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How enticing Nigerian Eurobonds can help local investors mitigate currency risks

Buhari
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Nigeria is set to decide its next leader among ruling President Muhammadu Buhari, his main challenger, business mogul and former vice president Atiku Abubakar, and other candidates. This makes the election the sixth of its kind since the country’s return to the civilian rule in 1999.

While President Buhari had promised to create jobs and improve on the ease of doing business in Africa’s largest economy, Atiku pledged to privatize the Nigerian National Petroleum Commission (NNPC) and float the nation’s currency which has remained relatively stable and hovering around N360 to a dollar since August 2017.

While millions of Nigerians are highly expectant of the outcome of the elections, this could be the best time for forward-looking investors to reconsider their investment strategy.

Consequently, policy consideration following the outcome of the election remains vital to investment decisions, particularly for investors considering fixed-income securities, as African economies including Nigeria enjoy a fantastic start to 2019 in the Sovereign Eurobond market.

If Atiku emerges the President and floats Nigeria’s naira as promised, this is seen to cause a depreciation of the currency, as the forces of demand and supply at this time when normalization of interest rates, although paused, is hurting emerging market currencies including naira.

On the flip side, some investors remain hopeful that Buhari will win, and if this happens, “we will go back to business as usual,” said Fola Abimbola, an analyst at Lagos-based FBN Quest. “That would breed continuity.”

When business returns as usual for monetary policy authorities, this implies that the Central Bank Nigeria (CBN) would likely continue with its weekly intervention into the foreign exchange market, an effort that chopped the nation’s external reserves significantly last year but kept the naira stable over time.

Although the naira appreciated marginally last week in the I&E window of the foreign exchange market to N361.65/USD from N361.73/USD, this is largely driven by the gradual return of offshore investors taking positions in the nation’s markets on waning political risks.

“The return of foreign investors which has led to the inflows of dollars might be temporal,” Gbolahan Ologunro, an analyst at CSL Stockbrokers Limited told BusinessDay. “That action was largely driven by dovish trend from the US Fed.”

Ologunro explained that the inflows could be halted if the U.S economy grows at a faster pace coupled with accelerating inflation rate, the apex bank might be prompted to continue with its interest rate hike in the second half of the year.

With this in mind and with average oil price estimated to remain below $65 per barrel in 2019, “foreign investors will began to think this is an indication of a possible drop of oil receipts and external reserves, and then the devaluation of the currency,” said Ayodele Akinwunmi, head of research at FSDH Merchant Bank.

Since the future looks bleak for investors of stocks and other risky assets regardless of which way the pendulum swings, this could be the best time to take advantage of the nation’s impressive Eurobonds performance as they are relatively immune to naira depreciation.

Nnamdi Olisaeloka, a fixed-income analyst at Zedcrest Capital Limited, explained that the Nigerian Eurobonds, which are denominated in the United States Dollars, are not tied to currency risks, and hence would be unaffected in events of a devaluation of naira. “It is even more likely for local investors to increase their holdings of Eurobonds in events of a devaluation of the currency,” he said.

Nigeria, according to Bloomberg reports, ranks as one of the most attractive emerging-markets’ Eurobonds – behind Kenya, Zambia and Argentina only – as African emerging markets dominate the top gainers’ list for Eurobond with a 6.4 percent  gain so far in the New Year, outperforming other emerging markets with an average of 4.4 percent.

With a year-to-date return of 9.2 percent, savvy investors ought to look in the direction of Nigerian Eurobonds, especially sovereign-issued external bonds which have consistently enjoyed a history of oversubscription.

Introduced in 2011, Reuters report that Nigeria’s debut $500 million 10-year Eurobond, received bids worth two and a half times the amount on offer, and that sentiment has remained strong over the years.

While CBN has been maintaining its up-tempo in defending the naira, the Eurobond instrument remains vital in improving the country’s foreign reserve buffers and accessing the much-needed dollar for the domestic economy.

Investors, however, remain watchful on Nigeria’s investment climate as returns on investment remain dependent on the policy stance of the country’s central bank, especially as two very important offices could be occupied by new individuals as the tenure of Godwin Emefiele, the apex bank governor, ends in June.

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