Citigroup Sees Vanishing Nigerian Deals on Devaluation Fears

Source: THISDAYLIVE

Citigroup Incorporated said deals in Nigeria have plummeted because investors are too scared to spend money when it’s expected that the naira will have to be devalued.

“I see this as a year of pause,” Citigroup’s head of investment banking for Africa, Miguel Melo Azevedo, who helped sell dollar debt for countries including Nigeria and Morocco, said in an interview with Bloomberg in Cape Town.

“You will look very stupid if you buy something in Nigeria and tomorrow it gets devalued. There’s an embarrassment factor.”

Nigeria’s government is shielding the naira after the 42 per cent decline in the price of Brent crude in the past year has decimated state revenues. The currency has been pegged at N197-N199 per dollar since March last year, while in the unofficial parallel market, the naira is 34 per cent weaker, and traded at about N300 per dollar on Wednesday.

The number and the size of mergers and acquisitions is showing the strain. So far this year there have been 12 deals valued at $1.45 billion compared with a year ago when there were 19 deals worth $5.62 billion, according to data compiled by Bloomberg. The value of mergers and acquisitions in Nigeria has plummeted

“The drop-off in mergers and acquisitions could get worse,” said Ronak Gadhia, a research analyst at London-based Exotix Partners LLP.

“The level of foreign direct investment has also dropped off a cliff and it’s not going to recover any time soon until policies around the naira change.”

Nigerian President Muhammadu Buhari came to power in May last year, promising to fight corruption, fix the economy and tackle terrorism. What he couldn’t give assurance on was the oil price. Economic growth last year eased to it’s lowest pace in more than a decade and the benchmark Nigerian Stock Exchange All Share Index has fallen 16 percent this year, the worst performer in sub-Saharan Africa.

Nonetheless, Buhari remains opposed to devaluing the currency, arguing that it would result in higher inflation and hurt the poorest citizens.

The drop in asset values “opens a buying opportunity,” said Azevedo, who joined Citigroup in 2010 from Bank of America Merrill Lynch and was involved in Bob Diamond’s initial public offering for Atlas Mara Limited.

Nigeria will likely be forced to devalue its currency and “those that have a longer-term perspective can take advantage of this. 2017, if oil comes back even to $50, I can see some resumption of normal levels of activity,” he said.

“It will become increasingly difficult to source enough forex to service debt repayments and a default will trigger a banking crisis,” a Johannesburg-based executive director at business risk consultancy Exx Africa, Robert Besseling said.

“If a default is going to happen, it will probably happen this year. It only takes one bank to hit the wall to create panic.”

Investors may be reconsidering their presence in Nigeria, but those with a longer-term view won’t withdraw completely, Besseling said.

“Looking from the outside it’s a highly under-penetrated market and valuations on assets like the banks are pitiful -- they’re so cheap you could buy them without having to get board approval,” Gadhia said. “But it boils down to a need for clarity. So far Buhari seems to have ad-hoc policies and you would need a lot more clarity before investors gain confidence again.”

The IMF on Wednesday called on Nigeria to stop pegging its currency and to remove curbs on access to foreign exchange. To try and conserve declining reserves and boost local manufacturing, the central bank last year imposed restrictions on access to foreign currency, but businesses dependent on imports suffered and foreign portfolio inflows waned. Adding to the pain is inflation at 9.6 percent in January, which is above the central bank’s 6-9 percent target range.

“There’s only a short list of people willing to take the risk of investing in Nigeria who have both the cash and the political backing,” Besseling said. “It’s very likely China will use this as an opportunity for its state banks to buy assets. It’s also an opportunity for sovereign wealth funds in the Middle East.”