Nigeria is in the shadows once again, as foreign portfolio investment pours into emerging markets asset classes at the fastest pace since 2013.
Emerging market assets (bonds and equities) have become the toast of portfolio investors who have their eyes on high yields.
In the month of November alone, investors pumped in as much as $77 billion into emerging market instruments, comprising $37 billion in debt and $40bn in equities, according to data from the Institute of International Finance (IIF).
That’s the swiftest pace since 2013, according to data tracked by the Financial Times, driven by the dovish stance by Central Banks of advanced economies crashing interest rates to a near-zero to assist recovery in the wake of the global pandemic.
But these gains of dollar inflows into emerging market securities have largely eluded Africa’s biggest economy.
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“The main reason Nigeria is not seeing capital flows in the form of ‘hot money’ is because we have difficulties in meeting FX obligations to portfolio investors who have sold their instruments and wanting to leave,” said Johnson Chukwu, MD/CEO, Cowry Asset Management Limited.
For two consecutive quarters, the period between April-September, Portfolio investors shunned investing in Nigerian bonds as they get discouraged due to the low-interest rate environment.
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 stashed into Nigerian bonds in the first quarter of 2020, and the same time last year.
The slowdown in new portfolio inflows has led to shrinking reserve for the oil-dependent nation, which has been hammered by the huge decline in petrol dollars occasioned by the pandemic, forcing the CBN to devalue to naira against the dollars for the third time this year.
Investors are finding it difficult to access dollars with ease with the Central Bank having over $729 million as unmet FX demand on its table in august, according to a report by auditing firm KPMG.
“Until you meet the demand of those who are in and want to leave, you will not see any coming in. Portfolio investors who are in feel they are trapped because there is no FX liquidity to enable them to repatriate the value of their investments,” Chukwu said.
Nigerian bonds and fixed income instruments particularly T-bills have been largely dominated by local institutional investors after a move by the Central bank to force liquidity to the real sector in a fundamentally weak economy, kept interest rates repressed, stifling international investors.
Yields on Nigeria’s 10-year bonds went for as low as 2.7 percent, with the country’s risk premium standing at 1.77 percent when compared with the 0.93 percent returns from a 10-year U.S bond.
While the low yield environment has served as a catalyst for governments to raise capital to fund an ambitious budget and boost spending in the economy which slipped into its deepest recession since the 80s owing to the covid, it has left most investors with a negative real return when adjusted for current inflation.
With inflation reaching a 32-month high of 14.89 percent in the month of November, investors in Nigerian bonds and fixed income instruments have seen real returns dipped further in the negative trajectory.
For the investors, it makes no economic sense staking funds in a long-dated instrument with real returns in the negative trajectory, far lower than what is seen in advanced clime.
“The CBN must have to increase interest rate so as to signal to the international community that it is bent on tackling higher commodity prices,” said Randall Kroszner, Professor of Economics, University of Chicago Booth School of Business.
Higher inflation has negative consequences for the economy. The apex bank should rein in on it because if it gets out of control it can destroy the economy as well as the value of the currency internationally,” Kroszner said
A low-interest rate environment is never bad. In fact, in a country like Nigeria which is currently in a recession, a low-interest rate is necessary to boost spending and capital raising.
Before investing in an economy, portfolio investors price their returns in line with perceived macroeconomic indicators such as inflation, regulations and other political and economic uncertainties.
Data from IIF showed that at the peak of the pandemic more than $95bn left local stock and bond markets in March, with subsequent cross-border flows bringing the total outflow to $243bn in the first four months of the crisis.
Foreign investors have piled into emerging markets this quarter at the most rapid clip in seven years, offsetting a record exodus from those countries’ stock and bond markets at the start of the coronavirus crisis.
Money is expected to continue pouring into the asset class in 2021, with several analysts forecasting a bumper year of inflows.
This year, the Fed’s aggressive monetary stimulus in response to the pandemic has boosted financial assets around the world. The Fed and other central banks in advanced economies have injected an estimated $7.5tn into global financial markets during the crisis, according to the IMF.
Emerging market equities have been slow to catch up, with cross-border flows only turning positive in the past two months, according to the IIF. The debt market has posted a more vigorous recovery as investors chase returns with interest rates in the developed world sitting at record lows.
A risk premium of 1.77 percent could have offered some comfort to investing portfolio investors in Nigeria’s, but for the country’s soaring inflation which is eroding the gains of investors and dampening their interest.
Even Nigerian equities which are one of the best globally, with a year-to-date return of 38 percent, have failed to catch the interest of foreign investors.
Portfolio investment into equities at $44 million in the third quarter of the year was down by 88.6 percent and 17.2 percent when compared with the $385 million and $53.3 million invested in equities in Q3 of 2019 and the Q2 of 2020, NBS data shows.
Rather than investing in bonds, investors have found solace in money market instruments, which has a shorter tenure and risk.
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.
But Chukwu argued that these investments that went into OMO bills and equities were made by investors who were trapped. “They have sold their assets and wanted to exit, but couldn’t because their money is stuck in naira,”
“What they are doing is that they are playing any of the assets available like equities and OMO bills. But in terms of fresh capital, we are not likely going to see very strong flows until you have met the FX demand of those who are already in,” Chukwu said on the phone.
For the first time in four years, Nigeria attracted more Foreign Direct Investment (FDI) than Portfolio Investment (FPI) in the third quarter of 2020.
Direct investment into Nigeria stood at $414.8 million while portfolio investments came to $407.3 million.
While this may sound appealing to the ear, the outpace in direct investment was due to the huge fall in portfolio investment which plunged by 86.6 percent in the period driven by the zero subscription of investors in the bond space.
As a country in dire need of dollars to boost reserves and prop up the naira, after the pandemic a huge fall in both oil and non-oil revenues, inflows from both portfolio and direct investments are important.
