Covid-19, NSE fair weather foreign portfolio investors




The Nigerian Stock Exchange (NSE) is perhaps the biggest casualty of the coronavirus pandemic in Nigeria at the moment. The NSE has lost something close to N3 trillion since the outbreak of the pandemic in the middle of January 2020. By the middle of March 2020 the NSE lost $1.8 billion through divestments by foreign portfolio investors.

The bear runs triggered by fleeing foreign portfolio investors following dwindling oil demand and consequent falling price induced by the pandemic has crowded out massive gains recorded by banks quoted in the NSE.

Despite the huge dividend of N2.75 declared by Guarantee Trust Bank for the bumper harvest it recorded in 2019, the bank’s share price has tumbled precipitously from a peak of nearly N60 in 2018 to N18.47 at the close of business last week. Zenith Bank with similar dividend payout as GTB has suffered similar decline in share price as it closed last week at a meager N19.

On one frenzied day in the middle of March 2020, market capitalization of the NSE tumbled by a record N656 billion. Foreign portfolio investors are at the root of the dwindling fortune of the Nigerian capital market.

Since coronavirus crippled demand for crude oil and drove down prices to a three-year low, foreign portfolio investors in the NSE have been edgy about what might happen to their investments in a country with a one-handed economy.

As oil price dropped below $30 per barrel, it dawned on the fair weather investors that with Nigeria’s foreign reserves tumbling due to low income from the oil market and the over-whelming demand for scarce dollars in the foreign exchange market, it was time for them to quit the NSE.

They stormed the NSE and triggered an unprecedented bear run.

It was obvious that any further delay could amount to double tragedy. The first danger of a possible delay in exiting the Nigerian bourse was that if the exchange rate of the naira plummets to N450 to the dollar as demand for forex in the market was grossly exceeding supply due to tumbling oil price, they would lose huge sums when they sell their shares that were bought when the naira was trading at N360 to the dollar in Investors/Exporters (I&E) window.

The second risk was a worst case scenario. If everything goes wrong in the international oil market (as they are now), and Nigeria’s foreign reserves drop below $30 billion making the Central Bank of Nigeria (CBN) incapable of funding the foreign exchange market adequately, they would not be able to export the proceeds of the sales of their shares out of Nigeria due to acute scarcity of forex.

That perception led to the stampede in the NSE two weeks ago when market capitalisation tumbled by N656 billion in one day. That was the first time in the history of the NSE that its capitalisation would suffer such humiliating capitulation.

The stampede in the capital market was transferred to the foreign exchange market two days after the near-collapse of share prices in the NSE. Foreign portfolio investors stormed the foreign exchange market with proceeds of their stampeded withdrawals from the NSE and were willing to buy a dollar at N420.

Bureau de change (BDC) operators had a field day selling dollars to the fleeing foreign portfolio investors at a huge margin. The CBN intervened the next day with an odd combination of stick and carrot.  The carrot came by way of increased funding of the forex market in defence of the capitulating Nigerian currency. The stick was wielded on greedy BDC operators who sold dollars at N420 to the imperiled foreign portfolio investors. Most of the erring BDC operators paid huge monetary penalties for the grievous sins against the nation’s currency.

CBN’s intervention in the market after the calamitous fall of the naira was momentary and the foreign portfolio investors knew it would not last. The CBN lacked the financial muscle to defend the naira at N360 to the dollar.

Even as the CBN vowed that it had no plans to devalue the naira, the regulator suddenly stormed the foreign exchange market with a four per cent devaluation of the naira which took the I&E window exchange rate to N380 to the dollar, down from N360.

Many had hoped that the four per cent devaluation of the naira would placate foreign portfolio investors to leave their investments in the NSE as they can now buy more shares with their intimidating dollars.

Ironically the precipitous bear run in the NSE has defied the devaluation of the naira. On Monday, March 23, 2020 the bear run in the NSE took another bewildering turn. Market capitalization plummeted by N259.2 billion.

Market watchers contend that the devaluation of the naira was not deep enough to convince investors to leave their money in the NSE.

A school of thoughts believe that the purchasing power parity (PPP) of the naira at the moment hovers around N413 to the dollar and that under that circumstance the apex bank should have adjusted the exchange rate of the naira pretty close to the prevailing PPP.

That suggests that the naira should be trading at I&E window at anything around N410 to the dollar. That perception probably informs the jittery posture of the foreign portfolio investors and their suspicion that the value of their investment in Nigeria would be tumbling as the CBN might eventually be compelled to do the needful.

There are fears that CBN might devalue the naira again by the second half of the year if the demon behind the coronavirus pandemic keeps his hands steady on the controls.

The consequence of CBN’s feeble financial muscle in the foreign exchange market is that Nigerians should brace for surging inflation as the purchasing power of the naira ebbs with repeated devaluations.

Inflation rate which the architects of the 2020 budget target at 10.9 per cent might cross the 20 per cent mark by the end of the year if oil price remains weak.

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