Lanka and Zimbabwe.