Against the background of the ongoing debate over the Federal Government’s proposed sale of national assets, analysts at United Capital Research have pointed out that apart from the move helping to restore liquidity to the foreign exchange market, it could also unlock private investment.
In a note obtained by New Telegraph, the experts argued that while the plan has generated diverse reactions, the government does not have many options especially with regard to restoring liquidity to the forex market in the short term.
They said: “Beyond the short term impact of the sale of these assets on the FX market is the longer term possibility of the opening-up of some of certain previously government controlled sectors of the economy to private investment, which effectively modifies the government’s market role from a participant to a regulator, solely tasked with quality control, ensuring local content, and putting in place mechanisms to create an enabling environment for market players to compete.
“This, to our mind, constitutes an even more important theme for the Nigerian growth story at this time and would be similar at least in part, to the liberation of the Telecommunications sector that has now become one of mainstay of the Services sub-sector in recent times.
We note that a similar model has been adopted in other frontier markets (notably India) and has recorded good success to date.”
According to the analysts, instead of the current debate over whether the national assets should be sold at this point or not, Nigerians should insist that the process employed for the sale is transparent and that there are no issues with valuation. They said: “We believe the more objective issues to address are transparency and valuation.
On the latter, Nigeria would have to be prepared to sell these assets at near distressed values given the country’s weak fundamentals at this time. Negotiating asset sales in a receding economy creates an automatic cap for valuation even if asset-specific upsides are substantial.
“This is especially so for earning assets. The issue around transparency is even more contentious but largely addressable in our view. The Buhari-led administration has gained substantial credibility in anti-corruption drive relative to previous administrations.”
The analysts suggested that in order to ensure that the process is transparent the sale could be structured in such a way that it is overseen by the Nigeria Sovereign Wealth Fund with co-management by global and local fund managers.
T hey contended that the government had little choice but to implement the plan as it was a certain short-term measure of restoring liquidity to the forex market. They pointed out that: “Portfolio inflows have been delayed, and are not likely to rebound sharply in the near term given Nigeria’s heightened sovereign risk occasioned by weak macro backdrop; global risk aversion and possible hike in the US Federal Reserves rate.
“Most importantly, the shift in global oil price regime suggests that EM flows are likely to be capped in the foreseeable future. In effect, past policy errors and delays in key decisions around the domestic currency appear to have derailed the short run equilibrium path of the naira.
To kick-start a process of recovery, the economy needs to respond in the same manner as it has been shocked.” According to the analyst, although tackling FX liquidity through injection of dollars from an asset sale may not be the panacea to the nation’s economic challenges , “it could potentially restore parity to the exchange rate at the interbank market, hence narrowing the arbitrage between the parallel and interbank rates.” However, they stated : “Despite the obvious merits of an asset sale, we deem it fit to mention that a more sustainable solution is needed to close the gap between FX supply and demand.”