Africa’s largest economy, Nigeria, is currently experiencing a low investment regime as a result of the disruption in commerce caused by the global pandemic, policies and drop in the prices of crude oil among other things. The effect of these negative factors has heightened economic uncertainties; hence, it puts the country in a low investment regime.
These uncertainties largely impact on the decision of investees (borrower) than do the investors (lender) on investment. While the borrowers are careful to fix interest rate (yield) given the economic uncertainties, the latter is on the look out for viable investment instruments given the effect of inflation.
Inflation rate in Nigeria is still higher than the Central Bank’s target range of 6 – 9 per cent. Data from the National Bureau of Statistics (NBS) revealed that Nigeria’s inflation figure climbed for 31 straight months to 13.71 per cent in September 2020. This represents an increase of 2.47 percentage point year-on-year and 0.49 percentage point from August 2020 (13.22 per cent).
Since inflation affects the real value of money compared to its nominal value, a constantly increasing inflation rate would lead to a constantly decreasing purchasing power of money, hence adversely affects the viability of investment instruments/yields.
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How viable are the investment instruments?
The latest auction by the Central Bank of Nigeria (CBN) revealed that the safest fixed-income security rate, Treasury Bills (T-Bills), for a 182-day tenor and 364-day tenor fell sharply to 0.50 per cent and 0.99 per cent respectively on October 28, 2020, from 1.00 per cent and 2.04 per cent respectively two weeks ago. The fall is due to the monetary policy stance to boost domestic credit.
Adjusting this yield for inflation puts this investment in T-Bills in the negative territory—13.21 per cent and 12.72 per cent respectively for the two periods.
What this means: For instance, if N10 million is invested in T-Bills for a 364-day tenor at 0.99 per cent yield, the expected yield would be N10.09 million (nominal value), that is, an excess of N99,000. However, when adjusted for inflation, the real value will be N8.71 million.
Against the 13.71 per cent inflation, this means that the accrued nominal value of N10.09 million from T-Bills can only purchase goods that are valued at N8.71 million. Hence, this investment instrument may not be considered viable.
Another fixed income security is bond. According to the Daily Quotation List (DQL) by FMDQ Securities exchange Plc as at November 2, 2020, the Federal Government of Nigeria (FGN) Bond for a 1-year Time to Maturity (TTM) has a yield of 0.82 per cent at the secondary market.
Other types of bonds at a 1-year tenor are: the FGN Savings Bond at a yield of 1.21 per cent; Sub-National Bond by various State governments; Corporate Bond; FGN Eurobond; Corporate Eurobond; and even Commercial Paper which is at a maximum 231 days have yields lower than the inflation rate.
At maturity, whatever amount the total return will be, all else equal, will be adversely affected by the double-digit inflation rate, thereby reducing the purchasing power of the return.
While most of the fixed income securities currently have low yields, another investment option, but driven by the forces of demand and supply are stocks. Although stocks are considered as high risk, the stock market still offers better returns in the current environment.
As yields in safer investment instruments fell, investors shifted to the equities market taking advantage of the current price levels of most stocks listed on the Nigerian Stock Exchange which remained good for long term investors. Stocks on the other hand are considered as high risk and are driven by the forces of demand and supply as well as investors’ sentiments.
Unfortunately, because of the low investment regime, a lot of Nigerians have no choice but to retain their funds in Nigeria’s low yielding financial institutions—banks. However, the interest rate on deposit savings was reviewed to 10 per cent of Monetary Policy ratio (MPR) which is 1.25 per cent per annum by the CBN.
Savings in commercial banks as an investment instrument in Nigeria is not viable when benchmarked against the inflation rate: this will mean negative 12.46 per cent.
Aside from this, it is statutory that savings account holders should not do more than 4 withdrawals in any month to be qualified for a monthly interest payment. Most savings account holders in Nigeria fall within the retail segment with a high frequency of withdrawals monthly.
For instance: If a bank customer saves N1 million, at the end of a year the return will be N1.01 million. Against inflation rate of 13.71 per cent, the real value of the money will be N873, 690. That is, the supposed N1,012,500 (face value) can all purchase goods that are valued at N873,690.
Even if this is viable, most of the savings account holders are ineligible for this interest payment because of the frequent transactions they execute daily and weekly. Also, given the numerous bank charges like VAT, SMS alert, and card maintenance fees among others that commercial banks levy on account holders, then customers are now in a situation where they are paying banks to keep their money.
