The headlines in the emerging market investment space are all about the suspension of Mallam Lamido Sanusi, governor of the Central Bank of Nigeria (CBN). This comes as a result of a bold executive order issued by the country’s president, Goodluck Jonathan.
And while politics will always just be politics, we’d like to focus on what this really means for the CBN, Nigeria’s financial sector and the impact the event will have on markets.
The sacking of Sanusi will probably have a negative impact in the short term but we don’t believe it will derail the development of Nigeria’s capital markets. We’ll probably see some negative price action, but we expect it to be transient as locals and long term investors step in to pick up attractive valuations.
The global finance community may be confused about what is happening here because it holds Sanusi in high esteem. He built a strong reputation by overseeing a number of positive developments while he was at the helm of the CBN. He especially earned much respect for his decisive actions that helped Nigeria pull its finance sector back together after it was hit hard by the global financial crisis.
He can also claim that under his watch, the CBN evolved into a highly functional and reputable institution. And while Sanusi got applauded around the world, his determination and outspoken nature ruffled many political feathers back home.
Let’s not lose sight of the fact that Sanusi was already scheduled to step down as the head of the central bank on 1 June so it is unlikely that his ‘sudden’ departure will compromise the CBN’s functionality or independence. With this in mind, a transition has probably already been in the making for some time. Regardless of how this story evolves during the next few days, this succession was a bridge that we were going to cross anyway.
The reality is that Sanusi did not leave the CBN steerless because deputy CBN governor Dr Sarah Alade is now running the institution as the interim governor. Alade is no stranger to the African investment community and she regularly interacts with the world regarding CBN policy. Having joined the CBN in 1993, she is certainly not a newcomer. In fact, she was expected to become Governor Charles Soludo’s successor in 2009 but lost the bid to Sanusi, her contender at the time.
Alade has the credentials and the credibility to assume the position but she probably won’t be as vocal as her predecessor.
Looking at the politics
Another thing to bear in mind is that Nigeria’s capital markets are mainly driven by local investors who weren’t too surprised by the president’s move. If you have been following Nigerian finances, you will be aware of the fact that the president already ordered Sanusi to step down in December 2013.
In addition, the fact that Sanusi wasn’t seeking a second five-year term already forced most habitual investors to start thinking about a CBN without him. This also implies that some of the ‘short term’ money may have already traded out of the market well before this debacle.
It’s also worth noting that during the past few years Nigeria’s capital markets have demonstrated a low correlation with political events so the most experienced emerging market investors have learned to profit from these short-term sell-offs.
And then there are the politics. Most local investors probably understand that because of the intensifying presidential election campaigns that will build up towards the end of the year, we are probably going to see many more big headlines in Nigeria’s notoriously outspoken media. From the outside, it may even be interpreted as instability, causing a temporary disconnect between domestic and foreign sentiment. This in turn could continue to put further pressure on Nigeria’s currency, the naira.
However, The CBN has the FX reserves, a strong balance sheet and an experienced team in the cockpit to manage the naira’s fluctuations so the current concerns around Sanusi’s suspension may be quite overblown.
So, if you believe in Nigeria’s long term value, now is a great time to be on the lookout for opportunities…
NB: Nigeria’s FX reserves cover the country’s total external debt by 500%. This is very high when compared to most developing nations. As a point of comparison, Turkey’s coverage ratio stands only at around 40%.
Malick Badjie is the director and head of investment solutions at Silk Invest and is responsible for leading investment solutions and strategy for the firm, working closely with frontier governments to develop and deepen the capital market base in frontier markets.