Hot Money in Nigeria’s Capital Markets

Hot Money in Nigeria’s Capital Markets
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Nigeria is the new kid on the block when it comes to international capital markets, with Abuja gaining international economic and political attention.

The setting for the World Economic Forum, recently held in South Africa, demonstrates that the focus of the world’s economic future will one day lie in Africa. It is against this backdrop that The Africa Panel will soon publish a progress report on the continent. In a preview of its findings, The Panel offers analysis that is on par with the prevailing sentiments of proper sustainable development and the need for reform on the continent. The current chair of the Africa Panel, former UN Secretary-General Kofi Annan, conducted an interview with the BBC where he posited Africa’s troubles are attributable to companies shifting their profits to tax havens and having “highly secretive and opaque business dealings”, which invariably cause gross inefficiencies on government projects and privatisation efforts.  The shifting of profits also means that many African governments are unable to benefit from potential revenue generated through taxation and such dealings exacerbate corrupt practices.

Nigeria is a case in point, and the lack of transparency during its push to privatise the power sector following the fuel subsidy scandal speaks directly to Annan’s concerns. Nigeria has a long history of such government projects left unfinished, and this ‘opaqueness’ coupled with multinationals shifting profits abroad has proven to be yet another detriment to Nigeria’s prospects for growth. However, the development of a country’s financial markets is even more crucial to its growth, given the benefits that arise from access to capital for governments and indigenous companies alike. Unfortunately, the issue of safeguarding African capital markets from abuse from international investors is something that received little attention from the report.

Countries like Nigeria, Kenya and Namibia have seen a growing interest in their capital markets as investors look to these new frontier markets for better returns. Nigeria in particular has gained much publicity for its recent listing on the JP Morgan’s GBI-EMI and Barclay’s emerging market indices that will bring in excess of $16 billion into the country. However, more money could also mean more problems for the country. The vast and unregulated flood into capital markets prompted by this new international focus is something many countries are not prepared for. There is a danger that much of their developmental progress could be hindered or even reversed due to the phenomenon of hot money as a result of this.

Hot money is the flow of capital into markets that have high short-term yields that investors can quickly take advantage of for quick returns. When investors begin to fear that assets in a given country are rapidly declining in value, they withdraw their money creating a liquidity crisis and further exacerbating a crisis as assetvalue further decline. Where governments fail to place restrictions on the length of time international investors have to keep their capital invested in a country, the risks of instability are high and crisis invariably ensues. The situation following the East Asia Crisis in 1997 is testament to this, from which the ramifications took nearly a decade to recover. How African countries manage greater demand of access to their capital markets is an central foundation for generating tax revenue and making continuous improvements towards sustainable growth. It is a prerequisite for stability with respect to revenue generation and diversification in economies known primarily for single commodity exporters in many cases, which is not highlighted in the Africa Progress Report.

The issue of tax evasion is truly global in its scope. Instead of its focus on offshore tax havens and opaque dealings, the Africa Progress Report should recommend measures that empower African governments. More work needs to be done in helping prepare many of these countries to play a more prominent role in the global economy and that starts with allowing these countries to develop their indigenous industries to a standard that will allow them to better compete. Ensuring better safeguards to how international investors access their capital markets is key and drives growth for many companies. Through properly developed home grown companies, African governments will not have to rely on multinationals to provide the bulk of their internally generated tax revenue. Financial markets can also play a key role in aiding transparency given the importance of information in the public domain drives investor action. The points highlighted in the Africa Progress Report are important facts to consider, but ensuring better institutions to allow African countries to have access to international capital should also be of chief concern.

About Author

Layi Abiola

Layi is an Associate Consultant at Capco, a financial services consultancy. Layi has industry experience in financial services, working as an investment banking analyst, where he was involved in debt capital markets as well as M&A. He also worked as a product consultant for a global credit ratings agency and has experience as a consultant in the healthcare space. Layi graduated with an MA with distinction in Politics, Philosophy & Economics (PPE) from the University of York.