Nigeria Corporate Treasury Update

Commentary

After Argentina, Nigeria is the second country we have visited recently which has made dramatic moves to improve the economic situation, and try to get cross border business moving freely again. The approaches and the lessons learned have similarities – but they also show differences which demonstrate that emerging markets do not accommodate a “one size fits all” approach.

The main similarity is the massive currency devaluation: in Nigeria’s case, the naira was devalued from around 800 to the USD and went overnight to 1200 – 1400. It then briefly depreciated to 1900, before settling in a range between 1050 and 1200. As of writing, it is nearing 1500. As with Argentina, in previous calls, participants were reluctant to take a haircut in the range of 30% to 50% to repatriate cash: they then experienced a significantly larger loss when the devaluation came. We all understand that businesses are reluctant to crystallise losses before they have to - but, when a country has a parallel rate which is significantly lower than the official rate, it is rare for the outcome to be anything other than an alignment with the parallel rate. 

In both cases, domestic inflation has spiked – but Nigeria’s rate of 30% to 40% seems manageable next to over 100% in the South American country. Interest rates have also risen substantially, to over 20%.

The unusual aspect of this call was that, while all participants agreed these painful moves are positive and things have improved, differences were reported in how things are working. All agreed that the flow of remittances out of the country is still subject to delays and challenges, but some found all their needs are being met, while others did not. All were concerned about the sustainability of the current improvement. 

Much of the discussion centred on an unusual feature of Nigerian exchange controls: there is no requirement to bring foreign currency earnings back into the country and convert them into naira. In previous calls, participants had discussed the possibility of finding counterparts willing to settle FX trades offshore, and their varying levels of comfort with this approach. It now appears to have gone mainstream, with several fintechs doing a brisk business in matching companies with naira to convert with those wishing to bring foreign currency into the country.

While most participants are now more or less satisfied that this approach is legal, they are still uncomfortable, and have concerns over other potential issues:

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• As payments are made to, and received from, the fintech, there are concerns with potential counterparty risk
• The introduction of a relatively unknown third party into the payments flow causes KYC and AML concerns with banks – business with Nigeria tends to put them on alert, at the best of times.
• Before the devaluation, this approach required a haircut of 30% to 50%. Now the official rate is close to the parallel rate, the cost has reduced significantly – as has the incentive to take risks by moving away from the official market.
• One participant is in investment mode, and sending cash into the country. They prefer to use the official conversion channels, so they can obtain a CCI (Certificate of Capital Importation). This will be required in the future when they want to take cash out in the form of dividends or equity reduction, so the decision was taken to forego any potential improvement in the FX rate available from this method.
• Overall, most participants prefer the safety and legal clarity of the official market – which is currently meeting requirements in most cases.

Otherwise, and despite the inflation, businesses are generally doing well, even if the environment is pushing some entities to manage their naira and dollar cash flows separately, and there is some distortion in the local books due to different accounting rules. All participants shared a concern that the current positive environment may not last – but they have appreciated the ability to clear their FX backlogs.

Most participants have not accumulated significant naira cash balances – so there was little concern about bank deposit rates, and most are content to stay with their core global banks.

Bottom line: this is one of the periods in struggling emerging markets where governments take difficult decisions, and try to clean house. Concern will always remain that the underlying issues may well still be there. But, in the meantime, there was a guarded optimism about where the country is headed.

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