Monthly Archives:

Brexit risks for Africa are overblown

By Rafiq Raji, PhD

For Africa and the United Kingdom, I choose to be optimistic.

Scare-mongering can stop now, the vote is over
I do not share the pessimism expressed by some on the potential negative impact of Brexit – term used to refer to the now almost certain exit of the United Kingdom from the European Union – on African countries. It is important to distinguish between short-term and long-term impacts. Credible risks – if they materialize – are likely short-term. Once market participants get over the shock, things should get back to normal. Market participants were surprised by Brexit. UK pollsters got it wrong. Again. Considering the margin by which the ‘leave’ side won, it is hard to believe that robust polling would have showed a ‘too close to call’ reading. Brexit-induced market volatility may pass sooner than people think, in my view. That is, after market participants get over the angst of being blind-sided. The South African Rand – the worst-hit African currency in the aftermath of the Brexit vote – is typically vulnerable when there are market jitters. And when negative domestic events – bizarrely intermittent – don’t cause some trouble, happenings in distant lands – a la Brexit – almost always come about to disrupt things. But if a long-term view is taken, it is not likely that increased sovereignty for the United Kingdom would be disadvantageous for African countries, the longstanding primary focus of UK foreign policy – or influence. There is ample time for both sides to calmly negotiate, once emotions become subdued and rationality takes over.

Brexit is an opportunity to rebalance the UK economy
Former Rolls Royce – a British carmaker – chief executive, John Rose, wrote once of the unbalanced ‘post-industrial’ UK economy for The Economist. In the article (“Made in Britain”), he recalls how an eminent British industrialist at a conference he was attending was introduced to a German audience as follows: “Our speaker is now going to explain how you run an economy based on real estate.” Sir John Rose made a case then for more British high value-added manufacturing. Brexit is an opportunity for such issues to get the type of attention they deserve. Also, even as Brexit negotiations could potentially get nasty, London’s place as a global financial centre in continental Europe would be hard to replace in a hurry. Still, some global banks have started to make contingency plans, reportedly transferring some jobs to Dublin, Paris, and Frankfurt. They are probably being hasty. It is still possible that the UK would be allowed some form of nuanced access to the single EU market for some services, probably just enough for financial institutions to be able to continue doing their EU-related business from London. So, upcoming Brexit negotiations may still tilt in banks’ favour. The view that a hard EU stance would be a crucial signaling tactic to dissuade other potential ‘Brexiters’ in the EU is short-sighted. I think the EU would be pragmatic.

Domestic factors matter more for African giants
It is the actions of authorities in Nigeria and South Africa – Africa’s largest economies – that matter more for investors. Structural imbalances in both economies have nothing to do with Brexit. And even portfolio inflows into these countries – expected by some to slow due to volatility and uncertainty in global markets owing to Brexit – would depend on the actions of their monetary authorities. Both countries clearly need to remain on a policy tightening path. And in the Nigerian case, if authorities follow through on ongoing structural reforms, the investment case for that country is hard to refute. Morever, capital seeking African assets are now more diversified. Long-term investment plays for asset classes like infrastructure are likely to continue unabated, in my view. The African Development Bank, Africa Finance Corporation and other African infrastucture or development-focused financial institutions are not going to cut back plans just because the UK decided it wanted more sovereignty over its own affairs. Furthermore, fears about a potential reduction in African diaspora remittances may be misplaced. Actually, I think Africans – who now see an increasingly insular West – may begin to build closer ties with their home countries.

Recessions don’t last forever
UK recession fears are the main argument behind negative African Brexit impact fears. Pray tell, do recessions last forever? The key question is whether Brexit would have a long-term negative impact on African economies. It is hardly robust to base an assessment of this on a potential UK recession; which would likely pass – if it happens – within the two years or so that Brexit negotiations and modalities are expected to be completed. Fears that Britons would buy less Kenyan flowers – expressed no less by the Kenya Flower Council – seem defeatist to me. Say that happens during a UK recession that everyone seems to think would occur this year, what about afterwards? I think things would either go back to normal or improve. Morever, there are other markets that could be explored.

British outwardness was never about the EU
There is a need to distinguish between the increasing insularity of some Britons – mostly the white, less educated and older ones, borne out of fears about immigration, and the likely rational decision-making of UK authorities. Whoever succeeds David Cameron as prime minister is not likely to jeopardize the advantages that the UK currently enjoys in global trade and finance. Now free from its EU obligations, it would likely ramp up its foreign policy reach through The Commonwealth – a multinational association of fifty-three member states formally under British colonization, which it controls. A likely renewed British Commonwealth focus would be an additional positive for African countries’ trade. Thus, I am sceptical of the view that the UK would need to renegotiate each and every trade deal it agreed to under the aegis of the EU, especially those with African countries. Brexiters are not dumb. A simple conversion would do.

