Brexit: How will it affect Nigerians?

                       



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. Demonstrators march onto College Green outside The Houses of Parliament at an anti-Brexit protest in central London on June 28, 2016. 


This decision to almost all commentators and analyst has huge ramifications for the future of the UK, the future of the EU and the future of the world. 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.