Transparency and Foreign Direct Investment

Tuesday, May 04,2021 09:25 PM / by Coronation Research/ Header ImageCredit: CESRAN

Last week the Central Bank of Nigeria removed the directors ofFirst Bank of Nigeria, but reinstated its managing director, in a move thatgrabbed headlines. It raises the issue of corporate governance and ofgovernance overall in Nigeria. What is the cost of poor governance and what arethe benefits of good governance?

Last week the exchange rate in the Investors and Exporters Window(I&E Window) was unchanged to close at N410.00/US$1. In the parallel, orstreet, market the Naira was unchanged, closingat N485.00/US$1, 18% weaker thanthe I&E rate. The CBN's FX reserves held almost steady at US$34.91bn (thedata point is a one-month moving average) with a loss of just 0.09% on theweek. The CBN's Naira 4 Dollar scheme, designed to improve FX liquidity, is setto come to an end later this week. It has had some success but incrementalinflows have not significantly outweighed outflows, in our view, with the FXposition showing just 0.29% accretion since the start of the scheme on 8 March.We think the CBN may continue the scheme. Although the I&E rate (and,together with it, the NAFEX rate) and the parallel rate have been quite stablefor a few weeks, the relative weakness of the parallel rate still suggests tous that pressure on the I&E and NAFEX rates is likely to continue

Bonds & T-bills

Last week, the secondary market yield for an FGN Naira-denominatedbond with 10 years to maturity fell by 4bps to 12.66%, the yield on the 7-yearbond was unchanged at 12.43% while the yield on a 3-year bond rose by 104bps to10.96%. Activity in the market was low, with trading seen mainly at theshort-to-mid durations of the curve. The overall average benchmark yieldsincreased by 51bps to 8.80% at the close of the week.

The annualized yield on a 335-day T-bill in the secondary marketfell by 1bp to 8.05%, while the yield on a 319-day OMO bill rose by 106bps to10.18%. By the end of the week, the average benchmark yield for T-bills closedat 4.74%, while OMO bills closed at 7.91%. In the OMO market, the CBN offeredN20.00bn (US$48.78m) worth of notes across all maturities. The 96-day noteswere allotted at 7.00%, 180-day notes at 8.50%, and 348-day notes at 10.10%.

Last week the yield on 364-day T-bills crossed the 10.00% benchmarkin the Primary Market Auction (PMA) for the fist time this year. At the PMAa91-day T-bill sold at a stop rate of 2.00% (a 2.05% annualised yield), a182-day T-bill sold at a stop rate of 3.50% (a 3.56% annualised yield), but a364-day T-bill sold at a stop rate of 9.75% (10.80% annualised yield). The DebtManagement Office offered N88.45bn (US$215.73m) worth of bills with the auctionrecording N242.93bn (US$592.51m) of transactions across all maturities onWednesday. Our sense is that upward pressure on 364-day T-bill rates is likelyto continue

Oil

The price of Brent crude rose by 1.72% last week, closing atUS$67.25/bbl, meaning a 29.83% increase year-to-date. The average priceyear-to-dateis US$62.32/bbl, 44.21% higher than the average of US$43.22/bblin2020. Last week the US had an interesting role to play in the sentiments of theoil market. The Chief Executive Officer of the Federal Reserve Bank of NewYork, John Williams, hinted that the US economy would grow faster than hithertoexpected. However, the increasing number of Covid-19 cases in India hascontinued to suppress the rally in oil prices as the recovery is not assured insome parts of the world. Our sense is that prices will remain aboveUS$60.00/bblover the coming weeks.

Equities

The Nigerian Stock Exchange All-Share Index (NSE-ASI) rose by 1.36%last week, trimming its loss to 1.08% year to date. Okomu Oil Palm +11.11%,Nigerian Breweries +7.03%, and MTN Nigeria +6.00%, closed positive last week,while Honeywell Flour Mills -17.14%, International Breweries -8.77%, and PZCussons -8.26%, closed negative. Performance across sectors was mixed last weekas the NSE Insurance Index was the highest gainer for the week, rising by+3.80%, followed by the NSE-Iindustrial +2.36%, NSE-30 +2.03%, NSE Oil &Gas +1.30% indices. Conversely, the NSE Consumer Goods -0.02% and NSE Banking-2.09% indices closed the week negative.

Transparency and Foreign Direct Investment

The news that the Central Bank of Nigeria last week replaced thedirectors of the country's third-largest bank by assets highlights the issue ofcorporate governance and of governance in Nigeria overall. There are manyindices for this, one being the Corruption Perception Index published byBerlin-based Transparency International. This index has the advantage of beinga compilation of other such indices and studies. Our question is how governanceinfluences investment, specifically foreign direct investment (FDI).

The Corruption Perceptions Index (CPI) measures nations with ascore (the range for the 2020 study is from 12 to 88) and assigns a rank out of180 nations. The headline data usually relates to the rank but we consider thescore more meaningful because the rank can be influenced by other nationsmoving up and down the scale.

Proshare Nigeria Pvt. Ltd.

The first, and remarkable, characteristic of the data for ourselected African countries is how dispersed they are. In the global comparisonBotswana outranks Poland, for example, Rwanda outranks Italy. Nigeria ranksclose to Lebanon.

Next, it appears that Kenya has been rising in the surveys, atleast over period from 2017 to 2020. This impression is confirmed when we lookat the improvement in its score from 2015 to 2020. Granted, it helps tocommence this comparison with a low score in 2015 (and not with comparativelyhigh scores like Ghana and Botswana), but Kenya does appear to be improving ina consistent manner.

Proshare Nigeria Pvt. Ltd.

How does this relate to Foreign Direct Investment (FDI)? Does a), agood CPI score and b), an improving CPI score influence FDI, or not? (Or, is itsimply the case that virtue is its own reward and unrelated to a materialoutcomes?) The answer appears to be that there are positive relationshipsbetween beating corruption and attracting FDI.

We take data from the World Bank on FDI and divide by each nation'spopulation to reach a US dollar FDI per capita reading. The dispersion of thisdata greater than for the CPI scores, not only between countries but, in somecountries like Botswana, from year to year (FDI can be lumpy). All the same,there are some trends.

Proshare Nigeria Pvt. Ltd.

First, nations with poor CPI scores tend to receive low US dollarFDI in per-capita terms, although some nations like Rwanda have good CPI scoresbut low US dollar FDI in per-capita terms. Second, a nation with an improvingCPI score, like Kenya, benefits from a rising trend in US dollar FDI inper-capita terms. Albeit that our statistical base is small for this study,butit appears that good governance leads to high FDI and that improvinggovernance pays off as well.

ModelEquity Portfolio

Last week the Model Equity Portfolio rose by 1.14% compared with arise in the Nigerian Stock Exchange All-Share Index (NSE-ASI) of 1.37%,therefore underperforming it by 23 basis points. Year to date it has lost 0.04%against a loss in the NSE-ASI of 1.07%, outperforming it by 103bps.

Our problem last week was in having a somewhat underweight notionalposition in BUA Cement which cost us when it rallied sharply on Friday. Theother issue was our overweight notional position in banks in a week when the CentralBank of Nigeria removed directors of First Bank of Nigeria (part of FBNHoldings) though reinstating its Managing Director, a move which could beconsidered positive but which hit the sector. We stuck to our commitment,published last week, to increase our notional overweight in banks and to reducethe notional cash position from 15.3% to 13.1%.

Proshare Nigeria Pvt. Ltd.

Once again, our intention is to look at opportunities in theinsurance sector in order to diversify the Model Equity Portfolio, but we havenot identified the stocks yet. We will report back.