Political risk may hurt portfolio inflows as election looms

by | January 18, 2018 12:15 pm

Despite Nigeria’s economy getting an impetus from rebound in oil price and stable foreign exchange policy, analysts predict that the country’s susceptibility to political risks could undermine portfolio inflows.

The elections in Nigeria will be watched by investors and market watchers as President Muhammadu Buhari goes for a second term despite complaints that an improvement in the economy last year hasn’t trickled down to the pocket of the people.

“Elsewhere in Nigeria, despite higher commodity prices and stable FX outlook, political risk is set to drive subdued portfolio flows,” said analysts at The Institute of International Finance IFF.

The 2019 election is no longer a one-horse race as political heavy weight Atiku Abubakar decamped from the ruling party, APC, to the opposition party Peoples Democratic Party (PDP).  Atiku, a billionaire, has the financial muscles to lock horns with the incumbent president if endorsed by the opposition party.

President Buhari is increasingly becoming unpopular among Nigerians due to what they perceive as his lackadaisical attitude and insensitivity to the spate of killings across the country.

Cattle herders have killed hundreds of farmers in the middle belt area.

“Because of the uncertainties surrounding elections in Nigeria, investors tend to reduce their portfolio,” said Ayodeji Ebo, managing director and CEO of Afrivest Securities Limited.

“Some investors may want to play safe because they’ve made some money by taking advantage of the rally on the exchange in the first two weeks of the year,” said Ebo.

Ebo says there has been increased participation in the bond market as yields have fallen while price has gone up. He however added there will be uptick in the equity market in the first quarter but things will slow in the second quarter as electioneering heightens.

Nigeria 10-year bond traded at 13.16 percent on Monday, January 15. Historically, Nigerian government 10-year bond reached all-time of high 17.31 percent in 2015 –at the height of an economic downturn brought on by lower price of commodity- and a low of 5.92 in March 2010.

The NSE ASI Index returned 42 percent last year, the third best in the world, thanks to the introduction of a new foreign exchange policy by the central bank.

The Market Capitalization appreciated on Wednesday by 1.89 percent to close at N16.08 trillion, compared with the appreciation of 2.17 percent  on Tuesday.

Nigeria Foreign portfolio investment (FPI), year on year witnessed a turn of fortune as it jumped to the highest since 2014 in the third quarter of 2017, rising 200.07 percent to $2.7 billion from $920 million recorded in the third quarter of 2016.

  Johnson Chukwu, managing director and CEO of Cowry Asset Management Limited, argued that in the run-up to elections, bond yields would go up and price falls while the naira could come under pressure.

President Muhammadu will have to convince legislators and governors as well as party stalwarts to support his candidacy for 2016 if he decides to contest.