Shrinking Oil Prices, Boko Haram Affecting Nigeria’s Frontier Market Appeal

Shrinking Oil Prices, Boko Haram Affecting Nigeria’s Frontier Market Appeal

Falling oil prices, increasing insurgency and rising political tensions before a general election in February are diminishing Nigeria’s status as a prime frontier-market investment destination.

The price of oil, which accounts for more than 70 percent of government revenue and 95 percent of foreign-exchange income, has fallen 37 percent this year. The price of OPEC basket of twelve crudes stood at 66.44 dollars a barrel on Monday December 1, 2014 compared with $68.89 the previous Friday, according to OPEC Secretariat calculations. According to Nnamdi Obasi, senior analyst for Nigeria at Brussels-based International Crisis Group, the impact of the falling global oil prices in addition with the seemingly intractable Boko Haram insurgency has serious implication for Nigeria’s economy.

Seven months since the government rebased its economy to claim it was Africa’s largest, at about $523 billion, the central bank has devalued its currency and pushed the benchmark interest rate to a record 13 percent, while Finance Minister Ngozi Okonjo-Iweala announced austerity measures in next year’s spending plan. Suspected members of the Boko Haram group have carried out a string of attacks, including a triple bombing on Nov. 28 that killed more than 100 people in the north’s biggest city, Kano.

After attracting at least $59 billion in investments in the past five years, according to Trade and Investment Minister Olusegun Aganga, the perception of Nigeria is changing. Its currency has fallen 11 percent against the dollar this quarter, the most among 24 African currencies tracked by Bloomberg after Malawi’s kwacha, while its stocks have plummeted 17 percent.

“We have been running an underweight position in Nigeria,” said John Mackie, head of Johannesburg-based Stanlib Asset Management’s Pan African Investment portfolios. “I think investors would play a wait-and-see game now until after the elections next year and have a look at where the oil price is. If the oil price keeps on dropping, that’s a huge risk.”

With the approach of elections in February, investors seem to be increasingly wary of the weaknesses in Africa’s biggest oil producer. Based on data published on the central bank’s website, portfolio flows into the country fell 40 percent year-on-year in the second quarter to $3.9 billion dollars. The 12-day decline of the Nigerian Stock Exchange All Share Index last month, the longest losing streak since January 2009, was partly due to foreign portfolio investors exiting the market.