The real rate of return on Nigerian assets has been negative for years, and even though it is now narrowing, it is not happening fast enough for some investors.
While the investment return on Nigeria’s one-year treasury bill was 7.35 percent in the month of September, inflation rate was 16.63 percent. That leaves Nigeria’s real rate of return, which is the difference between the expected return on investment of an asset and rate of inflation, at -9.28 percent.
That is down by more than 500 basis points compared with the -14.47 percent level it was in January 2021.
Investors are taking note of the shrinking negative real return but are still holding out on Nigerian assets amid higher returns in other markets from Egypt to Kenya.
“It is happening at a pace too slow,” a fund manager based in South Africa said about the collapsing negative real returns in Nigeria. “The question is why invest in Nigeria if I can be guaranteed higher returns elsewhere? Nigeria is not as competitive if the real rate of return stays this way,” the fund manager said.
Nigeria is in need of foreign investments, portfolio and direct, as it seeks to breathe life into its embattled currency and restore investor confidence in the economy.
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A positive real rate of return is one of the factors that can help Nigeria attract foreign portfolio investment, which it has been lacking since 2020.
Foreign portfolio investments in Nigeria fell 77.4 percent in the first quarter of 2021 to $974 million, according to data by the Central Bank of Nigeria (CBN).
Some analysts are of the view that the negative real return in Nigeria will narrow further on the back of declining inflation.
“We strongly believe that the negative real return will narrow further largely because we expect inflation to continue to moderate downward, partly due to moderation in food inflation on the back of the harvest season, as well as the high base effect from last year,” Tajudeen Ibrahim, head of Research and Strategy at Chapel Hill Denham, said.
“For investors to see a positive rate of return in Nigeria, it will be dependent on inflation. This is because it looks more like a compelling factor for a positive real rate of return than an increase in NTB interest rate,” Ibrahim said.
The last transaction auction in September showed that investors’ appetite for the longer 364-day bill remained higher than the 91-day and 182-day bills. The 364-day bill with a higher interest rate was oversubscribed by N57.61 billion, while shorter 91-day and 282-day bills were oversubscribed by a combined N1.75 billion.
The CBN offered to raise N106.37 billion through the 364-day Treasury bill but investors said they were willing to invest more with N166.32 billion. The apex bank later raised N108.71 billion, N57.61 billion more than the initial offer.
The CBN also planned to raise N2.26 billion for the shorter 91-day bill, investors said they were willing to subscribe with N5.47 billion. The apex bank eventually issued N4.61 billion, with N2.35 billion worth of unsuccessful bids.
Meanwhile, investors were willing to bid with N2.95 billion for the N3.24 billion offered for the 182-day bill, N290 million less than what the CBN had offered. The apex bank was able to raise N2.09 billion, N1.15 billion less than its initial offer.
Paul Uzum, head of Securities Trading in Planet Capital Limited, believes that the devaluation of the Maria and high inflation influenced investors’ request for premium during the auction, which led to increase in interest rate.
“Amid the devaluation of currency and high inflation, you expect investors to ask for a premium, a rate higher than what they got before, so they can have something closer to a positive real return,” Paul said.
A Lagos-based fixed income analyst said further narrowing of the real returns for investors through the Treasury bill might not be feasible because of the fluctuation in the Nigeria Treasury Bill (NTB) rates.
“Where the NTB rates will go, no one can tell. At the beginning of the year, it was expected that yields would go up but it reduced,” he said.
