THE world lives in dangerous times. The
unimaginable and surprises are springing up by the day. At odds with almost all
conventional economic thinking the British voted to leave the EU. The entire
world was shocked beyond measure. It sent cold wave down the economic spine of
global markets.
It stands to reason that it is
undoubtedly a manifestation of the widespread feeling in Europe, the US and
elsewhere that ordinary people are being ignored politically and left behind
economically. But whether this outcome improves anything for them is highly
questionable and will depend on how the rest of the EU responds. It makes other
elections such as the US presidential one later this year harder to predict. In the short term there is massive uncertainty. For the banks and for London as an international financial centre this outcome is definitely a negative and the failure to retain passporting rights across the single European market would be very damaging.
Non-binding advisory referendum: United
Kingdom UK, vote to leave the EU was based on a non-binding advisory referendum
which does not guarantee the UK's departure from the EU. However, the outcome
of the vote has resulted in months of political uncertainty throughout Europe
that is rattling global and African markets. If the UK does leave the EU, the
impact on many African economies and Nigeria in particular will be short-term
and relatively insignificant. The UK has two years to renegotiate trade
agreements with the EU and African countries.
Nigeria will struggle to raise foreign
loans: In Nigeria the effective implementation of a new foreign exchange
mechanism and liberalisation of the fuel sector will face fresh hurdles as the
UK withdraws from the EU. Nigeria will also struggle to attract interest in new
debt sales aimed at financing the 2016 expansive budget. Mr. Victor Ogiemwonyin, MD/CEO, Partnership Investment Company Plc reflecting on the issue said "the British exit from the EU is a mixed bag for Nigeria. There are however more pluses for our economy.
Because of the uncertainty and instability of the European Economy and particularly the UK economy , means those investors who have money to invest but worried about the European Economic situation and particularly the UK sees Nigeria as an option, for these investors, particularly because of the cheap equity prices in Nigeria and Assets generally. There is also a high incentive given a devalued Naira that is now also floating. The commencement of the Naira Settled FX Futures Market is a confidence boosting step for investors looking at Nigeria.
Fixed Income investors will benefit:
Fixed Income investors will also benefit, they can invest and hedge their
investments, at the Nigeria FX Futures, and giving them confidence that they
can exit at will. Those who import from the UK will also benefit from the
devalued Naira, particularly manufacturing companies with UK ties. Parents who
have children in the UK also will be able to buy the pound Sterling cheaper.
This will compensate them for the loss in the value of the Naira. Because
Nigerians spend a large proportion of their FX expenditure in the UK, Nigerians
will save some money from the lower valued Sterling. The negative is the Asset
values of Nigerians investing in the UK will also go down.
Financial Market Dealers Association of
Nigeria: Wale Abe, Former, Executive Secretary, Financial Market Dealers
Association of Nigeria in his reaction said "The negative impact of
the immediate consequences may impact Nigeria is not likely to be significant
as FDIs as new investments have been virtually non-existent in the past years.
Relationship has been more historical because of the colonial bond.
CBN: Will boost Nigeria's foreign
exchange
Central Bank of Nigeria (CBN) said that
the decision of the British people to leave the European Union (EU) will boost
Nigeria's foreign exchange policy.
Commenting on the outcome of the
British referendum, CBN Deputy Governor, Economic Policy, Dr. Sarah Alade said
that the bank expected Britain's vote to exit the European Union to be good for
its forex policy as interest rates are likely to stay low in the U.S.,
channelling foreign investors to Nigeria.
"We only need to take advantage of
this opportunity to grow the economy," she said.
Cowry Assets Management Company:
According to analysts at Cowry Assets Management Company, the naira will enjoy
stability in the foreign exchange market this week due to slowdown in demand by
end users.
Delay in foreign funds into capital
market: Operators in the Nigerian capital market see a mixed impact of
Britain's vote to exit the European Union on the stock market. For Tola
Odukoya, Managing Director, Dunn Loren Merrifield Asset Management &
Research Limited, "at present, I do not see any direct impact.
Effect on our markets
Therefore, it is my opinion that the
effect on our markets will be neutral; and if at all there will be any impact,
it should be positive in favour of our equity and capital markets.
Eczellon Capital: In his views, Mr.
Mustapha Suberu, Research Analyst at Eczellon Capital said "the Nigerian
equities has experienced significant sell-off since Friday, June 24th 2016.
This could partly be attributed to the uncertainty created by the Brexit
phenomena, and profit taking on the part of local investors given the rally recorded
in the previous weeks of trading following the liberalisation of the naira. We
expect the market to normalize soon as the spate of profit taking reduces in
the coming days."
He added: "That said, the likely
impact of the Brexit on the Nigerian market will largely be a delay in the flow
of funds into the financial markets which many had expected to trickle in
following the liberalisation of the FX market. We still expect foreign
portfolio investors to grace the Nigerian market as soon as the dust surrounding
the Brexit settles in the coming weeks."
