Investors are seeing Nigerian assets as too risky to invest in the short to medium term as they fear the country lacks what it takes to weather the storm of current economic challenges.
Investors demanded as much as 17.05 percent on Federal Government’s Eurobond with a year maturity period (28-Jan-21), according to FMDQ data. That’s 26.6 percent higher than the 13.40 percent investors demanded on the security with a 10-year maturity period (23-Feb-30), forcing the yield curve in the Eurobond market to invert.
“By having an inverted yield curve, it means the longer economic outlook of Nigeria is better than the short-term economic outlook,” said Johnson Chukwu, managing director and CEO, Cowry Asset Management.
“What this means is that with the heightened economic crisis, people expect that the economic environment would be very volatile in the next one year and, therefore, they are ready to invest in the longer-term instrument so they can lock in on a relatively good yield for the long term than taking a short-term horizon,” Chukwu told BusinessDay.
In a normal yield curve, yields on short-term bills are lower than the long-term bonds. A yield curve becomes inverted when the yields on bonds with a shorter duration are higher than the yields on bonds that have a longer duration. Analysts say Africa’s largest economy is experiencing an inverted yield curve in the wake of falling oil prices and a depletion of its reserves.
“It’s an abnormal situation that often signals an impending recession,” a renowned economist told BusinessDay.
Foreign portfolio investors who have largely been major holders of Nigerian assets are selling off their portfolios and leaving in droves. They fear that the Nigerian economy might not have the ammunition in its arsenal to weather the storm of falling oil prices occasioned by low oil demand due to the coronavirus pandemic as well as failure of Saudi Arabia and Russia, world’s biggest exporters of oil, to reach an agreement on a supply cut and bury the hatchet of an oil price war.
The price of Brent crude has bottomed as low as $27 per barrel, even lower than what it traded in 2016 when the international market last witnessed an oil supply glut, prompting analysts to believe oil prices could go as low as $20 per barrel when Saudi increases oil exports to 10 million barrel in April, as predicted by Goldman Sachs.
Nigeria’s external reserves fell to $35.9 billion, its lowest levels in 29 months, as the Central Bank continues to keep the naira stable against the dollar.
From the equities market to the CBN short-term OMO bills, there have been massive sell-offs as investors watch the extent to which the coronavirus pandemic would impact on the economy.
The Nigerian Stock Exchange has lost 17.30 percent since the start of the year.
In the last primary market OMO auction Thursday, the CBN made zero sales from it N150 billion auction as it failed to offer at high rates to portfolio investors who see it as too risky to invest in Nigerian assets.
For portfolio investors, it makes no business sense sticking to the CBN’s low yields in the primary auction when the can get yields at higher levels in the secondary market.
“There is a lot of uncertainty in the system and that is why we are seeing huge sell-offs,” Wale Olusi, head of research, United Capital, told BusinessDay.
