Naira-denominated investments are facing the double whammy of rising inflation and foreign exchange (FX) pressures but some investors are still bullish, according to analysts in the financial services sector.
The investments consist of Federal Government bonds, stocks, commercial papers, Nigerian Treasury bills and mutual funds, among others.
Last week, the Nigerian Exchange Limited All-Share Index rose by 0.70 percent, its first weekly gain in three weeks, to settle at 50,722.33 points, according to a report by Coronation research.
FMDQ Securities Exchange Limited, in January 2022, approved the admission of new commercial papers programmes worth N40 billion to its platform.
“Naira investments are facing both currency and inflation risks at the moment. But many people and institutions still believe in the prospects of the Nigerian economy and therefore are investing in Naira instruments,” said Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited.
He said a number of organisations, by regulation, would also continue to invest in naira instruments.
“To fix the naira, we will need to implement policies that will make the country earn foreign exchange from the following: exports of goods and services, inflows of FX from foreign direct investment, inflows from portfolio investments, foreign remittances. Most of these will happen if we have a conducive environment that protects lives and property,” Akinwunmi said.
On what to do to fix the naira, Bismarck Rewane, managing director of Financial Derivatives Company Limited, suggested an increase in dollar inflow as a short-term measure to address the naira crisis, and the elimination of multiple exchange rates in the long run.
August outlook for money market or equities show that investor sentiment will be driven by earnings performance, GDP growth, interest rate movement, dividend yields, and stock specific events, according to Rewane.
He said aggressive and speculative investors would stick to attractive dividend yields and that capital preservation remains a priority for conservative investors.
“Rally confined to sectors that are less exchange rate, interest rate and politically sensitive,” he said in his presentation at the LBS breakfast meeting.
Nigeria’s currency has been on a free fall in recent weeks, losing 20.42 percent in seven months, as it peaked at N710 per dollar last month from N565 at the beginning of the year at the parallel market, popularly called black market.
At the Investors and Exporters (I&E) forex window, an official market, the naira fell to a low of N431 per dollar, losing 2.08 percent in the last seven months, from N422 on the first trading day of the year.
Nigeria’s external reserves, which give the Central Bank of Nigeria (CBN) the firepower to defend the naira, have lost 3.83 percent in the last seven months from $40.50 billion at the beginning of the year to $38.95 billion as of August 8, 2022, data from the CBN have indicated.
“Exchange rate is a major victim of inflation,” said Rewane, adding that when the exchange rate is addressed, inflation will decelerate and growth will increase.
Nigeria’s headline inflation increased to a five-year high of 18.6 percent in June 2022, from 17.71 percent in May 2022. Economists have predicted the rate will hit 20 percent by year-end amid rising food and energy costs.
The report noted that last week, trading in the Federal Government of Nigeria bond secondary market was bearish as system liquidity remained tight. As a result, the average benchmark yield for bonds rose 29 basis points to close at 12.25 percent.
Across the curve, the yields on the 7-year (+15bps to 11.90 percent) and 10-year (+45bps to 12.66 percent) bonds expanded, while the yield on the 3-year (-1bp to 11.41 percent) bond declined.
“Our view remains that the combination of thin system liquidity and elevated Federal Government domestic borrowing will continue to drive yields upwards over the coming months,” analysts at Coronation Research said.
The Economist Intelligence Unit Limited, said the Nigerian Autonomous Foreign Exchange Rate Fixing rate is overvalued, at N416.4:US$1 (as given by the CBN) in mid-July, compared with a parallel-market mid-rate of N700:US$1.
According to the EIU, the spread invites illicit arbitrage and is widening. In 2022-24 foreign reserves (averaging 5.6 months of imports) should be adequate to avert speculative attacks, although one appears increasingly likely ahead of elections in early 2023.
It said in a report, “Foreign-exchange pressures will mount and devaluation cannot be ruled out. Our baseline forecast is that modest depreciation (of 4.2% a year on average) will be permitted over 2022-24, and the currency will end 2022 at N418.8:US$1 and at N445.7:US$1 by end-2024.
“Real Effective Exchange rate (REER) appreciation will build up, as happened during the last commodity super-cycle, in 2011-14, causing the import bill (notably services) to increase. As oil prices retreat, devaluations are expected in 2025-26 to limit foreign-reserve depletion. This will be only a partial correction in REER terms, and the naira will remain overvalued at N614.3:US$1 at end-2025 and N666.5:US$1 at end-2026.”