Nigeria’s Copious Currency Complaints

Nigerian stocks sold off to extend a double-digit MSCI loss and the parallel naira market spiked as President Buhari tapped investment banker and currency control policy defender Adeosun as Finance Minister, while keeping the Oil Ministry portfolio himself.  The appointment surprised investors after the central bank chief seemed to hint at more flexibility at a London conference, after imposing restrictions on another 40 import categories and ordering tax identification registry for all money dealer transactions. In the past year reserves have dropped one-quarter to help preserve the official 200/dollar rate, while Q2 GDP growth slid to 2.5 percent. The continued intervention removed local currency bonds from both the JP Morgan and Barclays indices, and the US and EU both filed WTO complaints that foreign exchange restrictions were free trade violations. Multinational companies also warned about reneging on previous oil production-sharing contracts, which often date back decades, under comprehensive review by the President’s team. They were further startled by the hefty $5 billion fine imposed on South Africa-based telecom operator MTN for disconnecting users, although the public pension fund at home, its biggest shareholder, likewise criticized the practice and acquitted Nigerian authorities of overreach.

South African shares were off over 10 percent on the MSCI Index as officials backpedaled on a university fee rise in the face of student protests, with a 3 percent of GDP budget deficit predicted through the medium term as ratings agencies are poised for a sovereign “junk” downgrade with possible breach of the 50 percent public debt/output threshold. Finance Minister Nene lowered the economic growth forecast to 1.5 percent this year, as mining strikes again shrank Q3 sector activity and the related PMI. The rand has tumbled toward 14/dollar with pass-through inflation climbing to 5 percent. The benchmark domestic bond yield reached 8.5 percent, and CDS spreads 250 basis points, as the fiscal blueprint mainly looked to higher growth to break the credit deterioration cycle. Ruling party labor union activists have called on the central bank for rate cuts and currency support, and President Zuma has been sympathetic while not trampling on formal monetary policy independence. However that stance may change with the opposition Democratic Alliance gaining opinion backing throughout the country, and splinter groups within the ANC coalition threatening to leave altogether. The President’s waning political strength has allowed a trade dispute with the US to fester over poultry export eligibility under AGOA duty preferences, and sapped interest in post-Mugabe planning in next-door Zimbabwe amid a severe cash shortage. No successor has been designated to the 90-year old whose frailty was apparent after unknowingly repeating an old speech, with tax revenue, wages and prices all falling under internal devaluation. Chinese aid has pulled back, and the IMF and World Bank cannot resume lending without arrears settlement. To mollify remaining foreign investors, the indigenization law mandating 50 percent local control has been diluted in specific cases, but the MSCI frontier reading has declined 30 percent on the grim outlook.

Ghana has seen a similar setback despite rough observance of the IMF program and a World Bank guarantee for external bond rollover. Local 3-year bond yields are at 25 percent with the 5 percent of GDP fiscal gap through September and fears of additional cancelled auctions. Zambia after initial repudiation has invited the Fund back for talks, as the central bank hiked rates to 21 percent to protect the copper-dependent kwacha. Electricity shortages and poor demand have shuttered mining operations, and another sovereign bond pending IFI imprimatur would entail a spark of imagination.

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