High-yielding government debt and a cheap currency are spurring a return of carry traders at a record clip into Nigeria, brightening the outlook for one of the world’s worst-performing currencies.
Bids submitted in auctions for Treasury bills surged to historical levels on March 27 as the risk of currency depreciation fades and the premium to hold them surged to a record.
Investors pile into Treasury Bills at record pace
Demand for the 364-day bills jumped to a record N2.48 trillion in a single auction, 17 times more than the N142 billion that was offered by the government, according to data from the Debt Management Office (DMO). That’s after the Central Bank of Nigeria (CBN) followed its jumbo 400 basis point hike in interest rates in February with another 200 basis points hike at a meeting on March 26, a day before the auction.
The CBN said at the last auction which was held on March 13 that over 75 percent of bids received were from foreign investors, a sign of their growing interest in Nigerian debt.
Nigeria is increasingly standing out for carry traders, who borrow where rates are low to invest where they are high.
Nigeria’s carry trade offers 21.8 percent using interest rate differential, placing it only behind Egypt (25.2 percent) and Ghana (24.2 percent) among peer African countries including South Africa, Zambia, Kenya, Mauritius, Uganda and Angola.
With returns of 16.1 percent, Nigeria however offers the highest return for carry trade among these countries when adjusted for expected movement in currency using 12-month Non-Deliverable Forwards (NDFs). Egypt offers 11.9 percent while Ghana, which rounds up the top three list, offers 10.7 percent.
“An inflow of dollars is looking likely and some big gains for dollar-based investors holding Nigeria assets,” Charles Robertson, head of macro-strategy at FIM Partners. “Nigeria is looking very attractive again for carry traders.”
Average FX turnover doubles in 2024 as naira hits N1,300
The Naira has been gaining against the dollar since it was allowed to weaken by more than 30 percent this year alone and the CBN delivered a record 600 basis points interest rate hike in one month.
The full settlement of outstanding foreign exchange forward contracts has also buoyed investor appetite for naira assets, spurring a benign outlook for the naira in the coming months.
The currency jumped to a three-month high of N1,300.43 per US dollar at the official foreign exchange market on Wednesday as dollar supply spiked 69.43 percent to $416.10 million, according to the data by the FMDQ Securities Exchange.
Daily FX turnover, a measure of liquidity, has surged to a year-to-date average of $4.3 billion compared to $2.3 billion in 2023, as more foreign investors pile into a market once snubbed.
The CBN estimated cumulative foreign inflows since the beginning of the year at $2.1 billion compared to $1.6 billion in the whole of 2023. That has led to an accretion in foreign exchange reserves which the CBN forecast will hit $35 billion by the end of this month.
“We see latitude for further improvements in FX reserves due to sustained foreign inflows, higher remittances, and the recent decision to house some NNPC accounts with the CBN,” said Olaolu Boboye, lead economist at Lagos-based investment bank, Cardinal Stone.
“With the US Fed sticking to its prediction of three rate cuts this year, Nigeria’s carry trade may also improve further,” Boboye said in a note to clients.
Investors previously shunned Nigeria’s local debt as the central bank resisted a devaluation of the heavily managed naira. It became overvalued in the eyes of foreign traders, contributing to shortages of hard currency that caused inflation to soar.
Those bottlenecks have however been resolved since the replacement of CBN Governor Godwin Emefiele with Olayemi Cardoso last September.
The former Citi bank chairman has won rare plaudits from the most skeptical investors who have been impressed by his bold reforms.
A source close to the CBN told BusinessDay last week that the apex bank is working to resolve the convertibility risk that is holding back some foreign participation in the bond auctions.
Foreign investors are now mandated to fund their accounts with the banks before they can participate in Treasury Bill and OMO auctions. They would however rather be sure they are successful at auctions before sending dollars to Nigeria.
If they have to pre-fund their auction bids, the banks will exchange their dollars for naira and then hold the naira uninvested if the bids are unsuccessful.
This has been discouraging FPIs who would like to participate in the auctions but balk at the idea of the banks converting their funds to naira whether their bids are successful or not.