Also published in my BusinessDay newspaper back-page column. See link viz.

On the economy, Buhari has to do more

By Rafiq Raji, PhD

Okay, Nigeria is back on track. It is all about the economy. President Muhammadu Buhari certainly knows this now. He made a mistake. But now he has changed course. For the better.

Floating the naira was a bold move. But the real test is yet to come
That time when it may begin to seem like it was all a mistake, as the naira potentially weakens to jaw-dropping levels. When this happens – if it does – Mr Buhari must keep his nerve. If he does, the long-term benefits could be huge. His resolve would be crucial to helping spur the much-needed diversification of the economy. If imports are expensive, Nigerians would adjust their tastes.

Foreign investors remain wary
I have received enquiries about how committed the Central Bank of Nigeria (CBN) is – or would be – to its new floating foreign exchange (FX) regime. Foreign investors are wary. There is a reported FX demand backlog of US$4 billion. It is probably twice as much or more. To meet this, the CBN would need to deplete its FX reserves by at least 15 percent to US$22.7 billiion (FX reserves were US$26.7 billion as at 10 June 2016) over the next month. Add say, US$600 million in crude oil earnings in the period, and the level could be about US$23.3 billion by mid-July. Beyond this threshold, it would have to give in if pressure persists.

Central bank is still well-placed to ensure stability
Considering the lingering scepticism of President Buhari, the CBN is likely going to try to ensure there is not too sharp a drop in the exchange rate; to the extent that it can. By still banning some 41 imported items from the FX market and the stern anti-money laundering stance of this government, it would probably still be in a good position to ensure stability. In the past, corrupt proceeds made for a signficant portion of FX demand.

Do not backtrack
More importantly, what investors would be looking to see is whether authorities would not backtrack if there is a negative surprise. If there is more FX demand than anticipated, for instance. Why should this be a worry? Some of the demand backlog are mostly requests in the normal course of business. With capital controls now lifted, some investors and businesses might have decided it would be best to get out while they still can. They cannot soon forget the utter despair of having their funds stuck for so long while the capital controls lasted. So expect some panic demand. The tentative view I have taken is that the CBN – which remains the main FX supplier and would still be able to determine the price – would try to hold the naira exchange rate for a US dollar at the 300 level. If that is not market-clearing and crude oil receipts remain challenged, expect further depreciation.

Appoint an economic management team
There is more to be done. Mr Buhari must appoint a proper economic management team to advise him and serve as a think-tank for the National Economic Council – which consists of governors of the federating states with the country’s vice-president as chair. The team should be dominated by independent economists who are not afraid to speak truth to power. A special adviser of cabinet rank should lead it. I recommend Dr Doyin Salami of the Lagos Business School, an independent member of the monetary policy committee, who was courageously consistent throughout the period of the wasteful CBN policy.

Leave the central bank alone
It is also quite clear the CBN is not going to be independent under President Buhari. So, he is the one that needs to be admonished. It is important to point out to him that the benefits of a floated currency would only come if it is sustained. Because if the CBN buckles when things seem like they are about to get out of control, it would all have been for nothing. The Nigerian leader should be told to expect some initial volatility. He must not be given a false sense of comfort. The exchange rate would balloon. Prices for imported goods would rise significantly. But Nigerians would eventually adjust, boosting demand for locally-manufactured goods. That is how to create jobs. What Mr Buhari really fears is a Babangida-era structural adjustment programme deterioration of the 1980s – which could have worked if it were sustained. As it is his mettle – not that of the CBN governor – that really matters, more courage is asked of him.

Also published in my BusinessDay newspaper back-page column. See link viz.

Is there a Ramadan effect in Nigerian markets?

By Rafiq Raji, PhD

Stock market returns have been found to be higher in Muslim countries during the month of Ramadan – the ninth month of the Islamic calendar. A Ramadan effect. Intuitively, this should probably be the case. Research studies have confirmed the phenomenon nonetheless. In a February 2014 research paper published by the International Review of Financial Analysis, a top academic finance journal, Prof. Osamah Al-Khazali of the American University of Sharjah in the United Arab Emirates, shows evidence of the Ramadan effect in fifteen Muslim countries: mostly from the Middle-East but includes two Asian countries with a dominant Muslim population: Indonesia and Malaysia. There were prior studies. In a 2012 study for instance, Dr. Jedrzej Bialkowski (an associate professor at the University of Canterbury in New Zealand), Prof. Ahmad Etebari (a finance professor at the University of New Hampshire in the United States) and Dr. Tomasz Wisniewski (a finance lecturer at the University of Leicester in the United Kingdom) showed evidence of the Ramadan effect in about 11 Muslim countries. Researchers interested in the subject are diverse.

