Falling oil prices and the increased political risk due to the upcoming elections have increased the risk profile of Nigeria, discouraging foreign investors to make investments in Naira. Even institutional investors like JP Morgan Chase & Co. have removed Nigerian bonds from their international bond index fund due to a lack of liquidity, pushing yields of Nigerian bonds to unfamiliar heights. But what is the impact of a Naira devaluation on the Nigerian citizen? What is getting more expensive and are there any opportunities to make use of the momentum? TopCheck explains the top 5 ways on how the Naira devaluation impact the daily lives of all of us.
1 Imported goods become more expensive
The major drawback for Nigerian citizens caused by the Naira devaluation will be realized in the prices of imported goods. These imports can more or less be divided into two different categories, namely goods that are exchange rate sensitive (whose prices change quickly after changes in the FX-rate), and products that adapt slowly to external factors. The first category includes most often groceries (wheat, rice, etc.) or clothing, which are traded on markets, and for which consumers have no fixed price perception. The second category includes higher priced products, like electronic goods or cars, for which the dealers usually accept the negative devaluation in the first place until a certain threshold has been reached, which will lead to an adjustment of prices at a later stage.
2 Remitted money
The money you'll receive from family abroad will actually be worth more as its value in the country where it is generated increases. This might more than counter-balance the increase in foods that are imported. Unfortunately, only a fraction of Nigerians enjoys the luxury of receiving money from abroad.
3 More job opportunities due to stronger exporting activities and increased foreign direct investments
Economists are teaching that the lower the exchange rate of a certain country becomes in relation to another country's exchange rate, the more attractive a country becomes for foreign direct investments (FDI) keeping all other circumstances the same. So in theory, we would see increased investment from international companies on Nigerian territory stimulation growth for certain industries, such as construction companies. The same goes for exporting industries for which the demand of goods will increase prices on world markets become more competitive.
4 Adjusting your investment strategy
Making changes to your current investment portfolio is crucial as the current status of the Naira provides huge opportunities to profit and invest in new opportunities, but on the other hand it also comes with significant potential to lose money. Think about your investments in US Dollars denominated securities - did the increase of US Dollars result in yields that are worth to be realized right now or do you expect the Naira to devaluate even further? If FDI might increase, does it make sense to invest in infrastructure / construction companies? How will interest rates change in order to compensate exchange rate movements? Invest in exporting companies? Nobody has answers to those questions, but you should think about potential outcomes and adjust your portfolio accordingly.