The week-long visit of President Muhammadu Buhari to China between April 11th and 15th 2016 confirmed preconceived notions that the Presidency will be pursuing a non-allied foreign policy objective, as with previous administrations, by partnering with countries both in the East and West to achieve development objectives. President Buhari’s predecessor, President Jonathan also made a similar visit to China in 2013 in which several infrastructure deals were signed but economic integration between the regions has mainly been defined in trade than finance and capital flows.
Between 2013 and February 2016, Nigeria received US$213.4m worth of capital inflows from mainland China, just 0.4% of US$52.4bn total capital importation into Nigeria within the period, ranking as the 18th largest source of foreign capital inflows into Nigeria. Including the autonomous region of Hong Kong, total capital flows from People's Republic of China was US$484.2m within the period, still less than 1.0% of total capital importation into Nigeria. On the other hand, trade relations have been burgeoning with merchandise trade between the two countries estimated at US$30.6bn between 2013 and 2015, 8.5% of Nigeria’s total merchandise trade. The Balance of Trade is however heavily tilted in favour of China; import from China was 7.8x Nigeria’s export (US$3.5bn) within the period and China remains one of the few trading partners Nigeria still operates trade deficit with. 22.0% of Nigeria’s imports between 2012 and 2015 were from China while only 1.5% of exports went to China.
Efforts to buoy capital integration has mainly been a unilateral objective of Nigeria. The CBN over the past 5 years has built up its stock of external reserves denominated in Yuan from US$101.3m in 2011 to US$2.2bn (7.5% of gross reserves) as at Q1:2015. Media sources also quoted Minister of Finance, Mrs Kemi Adeosun, as saying the Federal Government is looking at the possibility of raising debt capital in the Renminbi to take advantage of the cheaper cost of borrowing. Hence, market expectations that President Buhari would seek to boost capital links with China and seek better trade terms during his visit.
The outcome of the deliberations have been short on details but snippets we gathered from Press Statements of the Presidency and comments from officials indicated the following:
- Foreign Direct Investment (FDI) deals worth US$5.8bn were negotiated between Nigerian private businesses & state governments with their Chinese counterparts. The sectors of interest include: power, solid minerals, road and rail transport infrastructure and housing.
- NSE-largest Company by market capitalization and Nigeria’s biggest cement manufacturer, Dangote Cement Plc., negotiated a US$2.0bn loan with the Industrial Commercial Bank of China Ltd.
- A “currency deal” whose nature is yet clear is being negotiated. During a briefing at the spring meetings of the IMF/World Bank, the CBN Governor was quoted as saying the CBN is discussing with the People’s Bank of China (PBOC) on a currency swap and an agreement has been reached with the Industrial and Commercial Bank of China to act as Nigeria’s agent (or clearing bank) when the swap transaction with the PBOC is concluded. A statement attributed to the Foreign Affairs Minister that the “currency deal” is not a swap created some confusions but a later update shared via the same Presidency source explained that the arrangement with the ICBC would let China and Nigeria trade directly in yuan & naira, which is partly in alignment with the CBN Governor’s earlier statement.
We think that the strong participation of private investors in the FDI and loan agreements sealed will improve the implementation rate relative to past bi-lateral investment engagements and could potentially boost capital importation from China and domestic infrastructure investment. We are currently caught in-between the two positions taken by the CBN Governor and Minster of Foreign Affairs. Whilst awaiting official clarifications, we think the “currency deal” could either be a conventional swap, in which the CBN and PBOC would exchange a stock of their currencies at a predetermined exchange rate to be reversed at maturity of the swap line, or a move by the PBOC to boost yuan-liquidity in Nigerian banks as a trade and investment currency in exchange for future assets transfer (probably oil) to China to liquidate the swap line.
Whilst we believe a “currency deal” with China is not an effective substitute for appropriate fiscal and monetary policy flexibility in adapting to the lower crude oil prices environment, we still view the development as positive as it could reduce the cost of transaction with Nigeria’s largest trading partner and also ease the immediate foreign currency challenges associated with Nigeria’s negative terms of trade.
Key risk to the downside is that the ease of transaction with a highly competitive country like China could worsen Nigeria’s trade balance and weaken domestic manufacturing capacity. We think this concern is justified and further emphasizes the need to deepen domestic policies on improving competitiveness.