The threat from the United States’ President Donal Trump has introduced some level of uncertainty into the Nigeria business environment. From now, the economy and indeed the entire country will operate under additional uncertainty arising from Trump’s pronouncement. This is a reality, no matter what anyone thinks about the face-off between the two countries. And that is not good for business.
The declaration of Nigeria as a Country of Particular Concern has the capacity to affect the operational business contours of the country by making Nigeria look riskier than it has been perceived by businesses operating here.
This is coming not long after the annual meetings of the World Bank and the IMF in Washington, D.C., at which the looming threat of uncertainty over the global economy received so much attention. “The global economy is undergoing a profound transformation and facing elevated uncertainty,” the Fund noted. Now, the events of last week are injecting into Nigeria a peculiar dimension to this uncertainty, and when added to the general uncertainty, this could impact negatively on the performance of the economy.
Perceptions and expectations will change, which will play a significant part in the coming uncertainty. Perceptions of Nigeria as a place to do business will change, at least for some classes of investors or business people. It will start first from the fact that Nigeria is a part of a global economy and that we depend a lot on foreigners.
Changes in foreigners’ perceptions about Nigeria as a place of investment will begin with projects currently at the margin. Which projects or ideas are these? First, these could be new businesses just being floated or discussed between Nigerians and their business partners. While most investors in the country have priced Nigeria’s challenges into their cost structures, what is emerging now presents a different scenario. It might require a reappraisal of short-to medium-term outlook for the country, politically, economically and socially.
This is where the concept of marginality will come into play in business decisions about Nigeria. Investors may begin to compare returns from their exposure to Nigeria with what they can potentially make from other markets. From the financial markets (bonds and equities, for instance), where it is easy for an investor to shout to a broker “Get me out quickly” as he or she dishes out a sale order, to physical projects still being considered or evaluated, it is possible to see reversals of capital inflows in the short term.
On the first trading day of the week after the announcement, our markets reflected a bit of the potential effect of the face-off. The naira reversed its gaining streak against the dollar, and depreciated from an exchange rate of N1,421.73/$, to N1,436.34/$ on Monday, just as stock market slide, with both the market cap and the All-Share Index declining marginally. These could be the market’s characteristic response to such events, as the naira rebounded yesterday, closing the day at N1,433.66/$. But it was not so for the equities market, where both the capitalisation and the Index continued their movement southward. So, there are still reasons to be cautious as further developments unfold.
Many Nigerians believe this threat from Trump will soon fizzle away with little or no impact at all on the economy. Indeed, that is the wish of every Nigerian. But what we will be dealing with in the coming weeks and months will be the announcement effects given the nature of markets, particularly global markets.
Markets are averse to uncertainty because it raises the cost of doing business and alters the benchmarks for decision variables for the environment concerned. Previous estimates in some industries will change because the assumptions on which they were based would have changed. For some types of business, it may raise the risk profile of the country. That is because uncertainty blurs the business horizon and makes predictions quite harrowing.
In a globalised world, investors with capital are not just looking for where to invest; they seek a place to invest and be certain of the safety of their capital first. Then they want a place where they can get the best possible rate of return within the assessed environment. Any location that meets these two criteria is as good as home for the business. That location becomes the same as or even better than the home country of the company. The company is able and willing to produce from there and export to the rest of the world. This is the dynamics of globalisation and the mobility of capital across boundaries.
The government’s biggest challenge now in the midst of the ongoing reforms is how best to reduce the country’s risk profile or perception to the barest minimum. With a decade and half heightened insecurity, the various economic and social disruptions must be tackled with vigour and commitment to usher in a season of certainty and stability that a business environment demands for optimal results.
By Vincent Nwanma
