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Foreigners shun Nigerian bonds for nine straight months amid FX uncertainties

One would have thought that it would be Uhuru for Nigeria’s bonds as economic activities picked up in the third and fourth quarter of last year, but it appears foreign investors are increasingly ruling out interest in the market until some form of improvement is seen in Nigeria’s FX crisis.

For three-straight quarters last year, April through December, foreign investors avoided staking their monies in Nigerian bonds after a move to ration dollar supply in the wake of falling external reserves, triggered a pile-up of unmet dollar demand and spooked fears in the heart of investors.

The economy suffered the economic and health impact of the COVID-19 pandemic, crashing oil prices-the country’s major foreign earner, and wiping nearly half of government revenue.

The naira ran into troubled waters last year, losing nearly 25 percent of its value, yet it was almost impossible for investors looking to convert their naira assets to dollars, hurting fresh capital from coming into the country.

There were no single subscribers to the country’s bond instruments in the second, third and fourth quarters of 2020, according to capital importation data by the National Bureau of Statistics.

That tells a lot about investors’ apathy and perception in investing in the country’s bond assets in the periods when compared with the $231 million and the total of $455.24 million they stashed into Nigerian bonds in the first quarter of 2020, and the last nine months of 2019 respectively.

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Before Q’2, Q’3 and Q’4 2020, the only time—since 2013 when the state-funded data agency, the NBS, started tracking capital importation data– Africa’s biggest economy had no foreign investors subscribed to its bond were in Q2’16 and Q’17 when the economy suffered a long recession due to the global collapse in oil price and restiveness in the Niger Delta region that sent oil production to lower lows.

At that time, the Central Bank resorted into rationing the amount of greenback in which customers of banks spend abroad. The apex bank at that time also expanded its list of products restricted from accessing dollars from its window.

Of course, the move came as severe pains for investors whose naira assets were stuck in their quest to convert to dollars. Manufacturers whose businesses were also hard hit as they were unable to find dollars to carry out major raw inputs.

It’s 2020 and the scenario four years ago is already playing out after a cumulative effect of the pandemic and a standoff between two of the world’s biggest oil producers (Saudi Arabia and Russia) crashed oil prices and slowed crude oil demand, wiping off more than half of the government’s revenue, and forcing the apex bank to resort to rationing of the dollars again

Investor’s funds were stuck again with unmet dollar obligations on the desk of the apex bank reaching as much as $759 million in August 2020, according to industry sources.

With no respite on Nigeria’ dollar crisis, portfolio investors had no option but to roll over maturing bonds into equities and OMO markets.

Also, multinationals that have waited tirelessly to get their funds out began reinvesting in their local units just to put their funds to work over the fear of further devaluation.

The poor dollar management also meant foreign investors missed out in Nigeria’s stocks rally.

Portfolio investments into equities and money market instruments fell to 6-year low in the fourth quarter of 2020 at $18 million and $17.10 million respectively.

With foreign portfolio investors staying out of naira debt denominated securities; it shows that Nigeria’s debt markets are now controlled by local investors.

Aside from the inability to repatriate funds by accessing dollars easily, investors were forced to make do in a repressed interest rate environment.

A raft of Central Bank policy, last year, banning non-bank foreign investors from buying OMO bills, aimed at driving credits to the real sector of the economy to boost growth in a frail economy, pushed excess liquidity into other debt instruments, thereby forcing yields on virtually all assets to reach lower lows.

Average yields on treasury bills have bottomed at 1.3 per cent from the high of 14 percent some three years ago. Yields on OMO average around 3 per cent while Interest on 5-year bond instruments is also down to 5 per cent.

A low-interest-rate environment alongside spiralling inflation, meant investors in Nigerian assets have had their worst time as they have been greeted with negative real returns. Real interest rates on Nigerian T Bills fell further below (-11 per cent) after commodity prices accelerated to a 32-month high of 14.8 per cent in November.

While getting a return that is far below inflation has been a thorn in the flesh of investors as they are left with nothing to cheer, the low-interest environment has catalyzed the government and large corporates to raise cheap debt. These gains elude small business, which makes up about 50 per cent of the country’s GDP and employs over 80 per cent of the population, as they are forced to borrow at a much higher cost of 25 percent from commercial banks due to their small cash flows.

Thanks to the low-interest-rate environment, the Federal Government raised over N2.36tn from the capital market in 2020, while corporates also leveraged the low yield environment to fund expansion objectives and pursue debt refinancing, raising a total of N192bn.

This year, with Nigeria’s reserve rising to $36.1, helped by higher oil prices, analysts expect some degree of legroom for the apex bank to clear off the backlog of dollar demand.

This would help in sending the right signals and may lead to the returning of foreign investors into the bond space.

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