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BusinessDay

Nigeria’s dollar funds jump 48% in 10 months

Nigerian Eurobonds pare losses as naira strengthens to N850/$

Increased investors’ appetite for dollar-denominated instruments has fuelled an N80.39 billion jump in the asset under management of the funds between January and October 15, 2021, as analysed from data by Coronation research.

The rise in investors’ interest for dollar-denominated funds is on the back of possible naira devaluation and to hedge against Nigeria’s double-digit inflation rate.

The net asset value of Nigeria’s dollar-denominated industry grew by 48 percent to N248.16billion on 15 October from 31 December 2020.

“We have seen a significant rise in US dollar-denominated funds growing by 48 percent,” research analysts at Coronation said.

The dollar-denominated instruments are typically invested in sovereign Eurobonds, corporate Eurobonds, money market instruments, and foreign equities, as permitted by the Nigerian Securities and Exchange Commission.

“In a bid to meet up with the increasing interest of investors to hedge their savings and investment against any devaluation of the naira, several investment outfits (registered with SEC) has set up dollar-denominated mutual funds,” Ayo Ebo, Head, Retail Investment, Chapel Hill Denham said.

With Naira inflation stubbornly in double digits and sub-inflation returns on naira T-bill and Fixed Income investments, analysts at Coronation said “it appears that many investors are pursuing currency diversification and a guard against potential Naira devaluation.”

Nigeria’s foreign exchange crisis which has persistently fuelled the depreciation of the naira and the high inflation rate that put the real return on investment in the negative are key reasons dollar-denominated investment is attractive for Nigerian investors, according to investment analysts.

A weak naira means that investors who hold their savings and investment in the local currency may continue to lose value in dollar-denominated terms.

This is one reason that necessitates the move for investors to have a portion of their investment portfolio in dollar-denominated assets, especially dollar mutual funds, which are more accessible due to the low entry amount required, analysts said.

“Without any major attempt to increase or diversify Nigeria’s FX proceeds through the export of non-oil products, we believe the FX crisis will continue to linger, specifically when crude oil prices drop significantly,” Ebo said.

Read also: Why e-Naira app fails to include Nigeria’s unbanked population

The country’s high inflation, although has slowed for the sixth successive month to September, which has put the real return on local investment in eth negative is another reason for the increased appetite for dollar assets.

The investment return on Nigeria’s one-year treasury bill dropped to 6.99 percent at the last auction in October, from a near 10 percent of 9.15 percent on July 14, 2021; the inflation rate on the other hand was 16.63 percent. That leaves a real return, the difference between the expected return on investment of an asset and the rate of inflation, at -9.64 percent.

When the same was inputted for the 7.5 percent recorded for the 364-day bill for September, it reported a negative real return of 9.17 percent, lower than October’s -9.64 percent

However, compared with the -14.47 percent level it was in January 2021, the October figure is higher by more than 500 basis points.

While investors are taking note of the shrinking negative real return, market analysts said Nigeria’s negative real return is deterring foreign investors who in search of high returns are exploring the opportunities in neighbouring markets with positive real returns.

“The negative interest rate environment is bound to deter foreign investors as there are several alternative countries in the Emerging and Frontier Market landscape with more attractive real return on investments,” Ayorinde Akinloye, associate investment research in United Capital Plc said.

T-bills rates, the interest the Nigerian government pays investors for borrowing their money, has remained relatively low this year.

Breakdown of the last T-bill primary market auction (PMA), revealed that the CBN through the DMO allotted N235.04 billion worth of bills across all tenors. Accordingly, stop rates remained unchanged on the 91-day (2.50%) and the 181-day bill (3.5) 3.50 percent and the rate on the 364-day bill fell from 7.250 percent to 6.99 percent.

Analysis of the auction result showed that investors’ appetite for the less risky federal government instrument has dropped to one of its lowest levels on record.

While fixed-income investors usually oversubscribe for the short-term investment instrument by hundreds of billions of naira, analysis of the result for the week traded October 27, 2021, showed that they only reported N92.08 billion worth of unsuccessful transactions.

The failed bids, the amount investors were willing to invest but were not accepted by the CBN, stood at a record high of over N282 billion in June 2021.

With a total subscription of N235 billion worth of T-bills, the demand at the last auction was relatively weak.

Dampened investors’ interest in the risk-free government instrument amid failed attempts to get high returns from the short-term papers forced investors to redirect their funds to the more attractive banks’ placement and commercial paper (CP), according to BusinessDay’s findings.

Investors bid at rates as high as 5.5 percent, 6.75 percent and 8.5 percent on the 91-day, 182-day and 364-day bills, respectively at the last auction but the apex bank lowered rates across the three tenors to 2.5 percent, 3.5 percent, and 6.99 percent, respectively.

The breakdown of the auction result for the last transaction in the tenth month of this year showed that investors’ appetite for the longer 364-day bill remained higher than the 91-day and 182-day bills.

While the 364-day bill with a higher interest rate was oversubscribed by N89.47 billion the shorter 91-day and 282-day bills were oversubscribed by a combined N2.61 billion.

The CBN planned to raise N3.17 billion for the shorter 91-day bill but investors said they were willing to subscribe with N3.99billion. The apex bank eventually issued N 2.68 billion, N490 million less than the CBN’s initial offer.

Investors were willing to bid with N 3.32 billion for the N2.02 billion raised for the 182-day bill, N1.3 million more than what the CBN planned to raise. The amount raised by the apex bank, however, was lower than its initial offer of N6 billion by 3.98 billion.

While the CBN offered to raise N140.87 billion through the longer 364-day Treasury bill, investors said they were willing to invest more with N 432.81 billion. The apex bank later raised N230.34 billion. The apex bank issued N89.47 billion worth of more bills.

According to market analysts, the decline in the unsuccessful bids reported by fixed income inventors is proof that the volume of funds interested in the short-term debt instrument is finding its way into other investment assets.

On the yield’s expectation, Akinloye said “we expect heavy government borrowing to keep the long-term yields tracking higher.”

However, the likely increase in the demand for the government short-term treasury may lead to further rate decline, according to analysts.