Nigeria: Report - Persistent Insecurity Hurting Investment, Development

3 August 2020

Persistent insecurity in the north-east and some parts of the country poses a major threat to stability in Nigeria's macroeconomic and socio-political environment, analysts have warned.

Analysts at Afrinvest West Africa Limited gave the warning in their latest macroeconomic report, pointed out that a climate of instability reduces confidence in the economy, leading to slower investment and development outcomes in areas affected. It noted that northern Nigeria has been the region most susceptible to the risk of insecurity, with this having disproportionate impact on development given the high incidence of poverty in the region.

It further stated that insecurity was also widespread in other regions, including high incidence of kidnapping in the south and the attack on oil infrastructure and oil theft in the Niger-Delta.

According to Afrinvest, from a sectorial point of view, agriculture continues to be affected by insecurity, leading to food shortages.

It noted that high food prices are devastating given that 56.6 per cent of household consumption spending was on food.

"Additionally, the majority of households who rely on agriculture, especially in the north-east, have either been displaced or suffered crop losses. Without economic means and limited social protection, these households are more vulnerable to poverty. As the majority of food supplies emerge from the North, the entire economy is also at risk from insecurity.

"The security challenges faced in the Niger-Delta also reduce the potential oil revenues accruing to the government. Without sufficient resources, government's spending on public goods would remain inadequate.

"While funding to the security ministry has been strong, the federal government has experienced difficulty in tackling insecurity. However, the situation requires more urgency as progress has been limited between 2017 and 2020. Perhaps, exploring more useful approaches beyond funding could yield better results," the report stated.

It noted that in the latest plan put forward by the federal government to accelerate recovery from the current COVID-19 induced crisis, there were no initiatives on the security front.

As such, the Lagos-based investment and financial advisory firm anticipated sustained security risk in the macroeconomic environment, with knock-on effects on consumer purchasing power, investments and ultimately growth.

"In our view, plans that do not recognise elevated insecurity as a threat to development and provide solutions would deliver less impact than expected," added.

In reviewing activities in the equities market, it noted that the market kicked off the year amid stronger optimism propelled in part by the unattractive fixed income yield environment and the hunt for high dividend yielding stocks by investors.

However, the outbreak of the COVID-19 pandemic and the economic fallout swiftly put an end to the early optimism, with the resulting fear and uncertainty dictating market sentiment for the rest of the first half, it stated.

"The social distancing measures put in place to curb the spread of the virus led to a disruption in economic activities and a shift in investors' confidence from high to low. Interestingly, the valuation of the Nigerian equities market from a price/earnings ratio viewpoint was down marginally to average 8.1x at the end of the first half.

"This was due to sustained upbeat performance in the reported Q1:2020 earnings of most listed corporates and the April to May recovery in prices. Trading activities on the floor of the NSE remained strong despite COVID19 disruptions, with volume of trades rising significantly during the period," it added.

According to the report, in the first eight trading sessions of January, the benchmark index advanced 10.4 per cent driven by robust demand for high dividend yielding stocks, concluding the month with a 7.5 per cent gain.

However, as the pandemic continued to spread with Nigeria recording its first case in February, stocks lost 9.1 per cent for the month as investors panicked. The sell-off worsened in March, resulting in an 18.8 per cent loss as more countries locked down and external risks to the Nigerian economy increased. In the same month, the NSE announced plans for the demutualisation of the Exchange, a process which would convert it into a public entity with a share capital of N1.3 billion.

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