Nigeria Bars Some Firms From High-Yielding Bonds to Boost Growth

Nigeria barred individuals and local non-financial firms from buying high-yielding central bank bonds as it tries to boost the economy by steering lending more widely.

The two types of investors are excluded from participating in auctions for open-market operations, which are short-term central bank securities, the Abuja-based regulator said in a letter to banks that was seen by Bloomberg.

“We don’t want to leave room for arbitrage,” central bank spokesman Isaac Okorafor said in a text message. It will discourage banks from giving loans to “speculators” who want to buy government securities instead of investing in the “real economy.”

The measures are in line with a wider policy to penalize banks that don’t boost lending, according to Okorafor.

The ban’s impact may be limited because it does not extend to the secondary market or foreign portfolio investors.

“The central bank has been uncomfortable with the level of demand at the OMO auctions recently and clearly they’re trying to reduce it,” said Omotola Abimbola, an analyst with Lagos-based Chapel Hill Denham Securities Ltd. “But this measure won’t go that far because they still have access to the secondary market.”

OMOs, which typically have maturities of less than a year, were originally used by the central bank to control liquidity and mainly bought by local lenders. But they have been opened up to others in the past two years and have become the main instrument for foreign carry traders.

Global investors have been attracted to naira bonds by yields of around 15% and a stable currency, which have made the Nigerian carry trade one of the most lucrative in emerging markets this year.

Africa’s top oil producer is struggling to jump-start an economy that’s yet to fully recover from the 2014 crash in crude prices. Growth will probably be 2.3% this year, according to a Bloomberg survey of economists, one of the lowest levels on the continent.

The central bank’s sales of OMO bills ballooned to $2.4 billion last year from $600 million in 2016, according to a Citigroup Inc. It issued $1.4 billion in the first eight months of 2019, the Wall Street bank estimates.

There are around $40 billion of outstanding OMOs, roughly half of which are owned by foreigners, Simon Kitchen, a strategist at Cairo-based investment bank EFG Hermes, said in a note on Oct. 23.

“OMO liabilities have become a huge obligation on the central bank’s balance sheet,” Abimbola said.