Nigeria urged to devalue its naira

NIGERIA’S stocks are caught in a devaluation trap.

Not even the best day for emerging-market equities in two months could buoy demand for stocks in Africa’s biggest economy on Tuesday. The all share index in Lagos dropped for an eighth day, sliding further into a bear market, even as those of almost every other major developing nation advanced.

The decline shows how wary investors have become about putting money into a country they say is on the cusp of devaluing its currency.

Nigeria’s central bank has kept a stranglehold on the naira’s value via currency trading curbs and restrictions on imports since March in an effort to stem capital flight from the continent’s largest oil producer.

Depreciation

Money managers, including Aberdeen Asset Management and Duet Asset Management, say the only way to revive investor demand is to let the currency depreciate.

Nigeria’s gauge has dropped 22 percent this year, the most among 93 primary indexes tracked by Bloomberg and making the country’s equities the cheapest in sub-Saharan Africa.

For money to flow back in, authorities need to let the currency depreciate by about 20 percent and end the foreign exchange trading restrictions, according to Duet’s Ayodele Salami. “The Nigerian equity market is ridiculously cheap,” Salami said. “But you’d look pretty stupid to buy it and then take a 20 or 25 percent writedown just because of a devaluation. A lot of people will wait on the sidelines.”

The bourse is at its lowest level since July 2012 and trades at 6.7 times forward earnings, compared with 10.1 times for the MSCI emerging markets index and 8.6 times for the Frontier markets index.

Many see a devaluation as inevitable following Brent crude’s slide to a 12-year low of below $30 a barrel. – Bloomberg