Naira faces pressure as offshore players book profit on local debt notes

Nigeria’s naira has been under pressure since the third quarter of 2019 on tightened dollar liquidity following profit-taking by foreign investors in the local debt market.

The local currency depreciated against the dollar, trading above N362 level on the Investor & Exporter (I&E) window of the foreign exchange market since July 30, according to data tracked by BusinessDay.

Naira exchanged at N363.14 to a dollar Friday, weakening slightly by 4 basis points percent from N363.01 in the previous day. But the rate has however been stable on the interbank window.

“It’s driven by sentiment. Having ministers gave investors a relief,” said Uchenna Minnis, Chief Market Analyst at Eagle Global Markets (EGM).

“But the long-term outlook depends on Nigeria’s Central Bank policies to curtail pressure in the market considering global risks and performance of crude oil prices.”

Dollar-demand pressure is not fuelled by selloffs on local bond market alone; weaker oil prices and apathy for Nigerian equities also aroused their decision to move funds outside the country.

“The pressure has increased on massive selloffs of local debt instruments by foreign investors in response to falling yields” said, analysts at Lagos-based CSL Stockbrokers in a note to clients.

“But initially, dollar inflows slowed due to lower yields in the market,” they said.

Brent crude, Nigeria’s benchmark grade, for the third consecutive week is trading below $60 per barrel on which the federal government’s budget is based on, following the escalation of trade war between the world’s two economic heavyweights, the United States and China.

This dents the country’s ability to settle forex obligations in the face of lower prices given Nigeria’s heavy reliance on the commodity.

Meanwhile, the bond auction conducted by the Debt Management Office last Wednesday was undersubscribed with only N95 billion of the N145 billion was offered.

The state debt agency also undersold total subscriptions at 0.14x bid to cover, with a total sale of N13.51 billion marking the lowest auction sales since December 2018.

Yields on 10-year government benchmark bond were bullish Friday, declining 36 basis points to 14.31 percent.

With the risk-free US 10-year Treasury note yielding 1.5 percent, investors are demanding an extra 13 percent return to take further risk in Nigeria.

In the six months through June, investors were bullish in the fixed income space which has moderated yields.

According to figures quoted by analysts at CSL Stockbrokers, yields in the Treasury bill markets have eased by a cumulative average of 0.55 percent across the curve, while bond yields have also eased a cumulative 0.78 percent yearlong.

As a result of the rout on the Lagos stock exchange and profit taking seen in the fixed income space, inflows to the I&E window slumped by a quarter to $2 billion in the seven months through July, 2019.

Portfolio flows and foreign direct flows plunged 41 percent and 75 percent respectively, while the portfolio of internationally-sourced to the inflows tanked to 45 percent in July from 61 percent in January, thereby fuelling pressure on the naira.

Analysts expect the local debt market to remain in bear territory amid the significantly low volume of sales by the Debt Management Office.

ISRAEL ODUBOLA & OLUWASEGUN OLAKOYENIKAN