The fall in global oil prices, which began in 2014/2015, has to some degree negatively impacted emerging oil exporting economies. One of these economies is the Federal Republic of Nigeria, located in the Sub-Saharan Africa region and Africa’s largest economy. As a result of the decline in global oil prices, the country has witnessed a number of effects, some of which can be seen in the chart below.
Some notable investment opportunities are fixed income and small and medium-sized enterprises (SMEs). Investments in fixed income provide investors of all calibre the opportunity to earn high returns benchmarked against inflation rate and thus prevents erosion in the purchasing power. SMEs, on the other hand, offer an interesting alternative with a long-term view for investors with excessive cash flows looking for relatively higher returns associated with some level of risk.
Fixed Income Investments
Given the bearish run in the Nigerian stock market as obvious in the chart below, coupled with the current state of the economy, the fixed income market offers interesting investment opportunities with reduced risk and relatively high-interest rates permitted by the monetary policy committee (MPC) as seen in the interest rate chart below. Fixed income market comprises of two main categories namely bonds and money market securities.
The Appeal For Bonds
The bond market is a financial market where participants buy and sell debt securities. When debt securities are purchased, it implies the lending of money by investors to a government, corporation, federal agency or other entity known as an issuer or borrower. In return for the money lent, the issuer provides the lender with a bond in which it promises to pay a specified rate of interest during the life of the bond as well as repay the face value of the bond (the principal) at maturity.
The current issuance of bonds in Nigeria according to FMDQ, are the 4.8 trillion naira Federal Government of Nigeria (FGN) bonds, 100 billion naira First City Monument Bank (FCMB) corporate bonds and 30.5 billion naira United Bank for Africa (UBA) corporate bonds. It is important to note that the issuance of bonds (request for lenders) is one of the ways through which companies and governments raise money to fund their growth, development and day to day activities. Given the current economic state of Nigeria, one should expect to see more of these issuances especially in the financial sectors at relatively high-interest rates.
Money Market Security
Money market securities comprise of a certificate of deposits (CD), Treasury bills (T-bills) and commercial papers. Treasury bills are short-term debt instruments considered by many to be the most risk-free investment. They are government securities with one year or less maturity, issued by the Central Bank of Nigeria. T-bills provide short-term funding for the deficit and are by nature the most liquid money market securities backed by the guarantee of the Federal Government.
Commercial papers are unsecured short-term promissory notes issued by financial and non-financial companies. Transactions volume for commercial paper according to Investment One Financial Services exceeds the amount of any money market instrument other than T-bills. It is typically issued by large, creditworthy corporations with unbiased lines of bank credit and therefore carries a low risk of default. An example of a recently issued commercial paper would be that by Coronation Merchant Bank.
A certificate of deposit is also referred to as time deposit issued by commercial banks with maturity periods ranging from three months to five years. The return on the certificate of deposit is usually higher than T-bills because it assumes a greater degree of risk. Given the current Nigerian economic situation alongside the government’s need for finances, T-bills possess a higher interest rate of about 17% when compared to the certificates of deposits (9%) and corporate bonds (14.5%).
Why Invest in Fixed Income Securities:
- Predictable income stream
- Preservation of capital
- Suitable for retirement plans
- Support financial goals and security
Investments In SMEs
SMEs play a very vital role in the Nigerian economy and are broadly defined as businesses with an annual turnover of less than 500 million naira or businesses with less than 300 employees. They account for over 70% of the country’s labour force and contribute approximately 50% to the country’s GDP (compared to the 1% in 2006).
Over the past ten years, SMEs have displayed significant growth potential with strong export and employment potentials. They have arguably closed up the infrastructure gap, invested tremendously in human capital, and received funding from local and foreign investors (e.g. Mark Zuckerberg’s investment in the Co-Creation Hub, an incubator in Nigeria’s Silicon Valley).
SMEs in Nigeria are currently distributed along sectors and regions, thus creating potential operations and cost synergies. Major corporations such as Guaranty Trust Bank and Heineken, alongside the Nigerian government, have shown a consistent commitment to the continuous improvement of SMEs, through the implementation of adequate legal and regulatory frameworks, basic and technological infrastructure, access to finance and financial incentives, and commitment to building domestic expertise and knowledge.
Despite the recent events in the Nigerian macroeconomic environment, SMEs still possess compelling growth potential and the ability to drive the country towards an economic recovery stage. In addition, they offer one of the best investment opportunities during a recession with limited risk and high returns for not only corporations but high net worth and regular individuals.