Not a single foreigner invested in Nigerian bonds in the second quarter of 2020.
For the first time in more than four years, foreign investors avoided staking their monies in Nigerian bonds, after a move to ration dollars heightened investors’ fear in the economy.
Nigeria, Africa’s biggest economy, is grappling with dollar crisis caused by the double whammy of the coronavirus pandemic and a deep plunge in prices of crude oil, the country’s biggest earner, and this has culminated into dampening investors’ sentiments.
There were no subscribers to the country’s bond instruments in the second quarter 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 $361.2 million they stashed into Nigerian bonds in the preceding quarter and the same time last year, respectively.
“The apathy seen by foreign investors is a combination of the effect of low yields that we have in the bond market due to the Open Market Operations (OMO) policy last year and also a risk aversion for Nigerian securities due to a lack of FX liquidity,” said Omotola Abimbola, a fixed income and macroeconomist at Lagos-based Chapel Hill Denham.
“As investors are thinking of coming in, they also have to think of the ease in going out. It is only normal that if you have your money trapped inside to the extent you can’t take it out, you won’t bring in any fresh capital until you are sure that there is clarity in getting your money out,” he said
Abimbola explained that foreign investors would rather invest in OMO bills than bonds since they do not face any duration risk.
“There is no maturity premium you get investing in bonds,” he said.
A raft of Central Bank policies 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 at 1.3 percent from a high of 21 percent some two 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 return. Real interest rates on Nigerian T-Bills fell further below (-11 percent) after commodity prices accelerated to a 27-month high of 12.8 percent in July.
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 businesses, which make up about 50 percent of the country’s GDP and employ 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 3 percent from the N7.94 billion raised between 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.
Something needs to happen where the CBN and the Debt Management Office will have to increase interest rates and move it where the inflation rate is so that they can be national savings and a gross capital, said Bismack Rewane, a renowned economist and CEO of Lagos-based Financial Derivatives Company.
“Right now what we have is a negative rate of return and it is a recipe for capital flight and pressure on the currency. Something has to happen very soon to turn the interest rate trajectory around,” Rewane said.
Before Q2 2020, the only time – since 2013 when the state-funded 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 to rationing the amount of greenback bank customers could spend abroad. The apex bank at that time also expanded its list of products restricted from accessing dollars from its window.
Of course, the move came as severe pains for investors whose naira assets were stuck in their quest to convert to dollars. Manufacturers were also hard hit as they were unable to find dollars to import major raw materials.
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.
Investors’ funds are stuck again with the CBN having over $5 billion as unmet FX obligation.
BusinessDay reported that multinationals that have waited tirelessly to get their funds out are now reinvesting in their local units just to put their funds to work over the fear of further devaluation.
Already, the naira has weakened to N379/$ 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 lingering dollar crisis is badly hurting the capital market including equities, fixed income and money market, Bola Onadele.Koko, CEO, FMDQ, said in a webinar session.
Though the economy is expected to improve in the third quarter of the year after contracting by 6 percent in Q2, analysts say the liquidity crisis might impede this growth.
