Prolonged US immigration restrictions would add a new risk to the Nigeria FX rate in the medium-term given the importance of remittance inflows to Nigeria (more important than oil revenues) and the position of the US as the single largest source of those remittances. This reinforces our relative caution on Nigeria's cheap equities.
The US has applied restrictions on the sort of immigration visa which can lead to residency for Nigerian citizens. The reason given is insufficient security screening and information sharing in Nigeria. Business, medical and tourist visas are not restricted. The authorities in Nigeria have responded by appointing a committee with ministerial leadership to address these shortcomings.
Remittances are a major contributor to the current account balance in Nigeria: they amounted to 5.4% of GDP in 9M 2019. Remittances were 60% larger than oil revenues in 2018 and 5.7x larger than foreign direct investment in 9M 2019. Remittances grew c10% in 2017 and 2018 before declining 0.5% in 9M 2019. The largest source of remittances was the US in 2018 (c30%).
In the medium-term, prolonged US immigration restrictions add another risk to a moderately over-valued and vulnerable FX rate (where FX reserves have been in decline since mid-2019 and real effective exchange rate implies an over-valuation on an absolute basis and relative to history).
While Nigerian equities have under-performed frontier peers on a one-year view (despite a significant bounce ytd) and look cheap at the index and stock-specific level, the lack of macroeconomic growth catalysts and structural reform, persistently high inflation, and moderate FX rate risk keep us cautious. We prefer the tier 1 Banks within Nigeria, non-CIB Egypt (also cheap and higher growth) for pan-Africa portfolios, and Asia country exposure (cheap and higher growth) for global small emerging and frontier portfolios.
(Apart from Nigeria, the other countries included in the new US restricted list are Eritrea, Kyrgyzstan, Myanmar, Sudan, and Tanzania. The existing restricted list includes Iran, Libya, North Korea, Somalia, Venezuela, and Yemen The White House Statement on this issue is accessible via this link).
Nigeria remittance inflows are critical for the current account
Nigeria FX rate vulnerable: Although the current account is close to balance, FX reserves have been in decline since mid-2019 and real effective exchange is over-valued on an absolute basis and relative to history
Nigeria stocks still screen well for value although macroeconomic growth catalysts remain elusive, inflation is still high and modest FX rate vulnerability persists.
Nigeria equities, measured by the local Nigeria Stock Exchange All-Share index, are down 2% in the last year in total US$ return terms and the larger stocks, measured by MSCI Nigeria, are down 9% (driven down by foreign net selling). This compares to MSCI EM up 5% and MSCI FM up 12% (with MSCI FM ex-GCC up 3%).
The 12-month underperformance is despite an 8% bounce for the local index ytd, driven by local purchases in response to restrictions on local asset manager purchases of central bank OMOs (open market operations) and attractive equity dividend yields.
The local index is on a 6% discount to the 5-year median trailing PB, a 31% discount to the 5-year median trailing PE and on a forward 2020f PE of 8x (for 9% consensus aggregate EPS growth).