Left to themselves, the economy and its component markets can only drift along like rudderless ships. Like babies, they depend on the guidance of adults, and without this, they can only yell and cry for attention, direction or leads. This is what is happening now as Nigeria goes through yet another election cycle. Like babies, they heave a sigh of relief once they receive the attention, and life, normal life, can resume.
Yet, the markets can also move irrationally, impelled by what a former Chairman of America’s Federal Reserve, Alan Greenspan, called irrational exuberance of the markets. Greenspan spoke long ago in relation to bubbles in asset prices that were rising without any correlation to the values of the underlying assets. When markets – or investors – act irrationally, they usually “act first and think later”. They act on perceived gains or losses, and either exit or enter markets.
Often, the factors that breed irrationality are uncertainty and lack of information. Of course, this is understandable because the absence of the two variables is what the markets loathe. The economy and markets at any point in time want to know that someone is in charge and effectively ready to give them direction. And, even in periods of transition, including elections such as we are going through now, they want to see a semblance of direction, guidance, and clarity. Comments by politicians; statements by agents of the government and other key participants are all factors that show what is in the making. At a time, such as this, simple comments constitute market movers that have the power to sway investor sentiment, one way or the other.
Nigeria is in such a state right now, and only clear, decisive actions over the next few days can lift up the lamp that will illuminate the economic landscape and show in clear terms where the economy is headed. For now, every action (and inaction) of state actors.
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The local markets currently stand somewhere between the two points: waiting for direction and irrationality in the decision. While our economy usually goes through this waiting mode during election periods, this year’s version is different. This economy, through an unusual convergence of issues and policies, was brought to a near-rudderless status as of the eve of the 2023 general election.
The naira redesign policy has effectively disenfranchised the larger part of participants in the economy, especially those who are politically unconnected. There is economic disenfranchisement. Both the formal and informal sectors are in a pause mode. With the financial system drained of cash, many economic operators have been effectively demobilized, just trudging on and waiting for direction from the drivers. They are asking for the driver or just wondering, who will take over the driver’s seat and give them a clue as to where the ship is headed.
Right now, the informal sector is in sleep mode. Not much business is being done. Most business entities are just waiting. The SMEs are being starved of cash, which is the blood that keeps them functioning. The talk about the cashless economy is not yet part of their lexicon, and this is hampering commerce. In a big market, you may just find a few sellers of foodstuffs who agree to be paid through bank transfers, and in most cases, such transactions attract additional costs because the prices are higher. Still, if you probe deeper, you discover that the bank account that the woman (the retailer) is giving you actually belongs to a dealer, who supplies her those goods on credit, who therefore must be in control of the sales.
Receiving cash now is difficult, near impossible, or at best, comes at an additional cost. For you to receive say N5,000 you must be prepared to give up as much as N1,000. That is a 20 per cent cost that is difficult to classify: is it a financing cost or a sales cost? If the business person borrowed that money, he or she will still pay the interest rate in addition to this additional and absolutely unnecessary cost. Those who cannot afford the additional costs simply sit idly, waiting and hoping that the economy will soon turn the bend and a new phase with clarity ushered in.
The events over the weekend, though taking place on the political scene, have had a tremendous impact on the economy. They have indeed put many actors, including foreign investors, on the alert. In what, by all standards, has acquired the status of a combustible election, this is the most likely response of investors, who might want to take an early lead in the unfolding scenario. There has been conflagration in many places all over the country. Ballot boxes have been burnt or snatched; many Nigerians – election officials and voters alike – have been hurt, shot, stabbed, and once again, blood has flowed on our streets in the course of an election.
These are signals for all rational investors. The local markets, as measured by the performance of the stock market, have been able to maintain a positive disposition thus far. On the eve of the elections, last Friday grew by 0.55 per cent, the third consecutive rise in against the background of worries over the market. On the same day, Nigeria’s Eurobonds gained, shrugging off the fears. This scenario replayed on Monday, when the local stock market gained by even a slightly higher margin of 0.69 per cent, just as the nation’s Eurobonds again gained in price.
Even yesterday, Tuesday, the local stock market continued its rising streak, with the All-Share Index gaining by yet a higher margin of 0.9 per cent. These incremental gains are a good measure of the waiting game. They indicate that investors are neither averse to the local environment, nor are they convinced to embrace it with two hands. But the truth is that investors can be unpredictable. It must be noted that one event considered significant by the investors, can reverse the trend in a swift response.
Therefore, the next few days are key. In what direction will the pendulum swing?
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