Foreign Investors Are Computing Their Own Forex Rate in Nigeria

18 November 2022

While the naira trades at an official and a vastly weaker parallel rate due to a chronic dollar shortage, foreign investors are using their own calculations to value their trapped Nigerian assets.

One alternative level is derived from pricing for two stocks listed in both Lagos and London -- Airtel Africa Plc and Seplat Energy Plc. The result provides a realistic valuation for the potential sale of holdings on the Nigerian Stock Exchange, said Jenni Chamberlain, a portfolio manager at Altree Capital Ltd.

“We mark our portfolio at an implied exchange rate obtained by using the average implied exchange rate from Airtel and Seplat prices in London and on the NSE,” Chamberlain said in an emailed response to questions. “This rate trades closer to the black market rate, but I know we can realize this valuation if required.”

While the naira has officially weakened by only about 4% against the dollar this year, that rate is inaccessible to many foreign portfolio managers seeking to repatriate funds from Nigeria due to a lack of hard currency. The International Monetary Fund has estimated that as much as $1.7 billion of investor funds could be trapped in Africa’s largest economy.

Many businesses and investors are more likely to get their dollars from the parallel market, where the greenback is freely traded but at a premium of almost 80% to the official spot rate. While the naira traded just below 444 a dollar on Thursday, the parallel-market rate was 793 per dollar.

Airtel closed at 116.2p in London on Wednesday, compared with 1,270 naira in Lagos -- equivalent to £2.41 at the official rate. For Seplat, the levels were 96.2p against 1,089 naira -- or £2.07.

Altree, incorporated in Bermuda, utilizes the Seplat-Airtel derived rate “as we believe it is a fair reflection of where we would be able to realize our Nigerian exposure today should we require the liquidity,” Chamberlain said.

The Nigerian situation has echoes of one in Zimbabwe, where analysts used to assess how out of sync Zimbabwean equities were due to rampant inflation by measuring the difference between the London and Harare stock of insurer Old Mutual Ltd., Africa’s largest insurer. Old Mutual’s Harare shares were suspended in 2020 after authorities blamed moves in the stock for fueling a collapse in the local currency.

Nigeria’s parallel-market naira rate is “certainly” much closer to a fair level than the official one, “which is very overvalued,” said Kevin Daly, a portfolio manager at abrdn in London. The firm sold its Nigeria assets in 2020 because of capital control concerns and will only return after the currency is weakened and bond rates are higher, Daly said.

Eleven out of 13 participants in a Bloomberg poll predict the central bank will devalue the naira in 2023 after allowing it to weaken three times since March 2020.

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