Nigerians abroad hoard dollar to hedge naira assets risk

Anthony Opara (not real name) is an information technology expert gainfully employed as a Nigerian-American in Texas for the past two decades.

Before now, to meet his financial obligations for his extended family members in Nigeria, he leveraged huge funds in his naira bank accounts and rental income from a few of his real estate assets in the country’s major cities.

Recently, Opara’s view on keeping the naira as against the dollar changed. “Why will I exchange my, say, $10,000 to naira just to buy an asset again when I know that if I need money from the same investment to pay my bills, on conversion to dollar, I won’t have equivalent of the $10,000 I had exchanged to naira?” he asked.

“I will rather keep my dollar here with me, whenever I have needs to spend naira in Nigeria, I will exchange it at the rate that is obtainable at that time, which may be even be higher; that is all,” he said.

In his almost two decades in the United States, he had before now leveraged better returns from his investments in Nigeria to service mortgage abroad, but the declining value of naira makes him earn less from Nigeria.

“Investors would usually consider not just the cost or value of an investment, but also the real expected returns and the associated risks,” said Taiwo Oyedele, head of tax and corporate advisory services at PwC.

He said while Nigerian assets may appear cheap when converted to major foreign currencies due to the devaluation of the naira, “there is risk and uncertainty regarding the stability of the naira which will impact the real return, foreign exchange regime and access to forex which will impact the ability to repatriate returns and capital on exit.”

Read also: Naira weakens to 615 as dollar scarcity lingers

Since March 2020, foreign exchange (FX) illiquidity and the widening gulf between the official and parallel exchange rates have led to FX conversion and fund repatriation problems for foreign investors in the Nigerian equities market, a concern that made the MSCI Inc, a global provider of equity, fixed income and real estate indexes, to recently announce that it is considering removing Nigeria from its Frontier Markets Indexes (MSCI Frontier Markets and MSCI Frontier Markets 100 indexes).

Several actions have been taken by the Central Bank of Nigeria (CBN) to increase its foreign earnings, improve liquidity across the FX windows and encourage the inflow of diaspora remittances.

For instance, the CBN had on November 30, 2020 directed all international money transfer operators to pay funds to beneficiaries of diaspora remittances in foreign currency (US dollars) as against naira payment in a bid to reduce the pressure on the FX parallel market.

The World Bank has said that Nigeria’s diaspora inflow will witness an increase to $29 billion in 2022 as a result of the continued adoption of official bank channels for the facilitation of remittance inflow and higher food prices in the country. It said the flow of diaspora remittances to low and middle-income economies would rise by 4.2 percent to $630 billion this year.

Currently, many analysts allocate higher risks to holding naira assets due to high inflation, consistent depreciation of the local currency in the parallel market. There is also limited investment option to protect the purchasing power of naira as the fixed income market offers negative real returns despite rate hike in May.

“The FX challenge in the country does not encourage diasporans to invest in Nigeria assets. Investors are unable to get their money out when they want either as dividends or as capital,” said Akeem Oyewale, CEO of Marble Capital Limited, an assets management firm.

Oyewale said: “We don’t have the asset classes that entice them enough. The major reason is actually the assets flows; if there’s proper access to flows where they can get in and get out as they like, then we will see a lot more investors’ participation in our market.

“Anybody that is going to come in now must be willing to take both FX risk and the country’s risk. So, when you are able to provide them additional returns, then they are able to participate. They don’t feel encouraged to invest right now because if they need money for anything, it is being stuck for a while for the last two to three years. So, they are not so confident.”

Busola Jeje, a portfolio manager in a Lagos-based investment bank, described FX and repatriation of capital as major issues.

“Foreign investors come in expecting naira to appreciate so as to get more dollars but naira doesn’t appreciate, although there are attractive gains in the equity market but the currency movement can move against you and wipe out your entire capital,” she said.

According to her, current yields from Nigeria assets are very low, and in addition to fixed income securities like Treasury bills, most foreign investors also like to invest in money market and other short-term investments. S

She noted that MSCI Inc wants to remove Nigeria from their frontier markets indexes, “making our assets more unattractive to foreign investors”.

“The Nigerian economy is not attractive to the foreign investors because even the macroeconomic indicators show that it is not doing well, also political instability drives away foreign investors,” she added.

Another investment banking source who spoke to BusinessDay said: “It is the same reason that foreign investors are not bringing capital to Nigeria, and what are the issues: (i) we have a pricing problem, to be specific, the Nigerian exchange rate and the foreign exchange policy. I don’t want to bring in $1,000 in the market when it will change for N420 and in the black market it is N615.

“Because the moment I bring in my dollar, I’m converting to naira first; so if I go through Nigerian stockbrokers and the like, I’m most likely to lose, because it passes through the banking system. The general thing is you go through that route and you don’t have a favourable policy and that’s the challenge and it’s one of the reasons foreign investors are not coming to Nigeria.”

The source also cited the recent rise in inflation and devaluation risk. “Devaluation is only favourable when I have not come into your market. It is not favourable when I’m already in your market; so when foreign investors want you to devalue, they will be able to sell cheaper and they want clarity around it, but the moment you are in, you are ready to convert your naira to the dollar.”

Ayodeji Ajilore, an investment research analyst at ARM Securities, said financial analysts’ belief in a government could shape the thought of investors.

Read also: I should have been a delegate (or dollargate)!

He said: “If they have confidence in a government, it reflects in their reports and can in turn shape the decision of both retail and high net worth investors.

“There’s a lack of confidence in the government, that they can project about the FX, that naira can devalue even more which can send panic into the system and people start hoarding the dollar. As at December, we had $20 billion in Nigeria domiciliary accounts and if these funds find their way into the system, it will provide enough liquidity to bring the naira up. But lack of trust is keeping people’s money tied there.

“There’s also fear of exit; foreign investors are afraid that upon maturity of their investments such as Eurobond and money market securities, they can’t get their money back in dollars as the CBN is not healthy FX-wise to meet this needs.”

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