Just two weeks into the job, Nigeria’s President Bola Tinubu has pulled the right levers for markets: ridding the country of a costly fuel subsidy, removing a controversial central bank governor, and promising to unify a web of varying exchange rates.
Foreign investors have bought into the turnaround story for Africa’s biggest economy, with Nigerian dollar debt surging this week. Tinubu set the tone for a new economic era in his inauguration speech on May 29, when he announced that the country’s gasoline subsidy was “gone” — a bold move that had set off riots when previous leaders attempted it.
“Overall, President Tinubu has shown that he’s willing to take on two of the most important factors investors are focusing on, which is fuel subsidies and FX reform, in a very short space of time,” said Thys Louw, a portfolio manager at Ninety One in London. “Reform momentum in Nigeria has picked up considerably, although from a low level, and sustaining this will be important given poor economic conditions Tinubu inherited.”
In two major moves, Tinubu suspended central bank Governor Godwin Emefiele on Friday, and on Monday a senior adviser said it’d be a matter of months before he unified its exchange rates, a key demand of investors and multilateral institutions including the World Bank.
Emefiele is widely considered to be the chief architect of a set of unorthodox policies — including propping up the naira, allowing a complex regime of multiple exchange rates, and lending tens of billions of dollars to the government of Tinubu’s predecessor — that have been blamed for crippling Africa’s largest economy.
Nigeria’s State Security Service detained Emefiele Saturday for “investigative reasons,” and Folashodun Shonubi, a deputy governor in charge of operations at the bank, took over in an acting capacity.
Bonds Rally
Nigeria’s international bonds due in 2051 jumped to the highest since January on Monday, a public holiday in Nigeria, and extended gains on Tuesday. The extra yield investors demand to hold the nation’s debt over US Treasuries fell 38 basis points to 7.19 percentage points, according to a JPMorgan index.
The changes at the central bank “could spell the end of unorthodox and often conflicting and confusing monetary policies that held back economic growth and destroyed local and foreign investor confidence,” Ayodeji Dawodu, head of Africa sovereign and corporate credit research at BancTrust & Co. in London, said by phone.
Read more: Nigeria’s Suspended Central Bank Governor Taken Into Custody
Under Emefiele, the central bank offered the US dollar through several windows at tightly controlled rates, with little liquidity, to businesses and individuals. This forced many to the black market, where the dollar traded more freely but at about a 60% premium to the official rate.
Wale Edun, an influential member of Tinubu’s advisory board, told Bloomberg by phone on Monday that the unification of exchange rates was “imminent.”
“I would say it would have to be done within a quarter as rather than within a year,” he said. “ I think you’re talking, think quarters rather than years, that’s where I would put it.”
Bets on a devaluation in the currency sent investors seeking cover in the derivaties market. Non-deliverable forward contracts on the currency slumped, with the one-month tenor reaching an all-time low of 580 per dollar on Tuesday, after falling 8.8% on Monday, the biggest drop since May 2016.
Emefiele was widely seen as acting in lockstep with the administration of Tinubu’s predecessor, Muhammadu Buhari. That government was perceived to be more statist and socialist in its approach, said Yemi Kale, chief economist for Nigeria at KPMG LLP and the nation’s former statistician general. “The markets will respond positively to an administration it believes to be more market oriented,” Kale said.
Political History
Tinubu has a long political history. A former governor of Lagos state, he was the most powerful politician in Nigeria’s commercial hub and Africa’s biggest city.
But he’s also been dogged by corruption allegations, which he’s denied. In 1993, he forfeited $460,000 to resolve a lawsuit in Chicago after US authorities said that bank accounts in his name held the proceeds of heroin trafficking. More recently on the eve of the 2019 election, two armored bank vans were spotted entering his compound in Lagos. He denied using any money to purchase votes.
In his inaugural address, Tinubu criticized the central bank and vowed to unify the multiple exchange rates in order to “direct funds away from arbitrage into meaningful investment in the plants, equipment and jobs that power the real economy.”
The current naira exchange rate of 471.92 to the dollar, a record low, likely needs to be adjusted to about 700-750 naira, closer to the current black-market rate, JPMorgan analysts said in an note on May 31.
A naira at that level, combined with Tinubu’s decision to remove a costly gasoline subsidy, “means the government does not have [to] borrow as much, just to pay interest on debt,” Charlie Robertson, head of strategy at FIM Partners, said in a series of posts on Twitter.
--With assistance from Colleen Goko.
(Updates prices.)
Author: Anthony Osae-Brown and Emele Onu