• Monday, July 22, 2024
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Foreign investors stay off Nigerian bonds for sixth straight month amid low yields

Foreigners shun Nigerian bonds for nine straight months amid FX uncertainties

Foreign investor apathy towards Nigerian bonds continued in the third quarter of 2020 amid low yields.

For the second consecutive quarter this year, foreign investors snubbed Nigerian bonds, a move that signals low investor confidence for the long-term financial instrument.

Nigeria’s economy is reeling from the impacts of the Covid-19 pandemic that crashed government revenue and prices of crude oil – the country’s major foreign exchange earner.

A low yield environment has also contributed to the weak appetite for Nigerian bonds.

There was no single subscriber to the country’s bond instruments in both the second and third quarters of the year, 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 period when compared with the $231 million and the $91.6 million they put into Nigerian bonds in the first quarter of 2020, and in the same time last year.

Rather than investing in bonds, investors have found solace in money market instruments.

Although still lower than the amounts invested in pre-pandemic days, investors increased their stake in the money market instrument by 9.4 percent to $363.15 million in Q3 of 2020 from $332.07 million subscribed to the instrument in the preceding quarter.

“Bond yields are very low now and their valuations are stretched,” said Omotola Abimbola, a fixed income and macroeconomist at Lagos-based Chapel Hill Dem.

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“The prices of bonds are very high now because yields are low. So, for many of these investors, they prefer to stay in the money market portfolio, particularly the CBN OMO bills where they still get some decent yields at least in the primary market auctions,” Abimbola said.

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 as low as 1.3 percent from the high of 21 percent some three years ago. Yields on OMO average around 3 percent while interest on 5-year bond instruments is also down to 5 percent.

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%) after commodity prices accelerated to a 32-month high of 14.8 percent 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 catalysed the government and large corporates to raise cheap debt. These gains elude small business, which makes up about 50 percent of the country’s GDP and employs over 80 percent 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.

As at August 29, a total of N559.77 billion has been raised by large corporates from commercial papers, which is about 103 percent higher than the N275.37 billion raised in March, according to data from the trading platform, FMDQ.

Between April to July this year, the Federal Government raised N7.74 billion in bonds, down by three per cent from the N7.94 billion raised in the first three months of the year.

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

“Although yields on OMO bills are slower than inflation, investors of bonds face what is called a duration risk,” Abimbola told BusinessDay.

Before Q’2 and Q’3 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.

As expected, 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 is 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.

Investor’s funds are stuck again with the CBN having over $759 million as unmet FX obligation. Businessday reported that multinationals that have waited tirelessly to get their funds out are now reinvesting in their local units just to put their funds to work over the fear of further devaluation.

Already, the naira has weakened to N379/$ in the CBN official window, but almost not available on demand, while in the parallel market where dollars are accessible, the naira is trading around N475/$.

The economy is in its worst recession since in the 80s, with growth expected to contract by 3.25 percent in the year 2020, according to the International Monetary Fund (IMF).