Economic experts have emphasized the importance of resolving currency issues in Nigeria and Kenya in order to attract foreign investors.
Simon Kitchen, Head of Strategy and Research at EFGs, revealed this during a briefing on Nigeria and Kenya’s foreign exchange and other topics.
He stated that both countries are losing a lot of money in frontier market funds because foreign investors are not encouraged to invest in markets where it is difficult to get their money out due to currency issues.
Fund for frontier markets
Kitchen explained that the frontier market fund is aimed at frontier markets and smaller emerging markets such as Vietnam and Morocco, Kazakhstan, Pakistan, Bangladesh, Kenya, and Nigeria. He added that there has been a significant inflow into these funds in recent months, including the recent $150 million infusion.
He added that Kenya and Nigeria are in a better position to benefit from the fund because of the availability of cheap stocks in the markets, but this isn’t happening.
The problem is, Kenya and Nigeria are not getting any of this money as a result the difficulty foreign investors face in getting their money out of these two markets. In Nigeria, this is a long standing problem. Foreign exchange has been scarce really since 2020 and it wasn’t easy before then. Foreigners have just found it impossible to take money out of the Nigerian economy if they sell stocks in Nigeria. In Kenya as well, this has become a problem in 2022.
He added;
Nigeria and Kenya together make up more than 10% of that frontier market index, and that means out of about $150 million that came in the past few weeks, $15 million should have gone into Nigeria but foreigners aren’t putting that money in. If you can’t get your money out, you’re not going to put money in. And so I think from a foreign investor point of view, it is absolutely critical that the authorities in these two countries fix the FX situation.
Kitchen noted that Kenya’s currency issue is a more recent issue, adding that the country has made some significant macroeconomic improvements in the last year as they have attempted to address the issue of fuel subsidies, increased tax revenues decently and that their debt situation is better than that of many peer markets.
However, in Nigeria, he stated that the currency challenge is even more acute, attributing the problem to the country’s legacy of several years of very unconventional economic policies.
He said;
There’s a potential breakthrough coming in 2023 because you have a change in political leadership with the election, and that could create the opportunity for a new government to come in and sort of draw a line under years of unorthodox political policies and take the right decisions by fixing the FX market and also putting the government finances on a more sustainable footing. If that happens then, you will see foreign money coming back into these countries.
Unutilized pension funds: Kitchen also pointed out that both countries have large pension systems but these Systems don’t put enough of their money into stocks.
In his view, “they really should, and the reason they should is that pension systems as the institution has the luxury of taking a very long-term view that we as individuals don’t often have.”
He advised that there is a need to change incentives, and regulators need to be part of this to force pension funds to take a much longer-term view in countries like Nigeria, Kenya, and many others countries.
“The regulators and pension fund managers are so worried about momentary loss that they don’t invest in the assets they should.”