Fundamentally, the academic interest is – as the group of researchers in my second example put it – “whether a religious practice can, through its influence on investors’ psychology, affect the behaviour of the market.” Similar investor buoyancy has been associated with the Chinese New Year for instance. That in regard of heightened optimism during the Gregorian New Year – when most make resolutions to change a bad habit, set financial goals, etc. – is also well-known. Little wonder, investors tend to earn higher stock returns in most markets during the month of January. A January effect. There is also a Monday effect: most people tend to be optimistic at the beginning of the business week – which but for some Muslim countries, is usually Mondays. So, there is a myriad of these so-called effects; stock market anomalies, we call them.

Two themes are palpable: Epochs or important periods in peoples’ lives – and the feel-good factor associated with them: optimism. So such epochs could be the month of Ramadan for Muslims, Christmas or New Year for Christians, and the Chinese New Year for the Chinese. It makes intuitive sense, doesn’t it? This was the main proposition of my doctoral dissertation, albeit I focused on the January effect in the Nigerian and South African equity markets. I suggest positive investor sentiment (optimism) around epochs may be why higher stock returns are earned at those celebrated periods of our lives. But the reverse case needs to be equally true for this to be considered seriously. It would probably take a lifetime of research work to prove this to be a consistent explanation. As a budding researcher, this is gratifying. Prof. Kalu Ojah – a Nigerian and professor of finance at the University of the Witwatersrand in South Africa – and I authored a research paper based on the dissertation (“Does investor sentiment explain the seasonality of overreaction? Examples of the Nigerian and South African equity markets”), published by The African Finance Journal in 2015.

I do not know that there has been a study of the Ramadan effect on the Nigerian Stock Exchange (NSE) – a tip for aspiring doctoral students in finance (I get asked about this on occasion). The closest proxy is probably the country’s food markets. Food prices are generally known to rise during the Muslim holy month in Nigeria, stoking inflation. Considering an investment return must at least compensate for inflation – the minimum expectation of lenders to the government for instance: a risk-free interest rate, you could intuitively assume that there is probably a Ramadan effect in the Nigerian equity market; where investors expect higher compensation for risk.

Ramadan-related food price inflation may be marginal this year, however. Put another way, we could not say that high inflation expectations for the months of May, June and July (the month-long Muslim fast started on 6 June) this year are related to Ramadan. Annual inflation forecasts for May are as high as about 15 percent (mine is 13.6 percent), much faster than the 13.7 percent headline figure in April. There are more significant factors pressuring prices: weak currency, power shortages, insecurity in key farming regions, pest-infected tomatoes, etc. When there have not been competing factors, food inflation tends to accelerate during Ramadan. It is a little bit counterintuitive that this should be the case. After all, fasting Muslims forgo lunch. Increased charity during the period may be why – more people probably get fed. Regardless, savvy food traders tend to add a Ramadan premium. Whether there is an actual increase in demand for food or not is no matter.

Still, supposedly rational investors in formal markets are not likely to be similarly motivated. In the Nigerian case especially – where Muslims are about half of the population, the behaviour of food traders in its informal markets may not be sufficient to motivate the intuition of a likely Ramadan effect on the Nigerian Stock Exchange. That is, as observed in the stock markets of countries where the dominant group is Muslim. There are opportunities for the savvy participant in the Nigerian financial markets nonetheless. A sukuk bond – debt instrument based on Islamic principles – would probably get more subscribers during Ramadan. It is also probably the best time to launch a ‘halal’ (or ‘ethical’) mutual fund. Similarly, Nigerian companies perceived to be ethical may choose to raise capital during the Muslim holy month. As with the Gregorian New Year, creative portfolio managers could probably design investment strategies that leverage on the feel-good factor associated with Ramadan as well. For those interested – academics and investors alike, these are certainly worth exploring.

Also published in my BusinessDay newspaper back-page column. See link viz.

