Foreign buyers drive Nigeria yields lower

Nigeria is slowly warming its way back to the hearts of foreign investors, at least in the short term, as demonstrated by the last Treasury bill auction.

The results of the country’s Treasury Bill auction on October 4 show that the discount rates on the 182-day and 364-day T-Bills fell sharply, by 130 basis points, and 127 basis points, to 15.499 percent and 15.725 percent respectively, relative to the rates at the previous auction.

The discount rate on the 91-day T-Bill, however, rose by 10 basis points (bps) to 13.25 percent, post the 10bps drop at the last auction.

The broad market expectation of lower rates in the coming months is spurring demand for the 364-day T-Bills, which was four times oversubscribed at the last auction, traders say. At the September 20 auction, which preceded the last auction in October, the 364 day T-bill was five times oversubscribed.

The market conditions are positive for foreign investment, according to Tajudeen Ibrahim, head of research at Lagos-based investment firm, Chapel Hill Denham.

“Accordingly, we highlight that at 18.7 percent, the true yield on the 364-day T-Bill is now 476bps below the peak of 23.4 percent on 19 April, while the yields of 13.7 percent and 16.8 percent on the 91-day and 182-day T-Bills are 80bps and 238bps below their YTD high levels of 14.5% and 19.2% on 04 January and 05 July respectively,” Ibrahim said by phone.

The yield on 1-month, 2 months and 1 year treasury bills traded flat on Friday, October 6, according to FMDQ data.

The moderation in yields implies lower funding cost for corporates that plan to raise debt capital or issue commercial paper (CP) to buffer liquidity positions, analysts say.

Investors have found new love for Nigerian bonds due to high yields and stable currency for investors, especially as an improving inflation outlook may mean that yields could start to decline.

Expectation for improved economic stability in Nigeria is also playing no small part in the rising demand for Nigerian bonds, as demonstrated by New-York based Black Rock- the world’s largest asset manager.

In a Reuters report Friday, the head of emerging markets and fixed income at Black Rock, Trigo Paz, said he has penciled down Nigeria as a market he plans to enter, convinced that the economy is beginning to stabilise.

“We are moving into some countries even deeper, because we feel that the macro environment is much more stable than it was and is likely to improve going forward,” Paz said.

BlackRock favours Nigeria, as well as oil producers such as Russia, Colombia and Kazakhstan.

A foreign currency crisis brought on by the oil price rout since mid 2014, saw Nigeria fall out of favour with foreign investors. Rather than allow the naira currency weaken, in line with oil prices, as Russia and Kazakhstan did, Nigeria resorted to capital controls.

The move sent foreign investors fleeing and stoked pressure on the naira, which went on to shed 40 percent of its value against the dollar last year.

The situation is however starting to look up once again for Africa’s largest oil producer, though slowly.

Oil prices have stabilised above $50 this year, as OPEC’s production cuts drain the supply glut which dampened prices.

To Nigeria’s advantage, it was exempted from any cuts to its crude oil output, and this has combined with higher prices and stability in the Niger-Delta to boost the inflow of petrodollars, greasing the illiquid foreign exchange market in the process and calming the nerves of some foreign investors.

The creation of a so-called “Investor and Exporters window,” in April, has also boosted dollar supply to the market and lifted investor confidence.

The exchange rate at this window is market determined, much to the excitement of investors.

The naira closed at N360/USD on Friday, according to FMDQ data. The currency has appreciated by 4.6 percent since the window opened on 24 April.

Notably, Nigeria’s external reserves have risen by 25.3 percent Year to date, to US$32.7 billion as at 03 October, with Bonny Light crude oil prices moving higher in recent months (US$59.92pb on 05 October).

As disclosed by the CBN, over c.US$7bn has been traded at the I&E window since inception.

“Accordingly, relative to the 10-yr UST yield of 2.44%, the FGN 10-yr bond yield of 15.00% (the Mar-2027s) is still compelling,” said Ibrahim of Chapel Hill Denham.

Based on FMDQ data, I&E turnover rose by c.15% month on month, to US$4.2bn in September, suggesting increased activity in the fixed income & money market, considering that the stock market turnover in September was N73bn (c.US$202mn).

Nonetheless, the latest NSE foreign investment report shows that foreign investment in the stock market expanded 3.4 times to N208bn (c.US$58mn) in August, the largest monthly investment in 2017.

Importantly, monthly net foreign investment inflow in the stock market has been consistently positive since April, reported at N122bn (c.US$34mn) in August and N141bn (c.US$39mn) YTD.

 

LOLADE AKINMURELE