Nigeria may have succeeded in postponing the reprieve that would have come the way of its financial markets, just as it postponed the coming general elections.
Currently, at the equities, bond, and forex markets, investors (domestic and international) have gone into surveillance mode as they continue to price-in the nation’s rising risk factors.
From declining oil price to volatile forex market, and recent concerns about political stability many analysts currently hold a downside view about Nigeria ‘s asset classes.
While the fixed income securities remain compelling asset class over attractive yields outlook; stock investors are cautious on equities. The forex market has been volatile and the local currency battered by weak oil prices and tensions around the postponement of elections in Africa’s biggest economy and leading energy producer.
Read also:
Following last weekend’s postponement of the general elections, a bourgeoning sale side at Nigeria’s equities market reflects a rub-off effect of about N800bn lost by investors for holding Nigerian equities in just one week. The NSE ASI declined by 2,399.82 points or 8% from 29,985.08 points to 27,585.26 points, while the market capitalisation of listed equities at the Nigerian bourse dropped from N10.005trn to N9.204trn.
Market analysts at Lagos-based Financial Derivatives Company Limited noted that investors remain cautious even as oil prices continue to dwindle.
“The buildup to the elections has been fierce, thus spurring high levels of uncertainty about its eventual outcome. The outcome will be a major determinant of the direction for the country’s economy and the stock market, as this may lead to key policy adjustments. The challenging economic outlook continues to fuel negative sentiments on the capital market, given the huge drop in oil prices” the analysts further said.
Oil rose above $60 a barrel last Friday for the first time this year, bringing gains this week to almost 4 percent, supported by signs that deeper industry spending cuts may curb excess supply.
Total equity risk premium of Africa’s largest economy by GDP size has risen from 11.15 percent in January 5, 2015 to 18 percent, according to Moody’s risk premium report. This is high compared to other emerging markets like Brazil (11 percent) and India (12 percent).
In line with FGN Bond Issuance Calendar for first-quarter 2015, the Debt Management Office (DMO) in the February auction targeted raising N90billion. The Debt Office targeted raising N35bn by issuing FGN Feb 2020 (5-Yr New Issue); N30bn -14.20% FGN Mar 2024 (10-Yr Re-opening) and N25bn – 12.1493% FGN July 2034 (20-Yr Re-opening).
Trading on Nigeria’s foreign exchange market was delayed until after 10 a.m last Friday to allow dealers submit demand for dollars to the Central Bank. After a weeks-long slide in the local currency, the CBN has burned through more than $110 million a day, trying to defend the naira’s target band.
In 1985, a dollar was exchanged for less than a naira; but today, it is exchanged for N168/$ at the official market and much less at the interbank and parallel markets (N210/$). While many analysts and financial market operators are not comfortable with this drastic change in the fortunes of the naira, others are of the opinion that with the changing economic environment, further devaluation may still be necessary for the naira to trade at its fair value.
At the Nigeria Stock Exchange last week, Godwin Emefiele, governor of the CBN said the Nigerian economy is resilient despite the falling crude oil prices in the international market and uncertainty surrounding the coming elections.
He admitted that the depressed crude oil price has affected activities at the Nigerian capital market, adding that the Nigerian monetary and fiscal authorities are working to arrest the current vulnerabilities in the market. The CBN chief said there was “no need to panic” about the plunge in the naira, which fell through the psychological level of 200 to the dollar last week.
“The writing is on the wall that a further devaluation of the naira is in the offing, as this is probably the only measure that will halt its loss in value. We expect a minimum of a 3-5% further devaluation in the currency. Since the MPC did not make any adjustments in its January meeting, citing the need to allow the changes made in November to manifest, the earliest possible time for the committee to react will be at the next meeting in March.
The CBN will continue to intervene in the markets to keep the naira afloat, at the detriment of the external reserves,” analysts at Financial Derivatives Company further noted.
The CBN plans to issue N142.43 billion ($698 million) in Treasury Bills (T-Bills) with maturities ranging between three months and one year by next week Wednesday February 18. The apex bank said it will issue N32.43 billion in the 3-month paper, N30 billion in the 6-month note and N80 billion in the 1-year debt. “Allotment letters would be issued for successful bids on Thursday, February 19,” the CBN said.
“Except for a significant reversal in the international prices of crude oil in the near term (which looks most unlikely), we expect the lull in the equities market to remain, at least, in the pre-election period, given a strong positive correlation between the performance of the Nigerian equities market and investors’ perception of domestic risks.
“In addition, we reckon that expectations of depressed corporate earnings and low dividend payout (on account of regulatory headwinds in the banking sector) will further subdue prices in the equities market in the near term,” according to financial analysts at Lagos-based WSTC Financial Services Limited.
On the forex market, the analysts added: “We believe the demand pressure in the foreign exchange market, which has hitherto been sustained by concerns about weak international crude oil prices, low fiscal buffers and domestic uncertainties will be further heightened by market reaction to the postponement of the general elections. In the light of these realities, and given the nation’s currently low stock of foreign reserves (with almost no hope of any accretion in the near term), we do not believe the CBN will be able to effectively hold unto its resolve to continue to defend the local currency. Thus we retain our expectation of a further devaluation of the Naira in the near term in order to check an avoidable depletion of the nation’s reserves.”
In the latest update on its reserves, the Central Bank of Nigeria (CBN) said its stockpile of dollars had dropped to $33.4 billion as of February 10, a decline of $1 billion since January 28.
On the fixed-income market, they expect yields on fixed income market to remain attractive adding that they anchored their view on aggressive government borrowing “as a result of ebbing government income from oil revenue and the maintenance of a tight monetary policy stance by the Central Bank of Nigeria (particularly in order to preserve positive net capital flows in the face of rising country risk premium).”
“We believe postponement of the election could send negative signals that might lead to deterioration in Nigeria’s political outlook. In opinion the postponement will further add to the risk premium on Nigerian asset class,” said market analysts at Lagos-based Investment One Financial Services Limited.
Iheanyi Nwachukwu