United Capital Plc: In the views of
analysts at a Lagos-based investment banking firm, United Capital Plc, the exit
will have minimal impact on equities, but a possibility of medium term uptick
in yields in fixed income instruments.
Though they envisaged a reduction in
foreign portfolio investments, FPIs, into the country as UK had in the last 10
decades accounted for about 44 per cent of capital importation into Nigeria,
they argued that the effect would be muted since domestic investors are the
drivers of activities in the market at the moment.
"Given that foreign portfolio
inflows (FPI) into Naira assets has waned significantly in the last 18 months,
we do not expect an immediate negative impact on the equities market. In fact,
the surge in equity market turnover seen in the last 1o days has been driven
largely by domestic investors," they said.
For fixed income assets, the impact on
the direction of FPI in the medium remains uncertain but we expect investors to
price in a possible decline in flows, they said, adding: "If we place this
against the backdrop of our expectation of significant FGN borrowing, we opine
that yields are likely to inch up in the short to medium term."
On prospects for FPIs, they
said:"In the last decade, the UK has accounted for an average of 44 per
cent of capital importation into Nigeria with the country's share of total
capital inflows into Nigeria reaching 61.8 per cent in 2012. While we do not
yet have data on the split of capital flows between FDI and portfolio
investments by origin, we reckon that the prospect of further political turmoil
in the European region could see capital outflows from Europe in the near term.
"This is because a "flight to
safety" may be accentuated by increased financial market volatility
expected to ensue from political turmoil going forward. However, we caution
that these political upheavals (especially the possibility of a flurry of
referendums across the region) could place investors on an alert for possible
deterioration in frontier markets that have strong trade ties to Europe, with
contagious impacts on the broader EM world."
Business Risk Intelligence: According a
special report by Business Risk Intelligence on the Brexit in Africa, "The
effective implementation of a new foreign exchange mechanism and liberalisation
of the fuel sector in Nigeria will likely face fresh hurdles as the UK
withdraws from the EU. Nigeria the report said will struggle in its bid to
attract foreign investors' interest in new debt sales aimed at financing the
2016 expansive budget.
Struggling economy
The main impact of a 'Brexit' on
Nigeria would be further deterioration of the country's already struggling
economy, which has been caused by the fall in global oil prices and a steep
drop in local crude production due to an insurgency in the Niger Delta".
The report noted "There is
extensive trade and security cooperation between the UK and Nigeria that would
be likely to face several years of disruption as the UK departs from the EU.
Nigeria is the UK's second-largest export market in Africa. Bilateral trade
between the two countries is currently worth $8.3 billion and projected to
reach $25 billion by 2020.
The UK is also Nigeria's largest source
of foreign investment, with assets worth over $1.4 billion. Moreover,
UK-Nigerian remittances account for $21 billion a year. The UK is also one of
the largest development assistance donors to Nigeria, although Nigeria is not
as aid-dependent as most continental counterparts.
Reduced trade flow: "A slowing UK
economy on the back of a departure from the EU and potential disruption as the
UK renegotiates its trade agreements, would be likely to reduce trade flows,
foreign direct investment, and Nigerian remittances. There is also no guarantee
that other EU countries will make up the UK shortfall in trade and investment,
as other EU. On 24 June, Nigerian stocks ended a three-day rally, falling 1.4%
over worries of Britain's vote to leave the EU. Nigerian banks, such as
Fidelity Bank and Zenith Bank, recorded the biggest losses. Nigerian stocks had
previously rallied 8.5% after the government floated the naira and ended a
highly controversial currency peg.
"As a result of Brexit, new
portfolio inflows will slow, which will hamper the implementation of the
country's new foreign exchange mechanism. On 20 June, the central bank
introduced a more flexible foreign currency policy, removing a de facto peg of
around N197 to the US dollar. The Naira' 16-month peg to the dollar had
overvalued the Nigerian currency, resulted in an economic contraction, and
harmed investments.
Fuel sector liberalisation
The implementation of the fuel sector
liberalisation, including the termination of a burdensome state-subsidy scheme,
would be likely to face implementation issues. The sector's liberalisation will
add to fuel importers' margins and will allow shipments of fuel to resume.
The liberalisation of the fuel
marketing sector and the introduction of a flexible exchange rate are both
aimed at soothing foreign investor concerns and to attract new fundraising to
finance a record budget deficit widened by a fall in oil revenues.
The effective implementation of the new
currency regime and establishing its credibility will be key to attracting new
foreign direct investment and portfolio flows. "Finance Minister Kemi
Adeosun is due launch a planned eurobond sale later in 2016. The government
plans to raise $10 billion of new debt of which $5 billion would come from
foreign investors. Much of this planning would be delayed as risk averse
investors steer away from Nigerian debt”.
Beyond trade and investment, the UK is
also a key partner in Nigerian security. The UK has been crucial to drawing
international attention to the Islamist Boko Haram insurgency in Nigeria's
northeast. There is a risk that the UK would become distracted from
international security threats, such as those by Boko Haram, as it negotiates
its departure from the EU.
SOURCE: VANGUARD.