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The Financial Times UK has described the
economic policies of the President
Muhammadu Buhari administration as the
‘height of foolishness’.
The leading international business publication
in an article by Steve Johnson,
the deputy
editor of the Financial Times, said the
economic policies of the Buhari administration
is doomed to fail because it is tailored after
Venezuela’s exchange rate policy and China’s
failed equity market strategy.
The article faulted the circuit breaker on the
Nigerian stock exchange which pauses trading
for 30 minutes if stock prices fall 5 per cent
and will cease for the day if it is triggered
twice in a session, or after 1.45pm.
It noted that this month, Beijing abandoned a
similar policy after just four days, stating that
in a falling market the existence of the circuit
breaker encouraged more selling as traders
rushed to exit while they could.
Quoting John Ashbourne, Africa economist at
Capital Economics, it said:
“It is hardly confidence-inspiring that Nigeria is
copying a Chinese policy that is widely seen to
have failed.”
See the full article below:
Nigeria plans to create a $25 billion fund with
public and private financing to modernize
infrastructure and avoid a recession.
Copying Venezuela’s exchange rate policy and
China’s failed equity market strategy might
seem the height of foolishness.
But, at least in the opinion of John Ashbourne,
Africa economist at Capital Economics, that is
precisely what Nigeria, the continent’s largest
economy, has just done.
“Low oil prices are battering Nigeria’s export-
dependent economy, but it’s the government’s
market-distorting response that risks pushing
the country into a Venezuela-style crisis,” Mr
Ashbourne says.
“Nigeria is sliding towards a Venezuela-style
FX regime and adopting a Chinese-style stock
market circuit breaker. Neither will reassure
foreign investors, many of whom seem to be
eyeing the exits.”
Both measures were announced after markets
closed on Friday, January 15.
The circuit breaker on the Nigerian stock
exchange, one of the worst performing in the
world this year with a fall of 17.7 per cent, will
pause trading for 30 minutes if stock prices
fall 5 per cent. Trading will cease for the day if
it is triggered twice in a session, or after
1.45pm.
This month, Beijing abandoned a similar policy
after just four days, concluding that in a falling
market the existence of the circuit breaker
encouraged more selling as traders rushed to
exit while they could.
“The effect is akin to calling last orders at a
crowded bar,” Mr Ashbourne says. “It is hardly
confidence-inspiring that Nigeria is copying a
Chinese policy that is widely seen to have
failed.”
He accepts that Nigeria’s circuit breaker may
not be as badly designed as the Chinese
version. Whereas the NSE All Share index
rarely falls by 5 per cent a day, the Shanghai
Composite did so a dozen times in 2015. The
NSE’s version has not yet been called into
action.
Nevertheless, Mr Ashbourne says that using a
circuit breaker to shore up the market, rather
than to avoid volatility, is “deeply flawed”.
Simultaneously, the central bank has said it
will stop selling US dollars into the interbank
FX market.
Nigeria has operated a de facto twin currency
system for the naira since February 2015,
when the bank held the official interbank rate
at N199 to the dollar to avoid a spike in
inflation. The unofficial rate, available at
bureaux de change, has plunged to N300/$,
as the first chart shows.
However Mr Ashbourne argues the latest move
takes Nigeria a step along the road to a
Venezuela-style scenario, where the dollar now
buys 913 bolívars on the black market,
according to dolartoday.com, compared with
an unofficial rate of 6.28/$.
“Suspending US dollar sales to the interbank
market will force consumers and firms to
source dollars at bureaux de change,” he says,
while providing an implicit subsidy for
companies and individuals with the
connections needed to access the official
rate.
As the second chart shows, Nigeria’s
reluctance to let the naira’s official exchange
rate weaken means it has borne the brunt of
the sharp fall in oil prices since the middle of
2014.
In naira terms, the oil price has fallen from
$115 a barrel to around $35, with the modic**
of weakening permitted so far doing little to
take the edge off the fall in oil prices to $28 in
dollar terms.

In contrast, Russia, which has allowed the
rouble to fall sharply, is still seeing oil prices of
around $65 in local currency terms, with many
other oil exporters such as Brazil and
Azerbaijan also seeing more cushioning of the
blow than Nigeria.
Charles Robertson, chief global economist at
Renaissance Capital, who drew up the second
chart, expects Nigeria to bow to the seemingly
inevitable and devalue the naira, given that his
calculation of fair value is N305/$, very close
to the current black market rate.
He notes that frontier market funds are now
underweight Nigerian equities, and believes
that international investors “are likely to
remain on the sidelines,” barring an obvious
catalyst for change.
Nevertheless he believes a devaluation to
N250/$, “while no longer sufficient to ease all
dollar shortages … would be good enough to
warrant investors taking a fresh look at
Nigeria, especially if they expect a rebound in
the oil price”.
Daniel Salter, global equity strategist at
RenCap, has been busy analysing just when
equity market investors should consider
returning to a freshly devalued Nigeria, if
history is anything to go by.
Mr Salter analysed 13 emerging market
currency devaluations since 1994 in countries
ranging from Mexico and Turkey to Egypt and
South Korea.
His conclusions are that it is rarely worth
buying in anticipation of a currency
devaluation and that, on average, equity
markets do not hit their low point (in dollar
terms) until 99 days after the start of the
currency devaluation.
This delay can vary significantly, though, as
the final chart shows. In the case of South
Korea in 1997 the stock market troughed the
day before the won started to fall. In Nigeria
itself, in 2009, this point was reached after 35
days.
However in the cases of Thailand (1997), the
Philippines (1998) and Egypt (2001), it would
have paid equity market investors to stay out
for at least six months.
Mr Salter believes the lag is due to two
factors: the initial devaluation is often
insufficient to stabilise the currency; and that
devaluations frequently coincide with banking
crises.
Unfortunately, this analysis probably tells us
little about how Nigeria’s equity market is
likely to behave in the year after any
devaluation.
In the 13 previous episodes, the stock market
typically fell 3 per cent in dollar terms in the
three months after the start of the devaluation.
However, as the above chart shows, there has
been huge variability in this figure, from -56
per cent in Mexico in 1994-1995 to +100 per
cent in South Korea in 1997-98.
Likewise, on average the typical stock market
gained 4 per cent in dollar terms in the year
after the devaluation, but once again this is the
average of a widely dispersed data set, with
the returns ranging from -86 per cent
(Indonesia, 1997-98) to +172 per cent (South
Korea).
The sector breakdown perhaps delivers a
clearer message. RenCap found that consumer
staples stocks have tended to outperform in
the 12 months after the start of a devaluation,
while consumer discretionary companies and
industrials tend to pick up once the currency
has bottomed.
Financial stocks, in contrast, tend to be the
worst sector in the year after a devaluation,
probably due to declining credit quality.

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