Regional agitations, regionalism and development commissions (Ramadan Kareem)

By Rafiq Raji, PhD

As Muslims across the World start their month-long fast – abstinence from eating, drinking, smoking, and sex from dawn till sunset – this week, Nigeria’s leader, Muhammadu Buhari, should take advantage of the calm and grace therein to reflect on his stewardship thus far. One in particular, his less than ideal response to the wanton violence of Fulani herdsmen – mostly from north-west Nigeria – forcefully taking pasture for their cattle in lands not their own. That is, if you choose to ignore the dismal state of the economy out of utter dismay; for on that great matter, he has floundered quite well. Farmers in the north-central and southern parts of the country – where pasture is relatively more abundant – who resisted the unruly behaviour of the marauding herdsmen have been attacked and killed. President Buhari is Fulani. He understands the issues. While I am reluctant to be one of those reading his now fabled ‘body language,’ there is a sense you get about his passion for the environment. President Buhari wants to revive the Lake Chad, fast drying up. Himself a cattle-owner, he surely wishes there could be more pasture for cattle in northern Nigeria – the part of the country he hails from. Could this be why he has been blasé about the issue? For he has been less than enthusiastic in taking on the marauding herdsmen, especially when you consider how impassioned he and his aides get about the renewed militancy in the Niger-Delta region or the so-called ‘south-south’ geopolitical zone of Nigeria. Incidentally, former President Goodluck Jonathan is also well-placed to placate the so-called ‘Niger Delta Avengers.’ Just like the Fulani elite know who the marauding herdsmen amongst them are, so do the elite in the Niger Delta know those amongst them who have returned to their errant ways. The perpetrators – whether Fulani or Izon – are known to their respective kinsfolk.

Firstly, I would admonish the militants in the Niger Delta to give peace a chance. In that regard, President Buhari must also adopt a pacifist stance. That said, most Niger Deltans live in abysmal circumstances. The culprits? Nigeria’s leaders. All of them. On a visit to a small town – a village really – in one of the oil-producing states years ago, I was astonished when upon waking up in the morning, I couldn’t find a well to fetch water – I arrived the previous evening after my first-ever and dizzying speedboat ride. Furthermore, I was told if I needed to relieve myself, I would have to use a plastic bag or an old newspaper page, which I would throw into the river afterwards. Taking that in my stride, I would be in for another rude shock. To brush my teeth, it happened the same river which I had not too long ago availed of my ‘relief,’ was the same river from which I was to get water for the purpose. Looking towards the riverbank, I saw villagers taking their bath, washing their wares and engaged in other ‘sanitary’ activities. I did not brush my teeth. As I departed the ‘town,’ I could not help but think how dreadful they must feel about the state of their affairs. There is no military solution to the renewed militancy in that part of the country. If President Buhari does not want the vulnerabilities of the Nigerian Armed Forces to be further exposed, he should take the reconciliatory approach of his predecessors. The Niger Delta Development Commission (NDDC) is a veritable and much more robust way to get around some of the greedy leaders in the region who have stymied efforts by the central government to distribute a portion of the region’s wealth to ordinary Niger-Deltans. What has been started – rehabilitation of ex-militants through educational and technical training grants and monthly stipend payments for the period of their transition to a more befitting way of life – should be made better, not diminished.

Incidentally, the Niger Delta issue has set a precedence. A North-East Development Commission (NEDC) is now about to be set up. And justifiably so. The Boko Haram insurgency has caused a lot of devastation in north-east Nigeria. But now other hitherto subdued regional aspirations have sprung up. Igbos in south-east Nigeria want more development in their part of the country. President Buhari has not appointed as many Igbos as he should into government positions. Nigerians in the so-called north-central geopolitcal zone could find reasons to agitate as well. After all, the victims of the wanton Fulani herdsmen violence in that part of the country deserve some ‘rehabilitation’ as well. Yoruba leaders in south-west Nigeria have always advocated for a return to the positively competitive regionalism of the immediate post-independence period of the 1960s. Surely, the government is not about to wait till there is some violence there before acting proactively. One little problem though: even if there was a consensus on a return to regionalism, a constitutional amendment – almost always scuttled by unpatriotic incumbents who seek to elongate their tenures in office through the process – would be required. State legislatures are unlikely to endorse a constitutional amendment that may abolish their existence. There is another way. And the current Constitution would do just fine. In the face of non-viable and mostly bankrupt federating states, regional development commissions similar to the NDDC and soon-to-be established NEDC, might be a less controversial approach. Each of the six geopolitical zones should have a development commission. The federal legislature should take the lead on this – a “Regional Development Commissions Bill” perhaps? What about the thirty-six federating states? Their many failings were amply discussed in an editorial by BusinessDay – the leading business newspaper in Nigeria and publishers of this column – on 2 May 2016 titled: “Collapse the states now!” The editors put it succinctly: “Nigeria’s expensive but broke federal structure is buckling and things are gradually falling apart.” A solution is urgently needed, clearly. I suggest regional development commissions.

Also published in my BusinessDay newspaper back-page column. See link viz.