The Nigerian Exchange Limited (NGX) recently disclosed its proposal to allow companies list bonds denominated in dollars on the bourse, potentially expanding this later to stocks too, with the aim of easing their difficulty in accessing hard currency in Africa’s biggest economy.
The bourse’s initiative is targeted at companies operating from the country’s special economic free trade zones and those earning foreign currencies, according to Temi Popoola, chief executive officer of NGX.
Besides listing and issuing foreign-currency bonds, the bourse said it is working with the Securities and Exchange Commission (SEC) to amend regulations so that selected companies can pay dividends in dollars.
What does NGX aim to achieve?
“Our primary objective is to enable these companies to issue bonds denominated in dollars and eventually offer equity in dollars as well,” he said in an interview. “It could potentially address the challenges posed by fluctuations in foreign currency.”
Though Popoola could not give a timeline for when the changes he floated will be implemented, he said the willingness of the government to consider market reforms increased the prospect of success. Changes to listing regulations can be achieved in a “relatively short time,” he said.
“Given the proactive stance of the current administration, it is reasonable to anticipate that these objectives can be achieved,” he said.
He said both retail and institutional investors have substantial amounts of dollars that domestic capital markets can tap to encourage more local listings. “If the target companies cannot access dollars in our market, many of them may opt to list abroad,” he said.
Are naira-denominated investments losing value?
The fate of the naira has been worsened by the outbreak of the COVID-19 pandemic. Nigerian investors are losing a lot to the devaluation of the naira, meaning they must invest in dollar-denominated assets to hedge against the depreciation. Considering the challenges brought forth by naira depreciation, it is imperative to have savings and investments in foreign currency to hedge against currency devaluation or depreciation, especially if you have potential FX obligations.
Do stakeholders agree completely with this push?
Yemi Kale, partner and chief economist at KPMG in Nigeria, said: “If firms raise dollar debt, they also have to repay in dollars. So, a firm issues dollar bonds to make FX transactions, for example, for imported inputs. It produces and sells its products in naira, and then has to convert profit back to dollars to pay investors at maturity. See the risk?”
Kalu Aja, personal finance consultant, said: “Dollar is not legal tender in Nigeria. The FGN is proposing to issue dollar bonds in Nigeria. It’s a brilliant move; all those dollars that are ‘dead’ in domiciliary accounts will come out.”
In his response, Kale said: “Are dollars in domiciliary accounts actually dead? Banks actually have access to them to lend to firms and often do. How to guarantee steady inflows and get the ones not already in the Nigerian banks and stem the incentive to ship most out of the country is to me the bigger challenge.”
Aja acknowledged that there is an exchange risk, saying: “Of course, there is an exchange risk. But companies can’t get FX to import raw materials, so they close shop; see the risk?”
Another public commentator sees the NGX’s initiative as a move to attract foreign portfolio investment (FPI).
“FPI is volatile because it can leave the country at any time. Foreign direct investment is always better than FPI. As at Q1 2023, FPI represents 57 percent of foreign investment in Nigeria and this is in decline,” he said.
An investment analyst with an X (formerly Twitter) handle @mayorspeaks who responded to question on whether it is better to keep dollars in domiciliary accounts or invest in bonds, said: “If you hold your dollar in domiciliary accounts, you earn close to zero on returns. However, an average Eurobond yields between 6 percent and 10 percent. Now if you have $100,000 saved up in your domiciliary accounts and someone is offering you 8 percent per annual on a commercial paper or short-term bond (denominated in dollars), will you still maintain your bank?”
Also speaking, another public commentator said: “This can only give immediate gratification. Long run impact will be catastrophic. It heralds official dollarisation of the economy. I see Venezuela loading. The retail end of the market has not started dollarising. This will lead to retail jumping into holding dollar against naira and the only result will be weak naira. We all saw this play like a movie in Venezuela and at some points in Zimbabwe. Time will tell.
“This policy is likely going to waken the monster or what I called the herd. When you see ordinary people start looking for dollar on the streets of Enugu, Kano and Abeokuta, that is when you know the clock has gone full cycle. The impact is that you may wake up today and see dollar at N700, tomorrow you see it at N1,500. It is a herd effect. You can’t control how it will end.”
Why dollar-denominated investments?
Dollar-denominated investments are assets, securities and transactions priced in US dollar. Most investors and regular traders in Nigeria have seen their purchasing power and assets diminish over the last few years. Naira-denominated investments have lost their value, while the regular staple items have seen their prices rise three-fold. Most Nigerians have recently resorted to saving their money in dollars.
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