Nigeria’s treasury bills rate fell to 0.5% per annum within two weeks, when the rate first fell to 2% from 4.6% about eight months ago.
Data from treasury bills auctioned by the Central Bank of Nigeria (CBN) showed 182-day and 364-day bills to have fallen to 0.5 and 0.98% respectively, while a 91-day bill sold for an interest rate of 0.34%, one of the lowest in the auction’s history. Regardless of the fall in rates, the auction was oversubscribed according to the CBN data, indicating to analysts that investors are willing to earn nearly nothing from their investments.
Efforts to stimulate economic growth
Nigeria is trying to push funds into the real sector to stimulate growth in the economy. One of the ways it can do that is to borrow funds at unattractive these rates since the Nigerian debt market continues to attract institutional investors. In fact, recent data show it’s usually oversubscribed, Olumide Adesina, a certified investment trader, with expertise in investment trading and financial market analysis, tells The Africa Report.
The Nigerian debt market remains unattractive to foreign investors whose cash is trapped in an economy that is reliant on crude prices for its foreign reserve, and are staying out of the market, as data shows.
Nigeria’s Q2 foreign capital inflow shrunk by as much 79% year-on-year, reflecting a need for the CBN to address the country’s foreign exchange issues. The performance of Foreign Portfolio Investments was the most negative, declining 91% YoY, according to data from the National Bureau of Statistics (NBS). This was the segment that had previously accounted for the large majority of foreign capital inflows, given the attractiveness of the CBN’s OMO bills in the past notes analyst Busola Jeje of Tellimer.
“Foreign portfolio investors are obviously staying out of the Nigerian debt market because of the rigid exchange rate system and the ongoing stringent cash flows structure put in place to curb the downward value of Nigerian local currency,” says Adesina.
‘Shrinking further by the end of 2020’
Tellimer, an emerging market research company, said it sees large-sized FPI and FDI inflows shrinking further by the end of 2020. “For the rest of 2020, we believe two disturbing issues are likely to discourage large-sized FPI and FDI inflows:
- Uncertainty around the FX level and FX illiquidity;
- Significant decline in the attractiveness of the CBN’s OMO bills, with average yield now around c3.1%, which is sharply negative in real terms,” says Jeje.
“Since March of this year, the CBN has been absent at the Investors & Exporters window, in terms of its weekly large-scale FX intervention sales to improve FX flows, while it is also holding off supply of FX at the Bureau De Change (BDC) segment. This has caused a significant dent in investor confidence, as investors scrambled to the small-sized BDC market to meet their FX needs, causing FX rates at the parallel market to skyrocket to over NGN470/$1. While the CBN has announced the resumption of BDC sales to start on 7 September, with the weekly volume pegged at US$20,000, this is unlikely to ease liquidity pressures,” she adds.
While the large decline in capital imports were definitely triggered by the COVID-19 pandemic, according to Michael Famoroti of Stears Business, the decline “ultimately exposed the fact that Nigeria’s capital imports have largely been hot money inflows that we anticipated would flee at any sign of trouble.” He, like other analysts, do not see much and if any improvement in capital inflows this year.
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“Most of Nigeria’s capital imports in the last half-decade have been portfolio inflows. In particular, foreign investments in money market instruments like OMO bills accounted for 56% of capital inflows in 2019 and 60% in the first quarter of 2020. These foreign inflows into money market instruments have dried up for a few reasons:
- Weaker risk sentiment and spare cash available once the pandemic hit.
- A change in the CBN’s approach – the CBN used to offer really attractive yields on these instruments up until Q1 of this year (e.g. +15% on a 1-year OMO). That has declined significantly now (single digits) so foreigners are less interested in the instruments.
- The FX regime: Once 1 and 2 (above) happened, the underlying weakness in the naira and the fragility of the CBN’s FX management routine came to the fore. Investors have decided that the devaluation risk and risk of not getting their dollars back is too high to take the plunge.
“Combine 1 & 2 (above) and there will be no real turnaround in the third quarter. It should not be as low as $1.3bn as it will be helped by other external loans the FG has secured. However, FDI and FPI will still be extremely low until at least two out of the three reasons listed in 2 changes. None of those are likely to change till 2021,” says Famoroti.
What choices do the Nigerian investors have? “The only attractive viable option for Nigerian investors remain the Nigerian stock market, amid increased buying pressures seen in the last two quarters at the Nigerian bourse, significantly responsible for seeing Nigerian Stock Exchange capitalisation hovering above N15trn naira and year to date return bullish,” says Adesina.
“Nigerian blue chip stock popularly known as NSE 30 stocks, continue to show good fundamentals and are relatively undervalued when compared to other African equities,” he adds, noting that the bullish trend is at least “likely to continue at least in the next two quarters on the bias, that institutional investors are taking advantage of impressive earnings coming from the likes of MTN Nigeria, Total,” among others.
As the Nigerian debt market is predominantly controlled by Nigerian institutional investors, like pension funds and investment banks, it seems the central bank isn’t worried about such a prevailing trend, says Adesina. He believes this could signal that “dollar inflow in [the] Nigerian economy would greatly be affected on the bias that FPI contribute a significant amount of dollar inflows into Nigerian capital market.”
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